April 11, 2023 – Between a Rock and a Hard Place. Excuse our overuse of common clichés. But we can find no other description of the dilemma facing the Federal Reserve.

Economic Commentary

Between a Rock and a Hard Place. Excuse our overuse of common clichés. But we can find no other description of the dilemma facing the Federal Reserve. We would not want to be in their place. On one hand, the jobs market has been red hot up until now and inflation is still a major concern. When you get jokes about taking out a loan for a dozen eggs, that just about sums it up. On the other hand, the real estate sector has slowed significantly because of higher rates which are the result of the Fed’s medicine against inflation.

Now we have a crisis of confidence in the banking sector, which could spread to the rest of the economy – a crisis which was at least partially precipitated again by the Fed’s medicine. Thus, while the Fed would be inclined to continue to raise rates, they may not be able to. They are in a very difficult position. There are very few times when you could conceive of governmental officials secretly hoping for the economy to create less jobs than it has been. But these are strange times. This is why last Friday’s jobs report was of so much interest. So, how did we do? 

The increase of 236,000 jobs was right on target with regard to expectations.  The headline employment rate ticked down to 3.5%, despite a slight uptick in the labor participation rate. In addition, wage inflation came in at 0.3% monthly and 4.2% on an annual basis, as wage increases are slowing but are still elevated.  Though the gains were lower than the first two months of the year, this was still a solid report. How will this report make the Fed feel about the future of inflation?  Progress is being made, but not enough to rule out another .25% increase when they meet again in May – just before the next employment report. Of course, there is a lot of other news coming before then.

Weekly Interest Rate Overview

The Markets. Rates eased a bit in the past week, as questions about the banking sector continued to raise more questions about how the economy might fare in light of recent events. For the week ending April 6, 30-year rates fell to 6.28% from 6.32% the week before. In addition, 15-year loans rose to 5.64%. A year ago, 30-year fixed rates averaged 4.76%, more than 1.5% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates continue to trend down entering the traditional spring homebuying season. Unfortunately, those in the market to buy are facing a number of challenges, not the least of which is the low inventory of homes for sale, especially for aspiring first-time homebuyers.” Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

The Wall Street Journal reported that a hike in the cost of homeownership and a limited supply of homes has driven the rise of rental properties, with the story noting, “three million U.S. households making over $150,000 are still renting.” According to the U.S. Census Bureau, five-year estimates show that between 2016 and 2021 the number of renter households making $150,000 or more a year rose 87%. The Census also reported that about 44 million households rented, and the median income of these households was nearly $71,000 in 2021. Real-estate companies have helped accelerate the trend of wealthier renters. Investment companies have begun buying thousands of suburban homes and then renting them out to high-income earners. Apartment complexes have started amenity-focused buildings, and home builders are catering to “single-family houses designed to be rented instead of sold,” reported The Journal. Chief Executive of AHV Communities Mark Wolf told The Journal, “Higher rents are here to stay.” AHV Communities is a development company that builds single-family rental homes near Seattle, where the average household income is more than $200,000. Source: CNBC

While nationwide single-family housing starts have slowed in the past year, the largest drop on a percentage basis is occurring in the densest counties, where housing costs are highest. Meanwhile, multifamily growth was robust throughout much of the nation at the end of 2022, with the notable exception in high-density markets, according to the latest findings from the National Association of Home Builders (NAHB) Home Building Geography Index (HBGI) for the fourth quarter of 2022. “While the largest single-family market continues to be core counties of large and small metropolitan areas, the urban core market share has fallen compared to pre-Covid levels,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “During the fourth quarter of 2019, urban core markets of small and large metro areas represented 47.2% of the single-family market. This share declined to 44.5% in the fourth quarter of 2022, representing a persistent shift in buyer preferences to live outside of densely populated areas.” The largest growth in single-family market share came in rural markets (micro counties and non-metro micro counties), rising from 9.4% in the fourth quarter of 2019 to a share of 11.8% in the fourth quarter of 2022. “Due to aggressive federal reserve monetary policy and high mortgage rates, all submarkets in the HBGI posted lower single-family growth rates in the fourth quarter of 2022 than a year earlier,” said NAHB Chief Economist Robert Dietz. “Rural areas were the only market with a positive single-family home building growth rate in the final quarter of 2022.” Source: NAHB

For many homebuyers nationwide, affordability, job opportunities and outdoor amenities are major driving factors for relocation. A previous analysis from CoreLogic showed that homebuyers who relocated to another metro in recent years often chose metros adjacent to their current location and/or had a lower cost of living. Although homebuyers were weighing these considerations before COVID-19, the migration rate to cities featuring these factors grew during the pandemic. With the combination of low for-sale inventory, low interest rates and a shift to a more flexible working environment, more people moved out of expensive metros in search of affordability, outdoor amenities and warmer weather. However, homebuyers’ location choice may shift again. As more employees returned to offices, homes sold for higher prices, interest rates climbed and uncertain economic conditions prevailed, these external economic forces may have influenced homebuyers’ decisions in 2022. Thanks to the flexibility of remote work, more people moved into affordable states compared to pre-pandemic. However, the ratios of in-migration to out-migration for all these states were higher in 2022 compared to pre-pandemic levels. Since remote work reduced the need to live near an employer, families have been able to broaden their homebuying search and consider affordability and other external amenities, a trend that accelerated homebuyers’ migration rate. As affordability continues to be an important consideration for homebuyers, we are likely to see more applicants buying in less expensive markets going forward. Source: DSNews