September 16, 2024 – As the market awaits for the Fed’s announcement on their upcoming rate cut later this week, latest inflation reports continue to provide mixed signals on how much the fed funds rate will be reduced in the September meeting. The market currently projects a 63% chance of a 50-basis-points (bps) rate reduction, and a 37% chance of a 25-bps rate cut. Regardless of the size of the reduction, if mortgage rates remain near the current level or dip further in the coming months, the housing market should begin to see a more consistent bounce-back as we move toward the end of the year.

Inflation drops to the lowest level since early 2021: A tepid increase in food prices and another moderation in energy prices kept inflation in check last month. The August headline Consumer Price Index (CPI) increased 0.2% from the prior month and was up 2.5% from the same month last year. The monthly increase was in line with consensus expectations, while the year-over-year gain was slightly below the estimate of 2.6%. The latest read on the annual figure was at its lowest level in 3 ½ year. Excluding energy and food prices, the core CPI rose 0.3% for the month and remained virtually unchanged at 3.2% for the year-over-year growth rate. Goods prices dropped more than expected, but the difference was largely cancelled out by the faster-than-anticipated price growth in services inflation. With consumer prices coming in mostly in line with economists’ forecasts, the reduction in the federal funds rate scheduled to be announced later this week is a 100% certainty. The market is currently projecting a 37% probability of a 25-bps rate cut in the upcoming meeting and a 63% probability of a 50-bps rate cut.

Expectations on price growth and jobs remain stable: Consumers expectations on inflation at the short-term and the longer-term horizons remained unchanged but up slightly at the medium-term in August, according to the latest New York Fed’s Survey of Consumer Expectations. At the one-year horizon, the median inflation expectation was at 3.0% last month, the same as what was recorded in July, but a solid improvement from the 3.6% recorded in August 2023. Consumers also expected home prices to increase 3.1% a year from now, a slight increase from the 3.0% recorded in July 2024. Their expectations on the labor market came in mixed, with the likelihood of losing one’s job in the next 12 months dipping one percentage point from the prior month to 13.3% in August. The mean perceived probability of finding a job if one’s current job was lost, on the other hand, fell 0.2 percentage points from July to 52.3% and was well below last August’s reading of 55.7%. With jobs data suggesting a gradual slowdown of the labor market in the short term, consumer optimism on jobs growth will likely moderate in the coming months, while their expectations on inflation will continue to improve.

Homeowner equity continues to grow solidly from a year ago: Homeowner equity increased with a solid pace on an annual basis in Q2 2024 as home prices remained on an upward trend in the past 12 months, according to the latest CoreLogic Homeowner Equity Insights. Homeowners with mortgages in the U.S. have seen an aggregated increase of $1.3 trillion in equity since Q2 2023, a surge of 8.0% year-over-year. Mortgaged residential properties with negative equity declined 4.2% from Q1 2024 and 15.0% from Q1 2023. Roughly 1.7%, or 960k, of all mortgaged properties were underwater, which was significantly below the peak of 26% observed in Q4 2009. On average, U.S. homeowners with mortgages gained $25,000 in equity last quarter compared to a year ago. California had the second-highest equity gain of all states in Q2 2024, with an average homeowner equity increase of $55,000 year-over-year in the latest quarter. The share of homes with negative equity in California remained unchanged at 0.7% in Q2 2024 and was one of the three states reported by CoreLogic with less than 1% negative equity share.

Economic and policy uncertainty curbs small business optimism: The NFIB Small Business Optimism Index fell for the first time in five months as dimming sales outlooks began to worry business owners more. After climbing for four consecutive months, the index dropped 2.5 points from 93.7 in July to 91.2 in August, erasing all the gain (and some) acquired in the prior month. Uncertainty around future public policy and the outlook of business conditions continued to weigh heavily on small firms. The Uncertainty Index, in fact, rose to 92, its highest level since October 2020. While inflation remained the top concern for small business owners, real sales volume expectations were the largest contributor to the decline in optimism, as the net percent of owners expecting higher real sales volumes fell nine points in August. With the political turmoil remaining in place in the near term in the U.S., expect more volatility in the index in the coming months. 

Foreclosures down both monthly and annually in the U.S.: U.S. foreclosure activity moderated last month, as filings went down 5.3% from a month ago and declined 11% from last August, according to ATTOM’s latest U.S. Foreclosure Market Report. A total of 30,227 properties in the U.S. had a foreclosure filing status last month, which was significantly below the peaks observed during the 2008 housing market collapse when filings exceeded 300,000 per month. For the month of August, 20,747 properties in the U.S. started the foreclosure process, a drop of 5.1% from the prior month, and a decline of 9.4% from the same month in 2023. At the national level, one in every 4,662 properties had a foreclosure filing in August. With home price growth moderating but continuing on an upward trend, foreclosure activity is expected to remain steady. The softening of the jobs market, however, could put some upward pressure on foreclosure rates in the medium term if the economy ended up slowing down at a faster pace than expected. 

Note: The weekly market minute report is updated every Monday by 6:00 PM PST.