August 12, 2020

Consumer prices continued to rebound from lows reached early in the spring. Applications for home purchase loans continue their strong stretch but rising mortgage rates pose a threat to that trend. And rental payment rates are holding firm amid rising uncertainty.

Prices rose in July at their strongest pace in years

• The Consumer Price Index increased 0.6% in July from June

• The Core Consumer Price Index – which omits prices of food and energy – also rose 0.6% in July from June, the strongest pace in nearly 30 years

Home purchase applications continue to increase, but rising mortgage rates threaten that streak

• Applications for home purchase mortgages rose 2% last week, according to the Mortgage Bankers Association

• Mortgage rates have risen strongly in recent days

August's rental payment rate declined from a year ago, but is holding firm compared to recent months

• According to the National Multifamily Housing Council, 79.3% of households renting apartments made their monthly payment during the first week of August

• That's down 1.9 percentage points from the same week of August 2019, but up 1.9 percentage points from the first week of July.

So what?

Following yesterday's read on the producer-price index, today's release of July inflation data reinforced that consumer demand has remained firm in recent months. The 0.6% increase in core prices was the largest one-month jump since January 1991, a development that is likely to quell any thoughts that the pandemic was going to deflate consumer demand enough to send the economy into a deflationary downfall. But despite the robust surge in prices, it's also unlikely that the news reflects a mounting surge of upward price pressures. In addition to steady demand, it's likely that these upward price pressures for many goods are brought upon by supply constraints. The closure of the economy in the spring included factories and plants shuttering their doors, leading to a shortage of many goods. And while consumer demand can snap back relatively quickly (but to be sure has a long way to go), supply constraints take longer to remedy. What's more, while today's release was the strongest upward pressure in years, core inflation rose just 1.6% in the past 12 months, well below the Federal Reserve's 2% target rate, suggesting that prices have a long way to go before being considered fully recovered.

A key weekly indicator of homebuyer demand, the MBA's for-purchase mortgage applications index, once again flexed its muscles this week. The seasonally adjusted version of the index rose 2% on the week and now sits 22% above where it was last year. The series – and indeed home shoppers – have greatly benefited from mortgage rates that have moved consistently downward for the better part of the last two months and remain near historic lows. But recent days have seen mortgage rates reverse course in a loud way. Rates made a notable move upward this week, rising in recent days at the fastest pace in months. That development could threaten run of home purchase mortgage applications, particularly at a time when job growth has slowed, fiscal benefits have expired, and inventory of for-sale homes remains very tight. The coming weeks will be a key indication of the endurance of homebuyer activity.