Market Update 4/12/2023

Mortgage Rates Drop Amid Banking Concerns and Weak Economic Reports

A few weeks ago, mortgage rates were on the rise, but they began to fall after bank failures occurred in early March. Further banking concerns and weak economic reports continued to exert downward pressure on mortgage rates. When the economy weakens, investors tend to purchase bonds, which in turn pushes down yields. Since bond yields have a direct influence on mortgage rates, lower rates are a natural consequence of this trend.

Median Home Prices Increase Following Strong Sales

Despite the fluctuating mortgage rates, surprisingly strong sales led median home prices to increase by 0.16% in February, following several months of decline. Analysts attribute this growth to the wide swings in 2023 mortgage rates, as savvy buyers are quick to capitalize on rate reductions. Out of the 50 largest markets, 39 witnessed a rise in home prices.

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Affordability Crisis: Majority of Households Unable to Afford Median-Priced Homes

According to the National Association of Home Builders (NAHB) "housing affordability pyramid," approximately 73% of America's 132.5 million households, or 96.5 million, cannot afford the median price of $425,786 for a new single-family home. Moreover, just under half (49%) of households are unable to afford a home priced over $250,000.

Employment Figures: Job Numbers Increase, but Job Openings Decrease

In economic news, a non-government report by the ADP Research Institute estimates that private-sector employment increased by 145,000 jobs in March. This growth was observed in industries such as leisure and hospitality, trade, transportation, and construction, while decreases were noted in the manufacturing, financial, and professional services sectors. However, the number of job openings decreased to 9.9 million at the end of February, according to government statistics.

Treasury Yields Drop Amid Labor Market Concerns

Treasury yields experienced a decline last week, as recent job openings statistics indicated that the Federal Reserve's rate hikes are beginning to impact the labor market. Additionally, traders are weighing the effects of a spike in oil prices, which led stock markets higher at the start of the new trading month.

Regulatory News: Downbeat Data and Exchange-Traded Funds

Last week, the weaker jobs report was just one of several "downbeat data" reports, which included lower manufacturing numbers and inventory gluts. Although the Fed is not scheduled to meet again until May, it has signaled more hikes to combat inflation. However, if the remaining data continues to be downbeat, making their case becomes increasingly difficult. Next Tuesday's inflation report could prove to be pivotal in this regard.

Exchange-traded funds (ETFs) have also made an impact on the market, as they allow investors to trade and hedge in the underlying corporate bond market. Due to their instantaneous exchange, ETFs often lead the underlying bond market. Bond funds took in $47 billion during the first three months of the year, accounting for approximately 60% of 2023 flows.

Supply Chain Issues Impact Companies and Consumers

The ongoing supply chain issues have led to bloated warehouse inventories, which are cutting into the bottom line of many companies. Most of these businesses do not expect the situation to improve soon. Companies dealing with perishable goods are often forced to resort to secondary markets or donate the products. Ultimately, most warehousing costs are passed on to consumers, further exacerbating affordability concerns.

In conclusion, the housing market and the economy are being shaped by a variety of factors, such as fluctuating mortgage rates, employment figures, and supply chain issues. As the Federal Reserve plans to implement further rate hikes, monitoring the