April 2, 2024 – Between a Rock and a Hard Place.

Economic Commentary

It is no fun being a member of the Federal Reserve right now. The economy continues to grow in spite of higher interest rates and inflation has calmed down. But inflation is still being a bit stubborn and it is taking a longer time to reach the Fed’s stated goal of 2.0% inflation rate. Here is the problem — even though costs for food and services have become steadier (note they have not dropped, but have leveled off), shelter costs are contributing enough to price pressures to keep inflation elevated as a whole.

The good news is that we are no longer talking about 9.0% inflation rates—we are more in the 3.0% to 4.0% percent range. However, this is not close enough to the “magic” 2.0% number. Which is where the problem comes in. Higher interest rates caused by the Fed’s medicine to combat inflation are contributing to the higher shelter costs. Logically, if the Fed lowered interest rates, the costs for mortgages would be lower and this would take some pressure off shelter inflation. Higher mortgage rates affect not only those buying homes, but also those who are renting because landlords pass on the higher costs of mortgages to their renters.

Seem simple? Not so fast. If the Fed lowers interest rates too quickly in an era of housing inventory shortages, the price of real estate could start climbing more rapidly. The cost of homes is another important part of the equation and significant increases would theoretically offset the savings of lower interest rates. Thus, the Fed can’t afford to lower interest rates too quickly and the situation becomes a balancing act. Which is why we say that the Fed is between a rock and a hard place. The solution? The Fed needs to start lowering rates, but slowly unless the economy does show signs of slowing and the housing inventory shortage eases.

Weekly Interest Rate Overview

Mortgage rates eased in the past week, as a slew of end of the month economic reports approached. 30-year fixed rates fell to 6.79% from 6.87% the week before. In addition, 15-year loans decreased one tick to 6.11%. A year ago, 30-year fixed rates averaged 6.32%, 0.47% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates moved slightly lower this week, providing a bit more room in the budgets of some prospective homebuyers. Additionally, encouraging data out on existing home sales reflects improving inventory. Regardless, rates remain elevated near seven percent as markets watch for signs of cooling inflation, hoping that rates will come down further.” 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

Homeownership plays an integral role in a household’s accumulation of wealth. Households who own a primary residence build primary residence equity, while renters have zero residence equity. In the third quarter of 2023, CoreLogic’s homeowner report analysis detailed that U.S. homeowners with mortgages have seen their equity increase by a total of $1.1 trillion, a gain of 6.8% from the same period in 2022. In addition to primary residence equity, households who own a primary residence almost always own other assets as well. In 2022, while almost every family owned some assets, homeowners own the vast majority of assets in aggregate. An analysis of the Survey of Consumer Finances (SCF) suggests that the households who owned a primary residence own most other assets in sum, such as other residential real estate, vehicles, other non-financial assets, business interests, stocks and bonds, retirement accounts, and other financial assets. In aggregate, homeowners owned 16 times more stocks and bonds than renters, and 15 times more business interests and retirement accounts than renters. More than half of renters owned other financial assets, but they did not accumulate as they aged. On the debt side of homeowners’ balance sheets, the value of the primary home mortgage debt was the largest liability faced by homeowners. However, the median value of mortgage debt declined between the 35 to 64 age categories. More than half of homeowners above the age of 65 did not have mortgage debt (nor a balance on any of the other major debt categories). For renters, the value of credit card and installment debt was the largest liability in their debt category. The median value of credit card and installment debt declined between the 35 to 64 age categories and was zero for renters aged 65 or older. Net worth, the measure of households’ wealth, is the difference between families’ assets and liabilities. An analysis of the 2022 SCF found that homeowners had a median net worth of $396,000, while renters had the median net worth of just $10,400. Source: National Association of Home Builders

The newest ServiceLink State of Homebuying Report highlights generational preferences and trends from today’s homebuyers—which are predominantly Gen Z and millennials—who have been found to be optimistic, eager, and ready to buy a home even in light of relatively high mortgage rates and lower income levels, which aren’t putting a damper on their homebuying aspirations. The report analyzes generational trends among today’s homebuyers, revealing their sentiment about the current housing market and their intentions to purchase, refinance and leverage home equity this year. Now in its fourth year, the 2024 ServiceLink State of Homebuying Report (SOHBR) features insights from homeowners who either purchased a home or tried to purchase a home within the past four years and focuses on yearly trends that provide valuable insights for lenders, servicers, investors and buyers alike. “This is an interesting and pivotal moment in the housing and mortgage industries as the younger generations are not only determined to buy but are seemingly undeterred by the higher price tags and interest rates,” said Dave Steinmetz, President of Origination Services at ServiceLink. “Our study suggests that Gen Z and millennials are poised to impact the market in several ways including purchase, refi and home equity, which is an opportunity for lenders to educate and usher these younger buyers through the process.” Key findings of the report show that 63% of Gen Z respondents and 59% of millennial respondents said they plan to purchase a home this year (compared to 45% of Gen X and 21% of baby boomers). The younger generations also have a more optimistic view of the housing market in 2024, with 56% of Gen Z respondents and 51% of millennial respondents saying conditions for buying are favorable (compared to 38% of Gen X and 18% of baby boomers). Source: Mortgage Point

Home buyers who paid cash accounted for 32% of home sales in January, marking the highest rate since 2014, the National Association of REALTORS® reports. Many leveraged the equity from a prior home sale. Vacation-home buyers and real estate investors made up the bulk of all-cash buyers over the last six months, according to NAR. However, in the last two years, more buyers purchasing a primary residence are using cash as well, NAR Deputy Chief Economist Jessica Lautz says on the association’s Economists’ Outlook blog. “These housing consumers owned a home, sold it and then they could purchase their next property without a mortgage,” Lautz says. “The freedom to make this purchase was likely due to the large amount of housing equity they have earned as home prices have increased in recent years.” Only 6% of first-time home buyers made a cash purchase in 2023 compared to 26% of repeat buyers, who likely had equity from a prior sale, according to NAR’s data. “As home prices are expected to increase throughout 2024 due to limited housing inventory and high demand to purchase homes, these all-cash buyers are likely to still be prevalent in the market as homeowners earn more housing equity,” Lautz says. With lean housing inventory in many markets, home buyers still find themselves up against plenty of competition. But cash buyers often have the upper hand. Home sellers may have more confidence in a cash offer. In January, the typical home received 2.7 offers. “If multiple offers continue, these all-cash buyers will likely win bidding wars,” Lautz says. “Those who are financing may not be the winning contract on the home.” Source: Realtor® Magazine