August 16, 2022 – The New Game Show. There is a new game show in town. It is called—Is it a Recession?


Economic Commentary

The New Game Show. There is a new game show in town. It is called—Is it a Recession? This show is being played by many—market analysts, the man on the street and certainly those who are in the real estate industry. The classic definition of a recession is two negative quarters of growth in a row. We have now achieved this standard—or have we?

For one, the last quarter was only slightly negative (-0.9%) and there are revisions coming to this number. What if the quarter ends up slightly positive? On the other hand, what if this number stays negative and we add one more quarter of negative growth this year? Certainly, it is the length and the depth of the negative growth which are both important. The pandemic-induced recession of 2020 was very short, but also very deep. Of course, that recession was very unique because of the pandemic. And the growth numbers are being affected more significantly by supply shortages and inventory variances.

For a real clue to how this game show works, we need to look at the consumer. For one, we have been adding jobs all year, mainly jobs that were lost during the pandemic. The July jobs report showed an increase of over 500,000 jobs, well above expectations. And when there are more jobs, consumers are spending more. Retail sales expanded by 1.0% in June (also subject to revision) and if they expanded in July, it would be hard to call a recession in the summer of 2022. However, it is likely that the economy is slowing as the Fed tries to get inflation under control.

Weekly Interest Rate Overview

The Markets. Mortgage rates rose in the past week, though they fell a bit in response to tamer inflation reports after the survey period came to an end   For the week ending August 11, 30-year rates rose to 5.22% from 4.99% the week before. In addition, 15-year loans increased to 4.59% and the average for five-year ARMs climbed to 4.43%. A year ago, 30-year fixed rates averaged 2.87%, more than 2.00% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The 30-year fixed-rate went back up to well over five percent this week, a reminder that recent volatility remains persistent. Although rates continue to fluctuate, recent data suggest that the housing market is stabilizing as it transitions from the surge of activity during the pandemic to a more balanced market. Declines in purchase demand continue to diminish while supply remains fairly tight across most markets. The consequence is that house prices likely will continue to rise, but at a slower pace for the rest of the summer.”   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

In a lending environment marked by rising mortgage rates, adjustable-rate mortgages can help prospective home buyers recapture some of their house-buying power. That’s the premise of First American Financial Corp. analysis via its Real House Price Index, which jumped by 50.8% year over year – the fastest growth in the more than 30-year history of the series. According to analysts, the annual decline in affordability was driven by a 20.1% annual increase in nominal house prices and a 2.3-percentage-point increase in the 30-year fixed mortgage rate compared with one year ago. The financial climate has led to nothing short of an ARMs race among consumers, suggested First American Financial’s chief economist, Mark Fleming. “Consumer house-buying power, how much one can buy based on average household income and a given mortgage rate, increases when the mortgage rate drops,” he said. “In fact, at those rates, an ARM increases consumer house-buying power by nearly $44,000 when compared with a traditional 30-year, fixed-rate mortgage.” That difference is nothing short of a game changer – particularly for first-time homebuyers, he suggested. “Because ARMs offer a lower mortgage rate, there has been a steady increase in the share of ARM loans as mortgage rates have increased,” Fleming said. “For the month of May, the average share of ARM loans was up to 9.8 percent, compared with 3.9 percent one year ago. The findings were revealed in the May 2022 First American Real House Price Index, which measures the price changes of single-family properties throughout the US adjusted for the impact of income and interest rate changes on consumer house-buying power over time at national-, state- and metropolitan-area levels. Source: First American

The number of homes for sale nationwide in June rose 2%, the first annual increase since July 2019 —according to a new report from Redfin. Supply has built up as the combination of 5.5%-plus mortgage rates, high home prices and a faltering economy push more buyers to the sidelines, thereby creating a more balanced market. Home sales fell nearly 16% from a year ago, the largest decline since May 2020. The shift has also started impacting sale prices: They’re still growing by double digits, but the 11% year-over-year increase is the smallest in nearly two years. “The country’s economic woes have already cooled the housing market, and they’re likely to continue dampening demand,” said Redfin Chief Economist Daryl Fairweather. “The Fed has signaled it may increase interest rates further to combat stubbornly high inflation, which could harm consumer confidence, and lower stock prices mean fewer prospective homebuyers can afford a down payment. I advise sellers to commit: If you decide to sell, do it quickly before demand falls further. And price carefully—this is not the time to test the waters. You’ll do more harm than good if you overprice and have to do a price reduction or take the home off the market.” The market is a now considered a mixed bag for buyers. They’re seeing higher monthly housing payments than earlier this year due to comparatively high mortgage rates but facing less competition for homes, which often allows them to make less risky offers that include protections like inspection and appraisal contingencies. Source: MReport

CoreLogic released its latest Single-Family Rent Index (SFRI), which analyzes single-family rent price changes nationally and across major metropolitan areas. Annual U.S. single-family rent growth remained at a record high in May 2022, posting a 13.9% increase from May 2021. This growth matched April’s increase, representing the first time that price growth did not accelerate from the previous month since January 2021. Sustained high rent prices are partially due to a robust labor market, with the national unemployment rate at 3.6% in May, down by 2.2 percentage points on an annual basis and the lowest recorded since before the start of the (coronavirus) COVID-19 pandemic. Additionally, since rising interest rates are sidelining more prospective homebuyers, landlords have a larger pool of potential tenants and thus more leverage to raise prices. The year-over-year U.S. single-family rent price growth was more than twice the May 2021 increase and more than eight times higher than the May 2020 growth. “Increases in mortgage rates and high home prices can be headwinds to the for-sale housing market but may be continually pushing up single-family rents,” said Molly Boesel, principal economist at CoreLogic. “While the annual increase in the SFRI for May matched April’s growth rate, the gain remains at a record-high level. Furthermore, the month-over-month growth rate for rents in May was well above that month’s 19-year average.” Source: CoreLogic

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