May 14, 2021

Sharply rising prices put the Fed in a difficult position. Rising lumber prices may finally be starting to cool off. And well-qualified borrowers continue to take home the lion’s share of mortgages.

Inflation jumps by more than expected

• The Consumer Price Index increased 4.2% in April from a year before and 0.8% from March.
• Mortgage rates rose following the release but remain very low.

Rapidly rising lumber prices finally show signs of slowing

• The price of framing lumber fell for five consecutive days this week, the first time that’s occurred since the beginning of the year.
• Prices remain 5x higher than they were in April 2020.

Better-qualified households continue to dominate mortgage borrowing

• 73% of residential mortgage funds in Q1 2021 went to borrowers with credit scores of at least 760.
• That share is 16.7 percentage points higher than the share in Q1 2019.

So what? 

Markets were expecting a steep increase in prices in April, but Wednesday’s Consumer Price Index report – which showed prices jumped 4.2% from April 2020 and 0.8% from March – greatly exceeding most expectations and putting the Federal Reserve in a tricky spot. Measures of inflation have become increasingly relevant as markets gauge whether the combination of aggressive monetary and fiscal stimulus and the nation’s accelerating economic recovery will cause the economy to overheat and force the Federal Reserve to intervene. Last week’s lackluster jobs report seemed to validate the central bank’s stance of maintaining loose monetary policy until more progress is made in the labor market. But the inflation figures present arguably the toughest test yet of the Fed’s commitment to this approach. Any signal that the Fed is moving to tighten monetary policy would push bond yields, and mortgage rates, upward and likely hinder some broader economic growth potential. For now, the Fed is downplaying the significance of the CPI figures, insisting the sharp price increases will be temporary. More broadly, the central bank appears unwilling to overreact to a single report, particularly with the economy still emerging from the depths of the crisis, increasing the likelihood of more noisy data to come.

Lumber prices have surged in the last year, especially over the past few months, but this week offered some hints that the boom may finally be nearing an end. The price of a lumber futures contract that expires in July has fallen for five consecutive days, its longest consecutive stretch of declines since the beginning of the year. While future price increases can’t yet be ruled out, the recent retreat is a welcome reprieve for all consumers of lumber, especially home builders, after prices more than doubled from March to mid-May and are 5.5 times higher April 2020. While home builders remain optimistic, concerns about the rising lumber prices have become increasingly common recently and threatened to hinder builders’ ability to address the housing shortage by constructing new homes at affordable price points. Lumber prices remain historically high, but a continuation of this week’s decreases should help keep the recent stretch of strong construction activity going in the months to come. 

Recent moves by the Federal Housing Finance Agency due to roll out in the next few months are aimed at helping borrowers with lower incomes and/or lower credit scores refinance and qualify for mortgages. But a report released earlier this week illustrated how borrowers with high credit scores continued to dominate mortgage borrowing. According to the Federal Reserve Bank of New York, the median credit score of mortgage borrowers in Q1 2021 – including both purchases and refinances – was 788, up two points from the last quarter of 2020 and the highest in the survey’s history, which dates to 1999. Nearly three quarters (73%) of mortgage originations – as measured by dollar value of loans originated – went to borrowers with credit scores of at least 760, also the highest share in the series’ history. As a comparison, at the beginning of 2004, just 22.9% of mortgage loan value was borrowed by those in the highest credit score bucket. While the figures may be discouraging for home shoppers with less-than-ideal credit, the figures do reinforce the fact that the quality of outstanding mortgages is much stronger than it was heading into the previous recession.

Click here to read past editions of Zillow’s Market Pulse updates.