February 6, 2024 – So, How Did We Do?

Economic Commentary

The triple whammy of economic data has been released during the past two weeks. The question is—how did we do overall? We have already reported that economic growth for the 4th quarter came in at an estimated 3.3%, which puts the annual rate at around 3.1% before 4th quarter revisions. Overall, a very solid year of growth, especially considering we were forecasted to have a recession last year. Another example of predictions which have gone awry.

Next the Fed Reserve met and as expected held interest rates steady. As of now, it has been over six months since the Fed last raised short-term interest rates. While the growth of the economy represents positive news, we probably would have witnessed the Fed already lowering interest rates had we moved into a recession. The announcement after the meeting gave us the usual mixed signals as they indicated they would continue to weigh the data before making their next move, wording that did not stray far from what the markets were expecting. 

That brings us to event number three on Friday of last week—the first employment data of the new year. In January, it was reported that the economy added 353,000 jobs, a number that blew away expectations. Plus, the previous month of data was revised upward by an additional 100,000+ jobs. The headline unemployment rate stood at a historically low 3.7%. The Fed has been watching wage growth carefully as this has been one of the “sticky points” of inflation. Wage growth was also higher than expected. So how did we do overall? Overall, our economy is still showing plenty of strength, and this gives us solid support for this year’s prediction of a soft landing instead of a recession. It does not bode well for interest rate cuts the next time the Fed meets in March.

Weekly Interest Rate Overview

The Markets. Mortgage rates moved slightly downward in the past week with little reaction to the Fed decision but moved higher after Friday’s strong jobs report. For the week ending February 1, 30-year fixed rates eased to 6.63% from 6.69% the week before. In addition, 15-year loans decreased to 5.94%. A year ago, 30-year fixed rates averaged 6.09%, approximately 0.50% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Although affordability continues to impact homeownership, the combination of a solid economy, strong demographics and lower mortgage rates are setting the stage for a more robust housing market. Mortgage rates have been stable for nearly two months, but with continued deceleration in inflation, rates are expected to decline further. The economy continues to outperform due to solid job and income growth, while household formation is increasing at rates above pre-pandemic levels. These favorable factors should provide strong fundamental support to the market in the months ahead.”  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

Renters are being hit harder by inflation than homeowners are according to CNN. Renters and homeowners experience inflation differently; and right now, renters are taking a much more painful hit. While shelter inflation has come down over the past few months, in December, the shelter index was still 6.2% higher year over year. That increase accounted for two-thirds of the total rise in the price index, excluding food and energy. While shelter costs are down from their 8.2% peak in March 2023, they likely need to fall to roughly 3.5% for inflation to come in consistently on target, Danielle Hale, chief economist for Realtor.com, said in a statement. Two things are driving the divide between how homeowners and renters experience inflation. First, while most homeowners’ monthly payments have not risen, the cost of renting has surged. Rent jumped 11% in 2022 from the year before. It also climbed higher in 2023, although at a significantly slower pace. Rent prices increased just 0.2% last year, according to Realtor.com. As of November, the price of rent nationally was up 22% compared to pre-pandemic levels, according to Realtor.com. Meanwhile, because most homeowners have a fixed-rate loan, their costs have not changed even as mortgage rates have soared during the Fed’s historic effort to rein in inflation. The second reason renters are feeling more pain is due to the disparity in pay between the typical homeowner and a typical renter. Even if the typical mortgage payment is higher than a typical monthly rent payment, renters’ incomes tend to be lower than homeowners. This means renters generally put a larger share of their income toward their shelter costs than homeowners do. That is leading renters to pull back on their discretionary spending more than homeowners, according to recent research from the Bank of America Institute. Source: CNN

There’s no place like home—which is why most young adults are sticking close by when they move out on their own. Sixty-two percent of young Americans live in or near their hometowns, according to a new survey from LendingTree. Living close to family and friends may provide an extra layer of support for young adults, particularly those struggling with high housing costs, researchers say. The top reasons millennials and Gen Zers say they remain close to home include feeling obligated to be near family, convenience, the proximity of friends, and not being able to afford to move farther away, according to the LendingTree survey, which is based on responses from about 2,000 people. “The lockdowns during the pandemic probably brought many families closer together, as they were able to spend more time with one another than they otherwise could have,” says Jacob Channel, LendingTree’s senior economist. “Even if they lived elsewhere before, realizing how much they liked being near their family may have resulted in more people opting to move closer to their parents.” The National Association of REALTORS®’ 2023 Profile of Home Buyers and Sellers showed that people of all ages have been moving shorter distances. In 2023, sellers moved a median distance of 20 miles to a new home, down from 50 miles the year prior, according to NAR’s survey. Significantly fewer moves in 2023 involved crossing state lines than in 2022. Further, the most commonly cited reason for selling a home in 2023 was the desire to move closer to family and friends (23%), the NAR survey shows. Source: REALTOR® Magazine

Daniel McCue, Senior Research Associate at the Joint Center for Housing Studies, released a report showing that after decades of driving growth, the number of renter households headed by millennials—those aged 28-42 in 2022—has peaked and is declining. While slowing multifamily construction has emphasized a significant downturn in rental markets, optimists are seeing rental demand hold strong and point to favorable demographics as a reason to remain optimistic. But are demographics truly favorable for rental housing? This large cohort has reached ages when more households are transitioning into homeownership rather than forming new renter households. Gen Z—aged 13–27 in 2022—is now the only generation adding renter households. Therefore, demand for rental housing will continue to grow only if the number of new Gen Z renter households outnumbers losses among older generations who are leaving rental units due to homeownership transitions or mortality. Can we expect Gen Z to continue either of these trends to uphold the levels of growth in renter households seen over the past 15 years? A major factor determining whether Gen Z forms as many renter households as millennials did before them is how many people are in this generation relative to millennials. According to U.S. population estimates for 2022, there are 66.1 million people in the 15-year cohort aged 13–27 who make up Gen Z, compared to 67.8 million people aged 28–42 who make up the millennial generation. Based on this data, Gen Z is currently not as large a generation as millennials, but close enough to maintain similar levels of rental households. However, if we dig deeper, we find that Gen Z today is 2.1 million larger than millennials were at similar ages 15 years ago. Adding up the overall population of our 15-year generational cohorts, we find a total of 66.1 million Gen Z people aged 13–27 in 2022, compared to 64.0 million millennials aged 13–27 in 2007. As the number of millennials in the U.S. grew by nearly 4 million over the past 15 years as a result of gains from immigration, the surge was so large because it was the years millennials passed through their 20s and 30s, ages where immigration rates peak. Source: DSNews