August 6, 2024 – A Busy Two Weeks

Economic Commentary

We have a very busy few weeks of economic news. While the stock market was reaching record highs in July, the month closed with some important news. As July came to a close, the initial reading of economic growth for the second quarter was released. The 2.8% growth rate was seen as better than expected. Then we saw the Fed’s favorite measure of inflation, the Personal Consumption Expenditures Index, which showed inflation continuing to subside.

These two reports were the most significant recent data the Federal Reserve’s Open Market Committee had to ruminate about when they met over the last two days of July. As expected, the Fed did not lower interest rates. However, their statement regarding progress on the war against inflation has given the market hope that their next meeting in September could result in a rate decrease. The markets have already started salivating over this possibility.

Finally, we had the July jobs report released at the end of last week. The economy added 114,000 jobs in July, less than expected. Furthermore, the previous two months of data were revised downward by 29,000 jobs. The headline unemployment rate rose to 4.3%. Wages grew by 0.2% from the previous month and 3.6% annually. This was the first major data released after the meeting of the Fed and taken as a whole, this report will serve to bolster the Fed’s statement about future rate cuts. Of course, with no meeting in August, there will be much data released before they meet again.

Weekly Interest Rate Overview

 Freddie Mac reported that mortgage rates hit their lowest level in six months and they dropped further after the release of the jobs report. 30-year fixed rates fell to 6.73% from 6.78% the week before. In addition, 15-year loans decreased to 5.99%. A year ago, 30-year fixed rates averaged 6.90%, 0.17% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates declined to their lowest level since early February. Expectations of a Fed rate cut coupled with signs of cooling inflation bode well for the market, but apprehension in consumer confidence may prevent an immediate uptick as affordability challenges remain top of mind. Despite this, a recent moderation in home price growth and increases in housing inventory are a welcoming sign for potential homebuyers.” 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

Single-family homes account for roughly two-thirds of the nation’s housing stock, and the majority are occupied by the families that own them. But a sizable share – 16.6 percent – are rented instead, and recent trends in construction data suggest that these single-family rentals will become an increasingly popular housing option in the years to come. Growth in single-family rentals is driven by a strong demand for single-family homes but a lack of affordable homeownership opportunities. Home prices have nearly doubled over the past decade, and two-thirds of that growth has occurred since the pandemic. Compounding this are high interest rates that further amplify the long-term costs of owning a home. So, for many households that want to live the single-family lifestyle, renting is the only financially viable option. Single-family rentals are typically operated by a mom-and-pop landlord or a small institutional investor. But the new model that is becoming increasingly common is the “built-for-rent” (BFR) community: a large-scale development of single-family homes that are designed for renter occupancy from the start. BFRs borrow some features of multifamily housing, like professional leasing offices, on-site property management, and community amenities, and are marketed as a middle-ground between renting and homeownership. And according to the Census Bureau’s Survey of Construction, BFR development is booming. In 2023 alone, construction started on 85,000 BFR single-family homes, a three-fold increase over the past decade. This accounted for 9 percent of all single-family starts that year, again an all-time high. Even as top-line home construction has cooled since 2021, built-for-rent construction has continued accelerating. Source: Apartment List

Millions of middle-class Americans face an enormous economical challenge as they age into their late 70s—the dual burden of housing and long-term services that older adults require. Increasingly, moderate-income seniors—those who make too much to qualify for government assistance—must sacrifice care (including medical and personal assistance) for their home, or vice versa. Those who own a home with equity, however, could be better positioned to afford both. That’s according to Harvard University’s Joint Center for Housing Studies Housing Older Americans report, which highlighted our country’s growing need for more and better options for older adults. Today only 14% of adults over 75 who live alone can afford a daily home health aide visit after paying for housing and other living costs, and just 13% can afford an assisted living facility. Harvard fellows refer to the previously mentioned moderate-income Americans as GAPS Households, because they fall into the gap between affordability and public assistance. Summarizing the recent report, Research Associate Tamara Scheckler and Research Assistant Peyton Whitney write that home equity creates opportunities for many households straddling the gap between affordability and public assistance to pay for care, either at home or in assisted living. They pointed out that more than three quarters of those gap households owned their home as of 2021, with a median home equity of $250,000. “Upon sale, the proceeds could fund care in assisted living for a period of time,” they note. This may not be a viable option for the 28% of “gap” homeowners with outstanding mortgage debt, which reduces their available equity and makes further leveraging more difficult, the researchers explained. Researchers concluded that the need for medical and other types of care will be “a major driver of older adults’ housing choices” in coming years. Source: MortgagePoint

Investors pulled back on home buying activity over the last couple of years, but investor activity maintained more momentum than the overall market. As a result, investor share has grown despite investors purchasing fewer homes. In 2023, investor activity fell to 13.1% of home purchases, down from 13.8% in 2022. Home prices and mortgage rates remained elevated through the year, taking some of the wind out of investors’ sails. However, 2023 still saw the second highest share of investor purchases in the data’s history (back to 2001). Though the share of investor buyers fell less than 1 percentage point, the number of investor transactions fell 25.3% year-over-year in 2023, outpacing the 20.4% drop in non-investor home purchases in the year. As the housing market got more challenging, investors pulled back more quickly than non-investor homebuyers. In the first quarter of 2024, the slowdown in home sales continued, but investor activity leveled off. In Q1 of 2024, 14.8% of sold homes were purchased by investors, the highest share on record. Though investors took a bigger piece of the pie than in any other quarter, the pie was much smaller. Investors purchased roughly the same number of homes as in the first quarter of 2023, while non-investor purchases fell 6.1% year-over-year. The housing market continues to present a challenge to investor and non-investor buyers. Investors are generally the first to pull out of the market, as seen in 2023, as well as the first to re-enter, which we are seeing signs of now. Though investor activity has not started to ramp back up, the rate of decline has slowed, signifying that investor transactions are nearing their post-pandemic bottom. Despite their lowest showing in the last 4 years, investors still purchased 10.6% more homes in 2024 Q1 than pre-pandemic in 2019 Q1. It seems that the pre-pandemic ‘ceiling’ in investor purchases lines up with this post-pandemic ‘floor’. That is to say that even with the recent slowdown in investor purchases, investor activity generally continues to trend higher, with more investors purchasing homes and competing with homebuyers than was common pre-pandemic. Source: Realtor.com®