Softer Inflation, Weaker Retail Sales and the Mortgage

Mortgage markets received several pieces of encouraging economic news this week, but there is still one major obstacle preventing interest rates from moving significantly lower.

Inflation, employment and consumer spending are all beginning to show signs of cooling.

July's Producer Price Index was unchanged for the month, coming in below expectations. Core wholesale inflation was also softer than forecast.

The labor market is showing weakness as well. July payrolls declined by 23,000 jobs, previous months were revised lower by a combined 103,000, and wage growth slowed.

Now the consumer may be showing signs of fatigue.

Retail Sales Fall

July Retail Sales declined 0.6%, significantly weaker than expected.

Even after removing volatile categories such as autos and gasoline, spending was

weaker than economists anticipated.

Online sales also declined, although some of that may have been influenced by the

timing of Amazon Prime Day.

The bigger concern is the combination of slower spending and a household savings rate

sitting near historically low levels.

Consumers have continued spending, but the question is how long that can continue if

employment and wage growth weaken.

Why This Matters for Mortgage Rates

The Federal Reserve has been concerned that persistent inflation and a strong

economy could require additional interest-rate increases.

Recent data make that argument more difficult.

Inflation is cooling.

Employment is weakening.

Wage growth is slowing.

Consumer spending is showing signs of softness.

As a result, market expectations for another Fed rate increase have declined.

That's generally positive for bonds and mortgage rates.

So Why Aren't Mortgage Rates Falling Faster?

There's another side to the story: U.S. government borrowing.

This week, the Treasury sold 30-year bonds at a yield of approximately 5.22%, the

highest financing cost for that maturity since 2001.

Investors are demanding higher yields to absorb the growing supply of government

debt.

Mortgage rates are closely connected to longer-term bond yields, so even if the Federal

Reserve doesn't raise short-term rates, elevated Treasury yields can keep mortgage

rates higher.

That's why today's rate environment can sometimes feel contradictory.

Economic data says rates should improve.

Government borrowing and Treasury supply say, "Not so fast."

More Options for Today's Borrower

Another important development in mortgage lending is the continued growth of non-

QM financing.

These aren't necessarily loans for borrowers with poor credit.

Many are designed for financially strong borrowers whose income simply doesn't fit

traditional underwriting guidelines.

That can include:

• Self-employed borrowers

• Real estate investors

• Borrowers using bank statements to document income

• DSCR investment-property borrowers

• Clients with complex tax returns

Homeowners with substantial equity also have alternatives to replacing their existing first mortgage.

A HELOC or closed-end second mortgage may allow someone to access equity while keeping an attractive first-mortgage rate in place.

What Happens Next?

Mortgage bonds are currently holding onto recent gains, but the market remains in a fairly wide trading range.

Next week's calendar includes Housing Starts and Permits, Pending Home Sales,

Federal Reserve minutes and weekly employment data.

The bigger picture, however, is becoming clearer.

Inflation is cooling, employment is softening, and consumers may finally be slowing down.

Those are ingredients that can eventually help mortgage rates.

The remaining question is whether pressure from government borrowing, Treasury supply and long-term yields will prevent mortgage rates from benefiting as much as

borrowers would normally expect.

For buyers and homeowners, this remains a market where having a strategy — and being ready when opportunities appear — matters more than trying to perfectly predict

the bottom in rates.