August 22, 2023 – The Great Disappearing Recession

Economic Commentary

The Great Disappearing Recession. For about a year now we have been talking about the predominant forecast of market analysts which projected a recession as early as the second quarter of this year. And for a year we have been stating emphatically that it is tough to have a recession when the job market is hot. Well, the job market may have cooled off a bit, but it is still strong. And the preliminary measure of the economy’s growth in the second quarter came in at 2.4%, which is stronger than the first quarter. What does that mean? No recession is on the horizon.

We also make a habit of not predicting the future. We report other predictions. Thus, we are not saying there will not be a recession. But we will take note of the fact that these economic prognosticators are now saying that a soft landing is more likely. What is a soft landing? Well, if you fall off of a trampoline, you want a soft landing. In economic terms, it means the economy will slow down, but not fall into negative growth territory. Or if we have negative growth during a quarter, it is only slightly negative.

A stronger economy is good news for everyone but the Federal Reserve. The Fed has been trying hard to stop the economy in its tracks. The stronger economy just gives the Fed more fuel to either raise rates again or keep them at this “higher” level for a longer period of time. If inflation continues to cool, we could have the best of both worlds – a strong economy and waning inflation. The July inflation numbers were released recently, and they showed that things continue to move in the right direction, though the numbers were slightly higher than expected. To us, that means we may have to wait a bit longer to see the Fed’s medicine accomplish its task.

Weekly Interest Rate Overview

The Markets. Rates continued to rise last week in the face of a stronger than expected economy. For the week ending August 17, 30-year rates rose to 7.09% from 6.96% the week before. In addition, 15-year loans increased to 6.46%. A year ago, 30-year fixed rates averaged 5.13%, almost 2.0% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The economy continues to do better than expected and the 10-year Treasury yield has moved up, causing mortgage rates to climb. The last time the 30-year fixed-rate mortgage exceeded seven percent was last November. Demand has been impacted by affordability headwinds, but low inventory remains the root cause of stalling home sales.”  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

More than one-quarter of homebuyers nationwide are looking to move to a different metro area, reported Redfin. The figure increased from 23% a year ago and less than 20% before the pandemic. The Redfin Housing Migration Report said a record share of homebuyers are relocating because high mortgage rates have made housing more expensive, which makes relatively affordable areas more attractive. But that doesn’t mean more homebuyers are looking to relocate, Redfin noted. In fact, the number of homebuyers moving to a new metro is down 7% from a year ago, the biggest decline on record, as elevated mortgage rates push many Americans out of the homebuying game entirely. Still, out-of-town moves are holding up better than in-town moves: The number of homebuyers looking to move within their current hometown is down a record 18%. “In other words, the overall homebuying pie has shrunk, but buyers moving to a new metro make up the biggest piece of that pie on record,” the report said. Phoenix is the most popular destination for homebuyers looking to move to a different part of the country, followed by Las Vegas and several Florida metros, Redfin said. Popularity is determined by net inflow, a measure of how many more Redfin.com users looked to move into an area than leave. “Climate risks haven’t yet stopped many homebuyers from moving into areas that don’t have enough water, like Phoenix, and places that could eventually be underwater, like coastal Florida,” Redfin Chief Economist Daryl Fairweather said. “That’s because even though Sun Belt home prices soared during the pandemic, those metros remain a bargain for people relocating from expensive coastal cities.” Source: https://www.redfin.com/news/housing-migration-trends-may-2023/

For the first time in a year, profit margins on median-priced single-family home and condo sales in the United States increased, according to a report from ATTOM. The Irvine, Calif.-based curator of land, property, and real estate data released its 2023 U.S. Home Sales Report, showing that profit margins increased in the second quarter of this year to 47.7%. The improvement in typical profit margins, from 43.9% in the first quarter of 2023, came amid a rebound in the U.S. housing market that pushed the median nationwide home price up 10% quarterly to a record $350,000. Both the nationwide profit margin and median home price increased after three straight quarterly drop-offs that had begun to reverse a decade-long market boom, ATTOM said. Even as seller fortunes turned around in the second quarter, the typical investment return nationwide remained below the recent high point of 53.2%, recorded during the second quarter of 2022. “Just when it looked like the housing market was flattening out, prices spiked again, which pushed seller profits back up to nearly their highest level in the past decade,” said ATTOM CEO Rob Barber. “Stable mortgage rates, an ongoing tight supply of homes for sale, and the usual springtime surge in buyer demand appeared to have combined to halt the downturn we started seeing a year ago.” Barber said it’s far too early to predict another long-term price run-up, “especially since buying a home is a financial stretch for so many households around the country. But the second-quarter numbers clearly show the market has more steam left in it, and sellers are reaping the benefits.” Source: ATTOM

The supply of low-cost rental apartments fell by 3.9 million units over the last decade and in every state, the Harvard Joint Center for Housing studies reported. Using data from the latest State of the Nation’s Housing report, Harvard Research Analyst Sophia Wedeen found the dwindling supply of low-cost rentals leaves lower- and middle-income renters with fewer housing options they can afford. “The supply of low-rent units has fallen continuously in the past decade due to rent increases in existing units, tenure conversions out of the rental stock, building condemnations, and demolitions,” Wedeen said in a Housing Perspectives blog post. She said the number of units with contract rents below $600 fell from 11.9 million to 8.0 million between 2011 and 2021 adjusted for inflation. ($600 is the maximum rent amount affordable to households earning $24,000 annually.) The market lost 1.5 million units with rents between $600 and $799, the report said. “Rent increases and high-end new construction have driven up the number of higher-cost units; the number of units renting for $1,400 or more increased by 7.8 million, to 14.5 million units in 2021,” Wedeen said. “These additions combined with the declining number of low-rent units have shifted the overall distribution of rents. Between 2011 and 2021, the share of rental units offering contract rents below $600 decreased by ten percentage points, to just 17 percent of rentals, while the share renting for $1,400 increased by 16 percentage points, to 31 percent of rentals.” Source: The Mortgage Bankers Association