February 13, 2024 – Is March The Month?

Economic Commentary

The Federal Reserve has been quite busy this decade. We started this decade with an economy-halting pandemic in March of 2020. The Fed reacted quickly, pushing short-term rates to zero, as well as adding significant qualitative stimulus in the form of purchasing treasuries and mortgages, further pushing down long-term interest rates as well. Along with massive stimulus packages from Congress, the recession was extremely deep, but also very short-lived.

The recovery was fast and powerful, but somewhat uneven, as certain parts of the economy were hit harder than others. It was so quick that the Fed was caught stimulating an economy which was already heating up. In their defense, it was not clear when and how the pandemic would end as we still are getting COVID spikes years later. The whole idea of an economy shutting down and then opening back up created much uncertainty on several levels – including how to overcome supply and labor shortages created by this unique situation.

The result? Massive world-wide inflation. In 2022 and 2023, the Fed was busy raising short-term rates and ending their purchases of mortgages and treasuries. Both short-term interest rates and long-term rates skyrocketed as inflation did not react as expected. Interestingly, the economy continued to be strong despite the Fed’s efforts to slow things down. The Fed stopped raising short-term rates over six months ago. Will their next meeting in March be their first move downward? Inflation has come down significantly, but the economic news is still stronger than expected. This contradiction makes March a tough call and the vibes coming from the Fed leads us to believe we will likely have to wait until May. 

Weekly Interest Rate Overview

The Markets. Mortgage rates were stable over the past week, though there was much volatility from day-to-day.  For the week ending February 8, 30-year fixed rates rose one tick to 6.64% from 6.63% the week before. In addition, 15-year loans decreased to 5.90%. A year ago, 30-year fixed rates averaged 6.12%, approximately 0.50% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates remain stagnant, hovering in the mid-six percent range over the past several weeks. The economy and labor market remain strong with wage growth outpacing inflation, which is keeping consumer spending robust. Meanwhile, affordability in the housing market is an ongoing issue due to continued high home prices, elevated mortgage rates and low supply of homes on the market, particularly for first-time and low-income 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

ATTOM released its Year-End 2023 U.S. Home Sales Report, highlighting that home sellers garnered $121,000 in profit on a typical home, and a 56.5% return on investment, in 2023. While those numbers remain near record highs, they are a decrease from 2022, marking the first decline since 2011. In 2022, the gross profit on a median-priced single-family home sold was $122,600, with sellers making a 59.8% return on investment. “Last year certainly stood out as another very good year for home sellers across most of the United States. Typical profits of over $120,000 and margins close to 60% were still more than double where they stood just five years earlier,” said Rob Barber, CEO at ATTOM. “But the market definitely softened amid modest price gains that weren’t enough to push profits up higher after a long run of improvements. In 2024, the stage seems set for more small changes in prices as well as seller gains given the competing forces of interest rates that have headed back down in recent months and home supplies that remain tight, but home ownership costs that remain a serious financial burden for many households.” The national median home price also recorded the slowest pace of growth since 2011, at 2.1%. That did push the price to yet another all-time annual high of $335,000. Homeownership tenure by sellers who sold in the fourth quarter of 2023 hit 7.96 years, up from 7.8 years in the third quarter. That’s the highest tenure since 2021. Source: ATTOM

You can’t talk about the housing shortage or runaway home prices without boomers on the brain. Baby boomers dominate America’s housing market. Members of the “Me” generation own nearly $19 trillion worth of US real estate — more than double the amount held by millennials and about $5 trillion more than Gen Xers. Their massive land grab has continued well into their twilight years as they’ve used their mountains of savings and accumulated equity to edge out younger buyers. But as the generation ages, its vast real-estate portfolio poses a question: What happens when boomers die? By 2040, the population of 80-plus-year-olds will have more than doubled from today, according to projections from the Census Bureau. In the years leading up to that, boomers will begin to leave their residences as they die, move into nursing homes, or shack up in granny flats. Some economists have predicted that a “silver tsunami” of aging Americans will leave millions of homes up for grabs, lowering prices and unlocking opportunities for younger generations used to fighting for table scraps. Others have likened the phenomenon to a glacial shift — slow, predictable, and unlikely to sway home prices as much as 20- and 30-somethings might hope. Regardless of the degree to which boomers’ exit shakes up the market, the changing of the guard will leave one generation in the driver’s seat: Gen Z. Most Gen Zers will be in their prime homebuying years at this crescendo — perfect timing to take advantage of the increase in supply. Since many boomers are downsizing later in life, their leftover inventory could include many of the kinds of starter homes that are perfect for younger households and scarce in today’s new housing stock. Millennials will benefit somewhat, but they’ll be well past the typical age for first-time buyers. After all their economic misfortune, they’ll still face a turbulent housing market and potentially tens of thousands of dollars’ worth of necessary updates to boomers’ aging houses. No generation has shaped the modern housing market more than baby boomers. Now they’re about to reshuffle the cards one last time — and Gen Zers might just end up with the winning hand. Source: Business Insider

According to a recent RentCafe report, over the past four years, there has been extraordinary growth in the conversion of office buildings into living spaces, with an estimated 12,100 apartments crafted out of old office spaces in 2021. By 2022, that number had nearly doubled to 23,100. The climb continued as 2023 saw an increase to 45,200, and into 2024, the pipeline has reached an impressive 55,300. That’s more than four times as great since the increasingly popular trend began. However, new data found that behind this shift lies a crucial factor: the $150 billion in office mortgages due by 2024. As residential space demand surges, developers are jumping on the opportunity to repurpose these aging buildings. Currently, office conversions represent a staggering 38% of the 147,000 apartments in future adaptive reuse projects, outpacing any other building type—a record high since 2020. The office spaces that are being picked for makeovers are newer than some of the rundown edifices seen in the average major metro. On average, they are 72 years old. That’s 20 years less than the ones already converted. This suggests a strategic preference for buildings that might require less investment in refurbishment and are more likely to meet modern standards, potentially simplifying the conversion process. Source: DSNews