August 2, 2022 – So How Did We Do in July? At the beginning of the month, we promised plenty of fireworks – after the 4th of July.

Economic Commentary

So How Did We Do in July? At the beginning of the month, we promised plenty of fireworks – after the 4th of July. It was certainly a busy month of events and economic data. And that does not even include baseball’s All-Star game and the continuing war in Ukraine, which has turned into a battle of attrition. So how did this busy month turn out? We started with a solid jobs report. Though this report allayed fears that a recession was around the corner, it did not assuage fears of a recession or economic slowdown further down the road.

These fears continued to be flamed by continued hot inflation data release in mid-June. This increased speculation of another large increase by the Fed, who was scheduled to meet as the month came to a close. Even before the Fed was to meet, earnings reports started flowing for the second quarter, another economic barometer. The season started with a bang with a major bank missing projected earnings and warning of — you guess it – a recession.

The Fed meeting was not a guess if they were to raise rates, but how much they will raise rates. Estimates were ranging from .50% to .75%, but stretched to 1.00% after the inflation reports were released. The .75% increase turned out to be right on the target expected by the markets. We finished the month with the first estimate of economic growth for the second quarter. The decline of 0.9% was the second quarter of negative growth in a row, clearly an indicator of an economic slowdown. This may give the Fed some reason to think harder regarding additional significant rate increases.

Weekly Interest Rate Overview

The Markets. Mortgage rates fell sharply in the past week. For the week ending July 28, 30-year rates fell to 5.30% from 5.54% the week before. In addition, 15-year loans decreased to 4.58% and the average for five-year ARMs declined to 4.29%. A year ago, 30-year fixed rates averaged 2.80%, 2.50% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Purchase demand continues to tumble as the cumulative impact of higher rates, elevated home prices, increased recession risk, and declining consumer confidence take a toll on homebuyers. It’s clear that over the past two years, the combination of the pandemic, record low mortgage rates, and the opportunity to work remotely spurred greater demand. Now, as the market adjusts to a higher rate environment, we are seeing a period of deflated sales activity until the market normalizes.” 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

Rents rose in the US in June at the fastest pace since 1986, helping to propel overall inflation to a fresh four-decade high. An index measuring rent of a primary residence was 0.8% higher in June than the month before, an acceleration from the 0.6% increase recorded in May, according to the Labor Department’s report on consumer prices. In the 12 months through June, rents were up 5.8%. Those costs are soaring across the country as would-be homebuyers slide back into the overcrowded rental market. But rent growth may be peaking as affordability concerns mount, and a surge in construction of new units is poised to start adding to the available inventory. The Labor Department measure tends to lag behind other estimates, so it is likely that rent increases will contribute to rising inflation in the consumer price index through the rest of this year, according to Mark Zandi, chief economist of Moody’s Analytics. “The big increase in CPI rents is catch-up with the consistent double-digit growth in market rents,” Zandi said. “The good news is that market rents appear to be topping out, as renters are not able to afford the higher rents and are balking. More rental supply is also coming, although this will take a year or two to have a meaningful impact on market rents.” Source: MPA

A new analysis of institutional home buyers and their impact on single-family properties conducted by the National Association of Realtors Research Group found that this segment of buyers comprised 13% of the residential sales market in 2021, with the median purchase price of institutional buyers on average 26% lower than the states’ median purchase prices. With the inventory of existing-homes available in March 2022 equivalent to just two months of supply, well below the desired level of six months, the home sales and rental markets continue to suffer from a huge undersupply of both for-sale and for-own units. For their analysis, “Impact of Institutional Buyers on Home Sales and Single-Family Rentals,” NAR defined institutional buyers as “companies, corporations, or limited liability companies (LLCs),” and researched deed records data to conclude that institutional buyers purchased 13.2% of the nation’s residential properties in 2021, up from 11.8% in 2020. It was found that institutional investors made up a greater share of the market in counties where the number of homes available for sale was tighter. “In counties where the investor share was higher than the national average, listings were down 7% year-over-year as of March 2022, and in counties where the investor share was lower than the national average, listings were down just 4% year-over-year,” said the report. Source: NAR.

Although home production has been on the rise, one of the consequences of the 2008 foreclosure crisis was a slow rebound in home construction, which has contributed to an underproduction of current housing by an estimated 3 million units. To help with this, the U.S. Department of Housing and Urban Development released a report outlining “innovative strategies” being pursued by state and local governments to remove barriers to increase the supply of affordable housing. According to the report, without significant new supply, cost burdens are likely to increase as current home prices reach all-time highs. The report specifically identifies localities zoning laws as a prime example of what needs to be changed to allow for new affordable housing. “Many communities limit residential development to primarily single-family detached houses, which can constitute up to 75% of the residential land in many cities, according to one estimate,” the report said. “Large apartment buildings are often perceived as the alternative. Many jurisdictions limit the production of diverse, unsubsidized housing options between single-family and large multifamily housing, ranging from duplexes to fourplexes, courtyard apartments, bungalow courts, and townhouses, which are necessary for meeting the range of families’ needs. This variety of housing, is sometimes referred to as ‘missing middle housing.” Localities can change this by enacting “gentle density” laws that can allow for low-density multi-family units, such as a duplex or fourplex, to be built in single-family neighborhoods without significantly changing its character. Other solutions include easing design and dimensional requirements at the local level so houses can use more cost-effective materials in the design process or reduce setbacks so larger units can be built on existing lots. Source: MReport