February 20, 2024 – The Elusive Goldilocks

Economic Commentary

We have seen so many words describing our economic climate during the past few years. Words/phrases such as soft-landing, stagflation, sticky inflation, recession, qualitative tightening and more. There are so many that it is hard to keep up with the nomenclature. This week, we would like to bring one more to the table—the famed Goldilocks. Yes, the character famous for visiting the three bears.

Why are we looking for Goldilocks? Well, we want a few economic reports that are not too hot and not too cold. At the start of the year, we talked about how strong the job market has been. We keep repeating the statement that you can’t have a recession when you are adding hundreds of thousands of jobs per month. However, unless the pace of jobs growth slows, it is unlikely that we will see the Federal Reserve lowering short-term interest rates anytime soon. It is so hard to root for the economy to create less jobs, but we need the porridge to cool somewhat.

The bottom line is that a hot job market will keep forcing labor costs higher which in turn will keep the Fed from achieving their goal of a 2.0% inflation rate. What’s more, the lack of listings in the market continues to support increasing real estate prices, another inflationary factor. We have made great progress against inflation, but the Fed has made it clear they need to finish the job and it is not likely we will see a rate cut in March. The conclusion? Like Goldilocks—we need to cool it.

Weekly Interest Rate Overview

The Markets. Mortgage rates rose in the past week in reaction to a hot consumer inflation report. For the week ending February 15, 30-year fixed rates rose to 6.77% from 6.64% the week before. In addition, 15-year loans increased to 6.12%. A year ago, 30-year fixed rates averaged 6.32%, approximately 0.50% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “On the heels of consumer prices rising more than expected, mortgage rates increased this week. The economy has been performing well so far this year and rates may stay higher for longer, potentially slowing the spring homebuying season. According to Freddie Mac data, mortgage applications to buy a home so far in 2024 are down in more than half of all states compared to a year earlier.  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

While pursuing homeownership without a partner isn’t the norm for all Americans, single homeowners are becoming more prominent in the home purchase market. A recent PennyMac survey revealed the driving trends and potential roadblocks to purchasing a home for singles. Over half of respondents believe the idea of waiting for a significant other to buy a home is outdated. The survey highlights the role societal pressures played in homebuyers’ decision to purchase and the biggest challenges they faced. While some homebuyers have the luxury of using monetary gifts from family for down payments, some 67% surveyed single homebuyers saved for it on their own and didn’t have any financial assistance from family and/or friends. The most popular down payment range reported by both male and female respondents was 6%–10%, with most individuals (65%) purchasing a home in the $0-$250,000 range. There are many reasons why people choose to buy a home, from the opportunity to build their own equity to reaping potential tax benefits. According to our survey, it’s not cultural norms, as 70% of respondents did not feel societal pressure to buy a home. Like many others, half of single homebuyers were prepared to acquire their own home. They made the decision to start building their own equity because 43% of respondents said they had leased on their own before buying a house. Source: MReport

The typical U.S. luxury home sold for a record $1.17 million in the fourth quarter, up 8.8% from a year earlier, according to Redfin. Prices of non-luxury homes increased at half the pace, rising 4.6% year over year to a record $340,000, Redfin said in a recent report. The analysis defines luxury homes as those with a market value in the top 5% of their respective metros and non-luxury homes as those in the 35th-65th percentile. The outsized increase in high-end home prices, along with a jump in luxury new listings and improving sales, signal that affluent homebuyers and sellers are becoming more active, the report said. In addition, the share of high-end homes bought in cash reached a record high. Nearly half (46.5%) of the fourth quarter’s luxury purchases were made in cash, up from 40% a year earlier. “Luxury prices are rising at twice the rate of non-luxury prices largely because so many affluent buyers are able to buy homes in cash, rendering today’s elevated mortgage rates irrelevant,” the report said. “A lot of luxury buyers are coming in with cash, snapping up expensive homes,” said Heather Mahmood-Corley, a Redfin agent in Phoenix. Low inventory of high-end houses is another factor pushing prices up, Redfin reported. “Even though the supply of luxury homes surged from a year earlier, it’s still well below pre-pandemic levels, leading to competition from well-heeled buyers over a limited number of homes,” the report said. Source: The Mortgage Bankers Association

What would you do if you inherited a significant chunk of cash? With baby boomers projected to pass down over $84 trillion to their heirs over the next two decades in what’s called the “great wealth transfer,” those fortunate enough to receive a hand-me-down windfall will have to decide how to use it. We surveyed Americans between the ages of 18 to 42 in November 2023 to determine what percentage of millennial and Gen Z adults expect to receive an inheritance, what percentage won’t be as lucky, and how this outlook impacts their plans for the future. We also asked younger Americans about the responsibility of caring for their aging parents — which for some respondents is already a reality. One of the primary reasons baby boomers’ wealth ballooned over the past several decades lies with home ownership. Home values have increased nearly 500% since 1983, when the first wave of boomers bought their first homes. When you also factor in investment growth, higher incomes and lower debt levels than their offspring, boomers have had the benefit of time and more favorable economic factors in which to increase their riches. As such, it is estimated that some millennials and Gen Zers stand to inherit roughly $320,000, which is actually lower than the cost of the average home in the U.S. of $431,000 (according to U.S. Census Bureau and U.S. Department of Housing and Urban Development data for the third quarter of 2023). As younger generations plan for the future, it’s not just cash they’re expecting. Of the millennials and members of Gen Z expecting an inheritance, 62% expect to receive real estate. Other commonly expected transfers of wealth include cash, vehicles, investments and other property. When faced with the prospect of a generous windfall, 40% of respondents said they would pay off debt, with 69% of those with more than $10,000 in debt saying an inheritance would clear their obligations. Student loan debt among millennials and Gen Z comprises roughly 36% of the $1.63 trillion of federal student loan debt total in the United States (though Gen X owes the most at almost 57%), according to a 2023 report from the Education Data Initiative. Credit card debt is another burden weighing down the lifestyles of younger generations, with the average credit card debt being about $5,649 for millennials and about $2,854 for Gen Z. However, almost 76% of survey respondents expecting an inheritance said they plan on socking away what they get for the future and almost 20% said they would pay off their mortgage. Source: USA Today/Blueprint