January 10, 2023 – The Coming Recession. First of all, we must qualify this headline with the important caveat that a recession is not a sure thing.

Economic Commentary

The Coming Recession. First of all, we must qualify this headline with the important caveat that a recession is not a sure thing. However, so many economic forecasts are banking on a recession in 2023, we must at least acknowledge the possibility of a recession this year. The vast majority of these forecasts are predicting “mild” recession. At the very least, we are expecting slower growth in the coming year.

Should there be a recession, not only is the severity in question, but different industries are likely to be affected disparately. We know that job growth should slow since we have recovered the jobs lost during the pandemic. Close to full employment, the pace should wind down naturally. December’s job numbers actually came in higher than expected, capping a year of very strong job growth in which the economy added approximately 4.5 million jobs and ended with a low unemployment rate of 3.5%. The pace of job growth has slowed, but the numbers are still solid. 

We also know that the housing market has slowed significantly. Whether we can term this a housing recession or just a pause is still to be determined. We do know that a slower housing market will affect the rest of the economy as many industries are connected to housing. Of course, the state of housing is connected to interest rates and if the housing industry causes the economy as a whole to slow down, it stands to reason that interest rates could ease a bit even if the Federal Reserve keeps short-term rates high. That is what could contribute to the “coming” recession being on the mild side, if it comes at all.

Weekly Interest Rate Overview

The Markets. Rates continued to inch higher as the year ended and the new year began — however they decreased after the survey was released. For the week ending January 5, 30-year rates rose to 6.48% from 6.42% the week before. In addition, 15-year loans increased to 5.73%. A year ago, 30-year fixed rates averaged 3.22%, more than 3.0% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage application activity sunk to a quarter century low this week as high mortgage rates continue to weaken the housing market. While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023. Homebuyers are waiting for rates to decrease more significantly, and when they do, a strong job market and a large demographic tailwind of Millennial renters will provide support to the purchase market. Moreover, if rates continue to decline, borrowers who purchased in the last year will have opportunities to refinance into lower rates.”   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

Zillow, Seattle, said U.S. home values are easing down, starting to provide relief for potential home buyers facing affordability challenges. Zillow reported the typical U.S. home fell to $357,733 in November, 0.2% less than in October and down 0.5% from a peak in June. In addition, mortgage rates falling in November brought monthly costs down for the first time since July, and for only the second time in the past 19 months. Zillow Senior Economist Jeff Tucker said November’s news is a positive sign that affordability may at least stabilize in 2023, helping households budget and plan for housing decisions in the months and years ahead. Tucker said, “The two big questions are whether mortgage rates will continue to decline, and whether that will be enough to bring buyers back in time for the spring selling season. In the meantime, those on the prowl for a house will benefit from motivated sellers, unusual bargains and a welcome lack of competition.” The report noted while national home value declines from peak levels have been minimal, some markets have seen significant changes. Source: The Mortgage Bankers Association

Like most Americans, Gen Z is looking to establish their financial footing amid record-high mortgage rates and nationwide inflation, as the economic environment poses new challenges in achieving their financial goals. This is according to new research published by Bank of America’s Better Money Habits, exploring this generation’s (ages 18 to 25) distinct approach to money – including their financial priorities, behaviors and challenges. According to an estimated 73% of Gen Z, the current economic environment has made it more challenging to save. They reported feeling that inflation has made it harder to save for financial goals (59%) and paying down debt (43%) has created more financial stress (56%) within their lives. Some 40% also said surging rents or home prices have made it challenging to afford day-to-day necessities. According to the study, younger consumers are getting squeezed the most by higher rent inflation, with median rent payments up 16% year-over-year in July for Gen Z, compared to just 3% for Baby Boomers. Currently, 75% of Gen Z are taking or considering steps to earn additional income including:

• Changing jobs (34%)
• Turning a passion into a source of income (31%)
• Taking on a second job (26%)
• Taking on a job they don’t like (23%)

When it comes to success at work and in life, Gen Z is driven by the desire to achieve financial peace of mind (74%) and to comfortably afford the things they want. Source: MReport

Reflecting the unprecedented housing shortages across the United States in the post-pandemic market, U.S. vacancy rates hit their lowest readings in decades in 2021. According to NAHB’s analysis of the 2021 American Community Survey (ACS), owner vacancy rates dropped below 0.9% and rental vacancy rates reached a new low of 5.2%, the lowest levels recorded by the ACS since the survey started generating these data in 2005. Comparing current abnormally low vacancy rates with long-run typical rates across metro markets of the U.S., NAHB now estimates that 1.5 million units are required to close the gap and bring the current vacancy rates back to the long-run equilibrium levels. This is our revised estimate for the size of the structural housing deficit in the U.S. It indicates the amount of above equilibrium home building required to bring the market back into long-run balance. NAHB’s forecast indicates that this will take place between 2025 and 2030.Homeowner and rental vacancy rates are one of the key statistics that are used to judge the health and direction of the housing market. The current low homeowner and rental vacancy rates are typically interpreted as a sign of tight housing markets, with abnormally low vacancy rates signaling a greater housing shortage. The ACS data allow estimating vacancy rates across metropolitan areas and identifying metro housing markets where unusually low vacancy rates signal deeper supply-demand imbalances. Source: NAHB Eye on Housing Blog