Inflation Mellows, Steady Appreciation, Yield Curve Inversion

Mortgage Rates increased this week as the price of Mortgage Backed Securities (MBS) declined. While the MBS market declined, prices remain in the upward trading pattern. Rates are up approximately 3.25% from this time last year.

Inflation – the Producer Price Index increased by 0.3% in November and is up 7.4% year over year. The year over year reading is down from last months’ 8.1% and has been steadily declining since its peak in March of 11.7%. The core rate (which strips out food and energy) declined from a 6.7% to 6.2% year over year increase. This is a good sign for Mortgage Rates as inflation is the arch-nemesis of long-term rates. The price of used cars declined 0.3% in November and are now down 14.2% since this time last year.

Jobs – the number of people filing for unemployment for the first time rose by 4,000 to 230,000. While this number is still relatively low it has been steadily increasing. The number of people filing continuing unemployment claims increased by 67,000 to 1.67M. This means that as people lose their jobs, they struggle to find new ones.

Home Values – Core Logic released their Home Price Insights Report showing that home prices remained flat in October and are up 10% compared with October of 2021. CoreLogic is forecasting a more modest 4% gain over the next 12 months which is incredibly meaningful. Remember that a 4% gain on a $400k home is $16,000 and if you put 10% down on that home it would be a 40% return on your investment.

Recessionary Indicators – The spread between the 10-yr and the 2-yr Treasury was as much as 81bps in favor of the 2yr. Which means you could get 0.81% better on a 2 year note that a 10 yr treasury note (so why by the 10year??). This ‘inversion’ of the yield curve is the largest we have seen since 1981. Additionally, the 10-yr and 3-month spread is also quite a bit in favor of the 3-month yield which is an even stronger recessionary indicator.

Mortgage Applications to purchase homes fell 3% last week and are down 40% year over year. Refinance applications rose 5% last week and are down 86% year over year.

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