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Zillow Market Pulse: June 10, 2020


June 10, 2020

Price inflation fell for the third straight month, but positive momentum in spending might be building. The Federal Reserve said key interest rates will remain at their current levels through next year. And the strong recovery in for-purchase mortgage activity continued.

  • Third-straight monthly decline in prices keeps inflation fears in check

    • The Core Consumer Price Index fell 0.1% in May from April.
    • But a separate report from Mastercard suggests consumer spending rose noticeably in May.
  • The Federal Reserve plans to keep rates at current levels and maintain bond purchases

    •  All 17 of the committee's officials said they believe benchmark interest rates will remain at zero through at least 2021.
    • Fed Chair Jerome Powell suggested that more fiscal support is necessary in order to support the economic recovery.
  • Purchase mortgage applications rise for the eighth-straight week

    • Applications for home purchase loans were 13% higher last week than the same week last year.
    • But access to mortgage credit continues to tighten.

 So what?

Consumer prices fell in May, the third monthly dip in a row — but only the twelfth time in the last 65 years. The 0.06% monthly decline in the core consumer price index – which excludes the typically more volatile prices associated with food and energy — brought the annual inflation figure (as measured by yearly change in the index) to just 1.24%, the smallest annual gain since March 2011. Clearly, the economic shutdown and broad uncertainty throughout the economy has inhibited consumer demand, as reflected in April's consumer spending figures and dampened consumer sentiment figures. That said, some signs of optimism may be emerging. A report from Mastercard suggested consumer spending is starting to normalize, finding that retail sales (excluding auto sales) for May were down just 5.6% year-over-year, compared to the 14.1% annual shortfall in April. While this improvement is partly because of many states at least partially reopening in May, it also suggests people are becoming more willing to open their wallets, particularly to shop local and invest in their homes. Hardware store sales were up 36.2% in May from May 2019.

Following the June meeting of the Federal Open Market Committee, Federal Reserve Chair Jerome Powell emphasized that the central bank will not be raising interest rates any time soon and that the central bank will maintain a crucial role in the economic recovery. Acknowledging the difficulty in making economic projections in the current environment, Powell said that not only is the Fed not thinking about raising rates, they're "not even thinking about thinking about raising rates." All of the committee's 17 officials said they expect overnight rates to remain at zero through the end of 2021, and 15 of 17 said they expect rates will remain near zero through 2022. Additionally, the Fed announced today that it would continue its current rate of purchases of Treasury bonds and mortgage-backed securities, in an effort to keep markets functioning. Powell specifically said that more fiscal support is going to be necessary in order for the economy to recover swiftly and many of the millions of lost jobs to return any time soon.

Weekly applications for for-purchase mortgages rose for the eighth-straight week, and now sit 13% higher than they did last year.  Low mortgage rates continue to boost homebuyer demand which, after being constrained earlier in the Spring due to stay-at-home initiatives, could now be contributing to a delayed Spring selling season. Refinancing activity also picked up last week, rising for the first time in almost two months. Remarkably, this monthslong recovery in home purchase applications activity has coincided with a mortgage market that remains very tight. The Mortgage Bankers Association reported late yesterday that already-tight lending criteria tightened further in May, to their strictest levels in six years. In particular, borrowers hoping to secure a loan while making a relatively low downpayment, or seeking jumbo loans, are having a difficult time finding financing. Taken together, while a growing number of people are entering the housing market and seeking to buy a home, market conditions are likely preventing a significant number of additional people from doing the same.

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