April 4, 2023 – Can The Machine Continue Humming? The employment sector of the economy has been nothing short of amazing.

Economic Commentary

Can The Machine Continue Humming? The employment sector of the economy has been nothing short of amazing. Close to full employment, we lost an amazing number of jobs during the pandemic – close to 25 million. By July of last year, we had recovered those jobs and it was expected that the pace of job creation would slow down from that point on. And the pace did slow down a bit towards the end of 2022, though the job market stayed stronger than normal.

We turned the page to 2023 and what happened? The economy created approximately 800,000 jobs in the first two months of this year, significantly out pacing expectations. At this juncture, we have to ask this question—how long can the employment machine create these many jobs with the unemployment rate again nearing full employment levels? Logically, we should see job creation slow to the point that we are just replacing jobs lost and accommodating population growth.

Thus, the March employment report to be released this Friday will be watched with great anticipation – together with the measure of wage inflation. Again, logic says that wage inflation will not slow down until the jobs machine slows. And if wage inflation continues, the Federal Reserve will have no choice but to continue to raise rates and keep them higher for a longer period of time – which would be very problematic for them considering the current weakness in the banking sector. Very few times in our history we have been rooting for the economy to create fewer jobs. But if we want lower interest rates, this is the path we must follow.

Weekly Interest Rate Overview

The Markets. Rates continued to be volatile day-to-day, but ended up last week about where they started from the previous week. For the week ending March 30, 30-year rates fell one tick to 6.32% from 6.33% the week before. In addition, 15-year loans decreased to 5.56%. A year ago, 30-year fixed rates averaged 4.67%, more than 1.5% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Economic uncertainty continues to keep mortgage rates down. Over the last several weeks, declining rates have brought borrowers back to the market but, as the spring homebuying season gets underway, low inventory remains a key challenge for prospective buyers.” 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

While it might be tempting to hold off on buying a property until a better deal arrives, there’s no guarantee that mortgage rates will drop or that homes will become more affordable in 2024, say real estate analysts and economists interviewed by CNBC Make It. Despite forecasts of lower mortgage rates in 2024, don’t expect them to bottom out to the record lows of the past decade, either, says Lawrence Yun, chief economist at the National Association of Realtors. “Returning to mortgage rates of 3% or 4% is not going to happen, in my view,” says Yun, who points out that historically rates have been higher. The low rates of 2020 and 2021 were “unique” and those that got them were “lucky,” he says. Plus, if “mortgage rates go back down to that level, people can always refinance their mortgages,” says Yun. As for home prices, a price correction is largely expected to be short-lived due to a chronic shortage of homes. Declining mortgage rates could also stoke demand, which would likely push prices higher. It’s also important to note that real estate trends vary by region, which means that home prices in your area might not drop in either 2023 or 2024. “I wouldn’t necessarily wait around and see if you can get the best possible deal because timing the housing market is very difficult,” says Cristian deRitis, deputy chair economist at Moody’s Analytics. His firm predicts another 5% to 10% drop in home prices from their peak over the next 18 to 24 months, after which prices will start rising again. While professional house flippers might need to worry about short-term fluctuations in home prices and interest rates, regular homebuyers who plan to live in their homes more than five years should be less concerned about timing the market, he says. The short-term forecast for home prices is “a modest decline,” he says. Source: CNBC

Zillow said home prices nationally should bottom out in 2023, then return to a more normal growth rate. Zillow surveyed economists and housing analysts for its Zillow Home Price Expectation survey. Respondents said they expect home prices to fall 1.6% through December, in part because affordability challenges still drag down demand for homes. Starting next year, however, the panel foresees price growth picking back up, the report said, noting a consensus forecast of 3.5% per year on average through 2027–the same rate that prices grew in the relatively stable period from 1987-1999, before the housing boom and bust cycle in the 2000s. “The housing market is resetting,” said Zillow senior economist Jeff Tucker. “Though we’re seeing early signs of renewed buyer interest early this year, prices should generally flatten out in 2023, helping buyers to catch up.” Tucker noted the sheer number of people in the first-time homebuyer age range and a lack of inventory should limit price declines. “A return to more normal growth would be welcome after the rollercoaster ride that home prices have been on lately,” he said. Zillow forecasts existing home sales will fall to 4.2 million in 2023, up slightly from November and December’s seasonally adjusted annual rate of sales, but lower than 5.0 million sales seen in full-year 2022. New construction–also expected to see sales decline this year–will likely play an expanded role to meet the need for inventory, Tucker said. “Existing homeowners have been reluctant to list their properties and builders are giving buyers some significant financial incentives to help overcome affordability constraints,” he said. Source: Zillow

A bit of good news for homebuyers: mega investors and iBuyers are buying less homes of late as fourth-quarter results year-over-year revealed that activity fell 2% from 2021—however, this number is still elevated compared to pre-pandemic numbers. By December of last year, investor activity plateaued to about 81,000 purchases by investors, which was also down 25% compared to the fourth quarter in 2021. The last time the market saw these conditions was at the inflection point of the pandemic in early 2020. This information comes from a report from CoreLogic, who said it appears that housing demand has declined by investors and owner-occupants relatively equally. But looking closer, mega-investors are also dropping out of the market faster than small investors. The medium investor share (those with 11 to 100 properties) remained steady, at around 35% of home purchases. Large investors (those with 101 to 1,000 properties) represented 8% of all investor purchases. In September 2022, small investors purchased 47,000 single-family homes; a number which fell to 36,000 by December of the same year. Large- and mega-investor activity also retreated throughout the quarter. In December, both of these groups made about 6,000 purchases. For mega investors, this is just over half of the 11,000 purchases made in September. IBuyers made up 1.2% of all investor purchases in September, but that number dropped to 0.3% in December, a huge pullback from the record high 6% of iBuyer purchases in 2021. The data also revealed that 15.7% of investor’s purchases were flipped from June 2022 to December 2022; a number that remained steady from last year. This is likely due to home price growth easing, which makes flipping a home a much less lucrative prospect. Source: DSNews