Portland Mortgage Market Update — March 1, 2024

What a difference a week makes, both in weather and in rates! Last Friday we had sun and rates frightened by Fed comments and unsavory reports. This Friday we are looing at potential snow and rates have been bolstered by a favorable PCE report that dropped yesterday. Rates are currently headed to their best they have been all week, dipping below the 7% line in some cases.

PCE, CPI, PPI? What's the difference?? All three are very important reports that track inflation, but they measure different things and have different bearing on how the market reacts. The CPI is the Consumer Price Index, which is conducted by the Bureau of Labor Statistic and measures the prices paid by urban households for the goods and services. The PPI (Producer Price Index) measures the prices paid by companies for their goods and services used to provide product to the consumers. SO, think of PPI as a wholesale cost measurement (buying baking supplies at costco) and CPI as the individual cost measurement (the cost consumers pay to buy the baked goods you made with said costco products). Both of these are conducted via survey. The PCE is similar in that it measures the costs of goods and services, but the data is derived from the GDP data rather than survey. So the "human element" of taking a survey is removed and the data is collated from cold, hard numbers. As such, this is the Fed's preferred measure of inflation, and generally speaking the market reacts to CPI and PPI because it is trying to determine how the Fed will react to the PCE report which usually comes out after the surveyed reports.

One other significant difference between the CPI and PCE report is how they weigh one component they measure- the "Owner's Equivalent Rent". In the CPI report it is assigned almost 1/3 of the core, whereas it only takes up 1/6 of the PCE. The OER is established by asking homeowners "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?". So, it is a pretty subjective question that carries a TON of weight in the CPI report. What has come to light recently is the BLS changed their model this past month and is now focusing on asking this question to more owners of single family residences rather than people that own multiplexes (who would inherently have a better idea of what their unit would rent for since they own other similar units that are actually rented out). The result is past month's CPI report, (which, remember, came as a surprise and killed mortgage rates) showed much higher OER and was the first time in over 6 years that the OER diverged from the accrual rent of primary residences. BOTTOM LINE, 1/3 of the core CPI is being based on a subjective question that is being answered by people who are making up the answer. And this is shaping monetary policy.

In the meantime, enjoy the improvement in rates and uptick in market activity. Next week is jobs week, and oddly enough the higher the unemployment the better it will be for the market and rates as a whole. Most of the Fed is projecting ~4.4% unemployment by the end of 2024. The sooner we can get there the sooner they will start cutting rates.