July 11, 2023 – Did The Jobs Machine Take a Breather as Well? Last month, the Federal Reserve Board took a breather from raising rates.

Economic Commentary

Did The Jobs Machine Take a Breather as Well? Last month, the Federal Reserve Board took a breather from raising rates. They went into “wait and see mode” in order to determine what they would do next. Well, one data point they were waiting for arrived last Friday – the jobs report. Up until now the jobs machine has not taken a breather at all, and the strong employment situation has been putting upward pressure on inflation. We are sure that the Fed is not rooting for the economy to cut jobs, but a lighter pace of jobs growth would be something we expect they would be hoping to see. Thus, they waited — what did they see?

The addition of 209,000 jobs was in the range of expectations. Expectations rose because of a strong ADP private payroll report the day before the job report was released. The headline unemployment rate dipped one tick to 3.6%. The previous two months of reports were revised downward by 110,000 jobs and part-time employment grew—both signs of possible weakness.  In addition, wage growth came in at 0.4% monthly and 4.4% year-over-year – slightly higher than expected. These numbers were seen as mixed – the number of jobs added was moderate, but wage growth continues to be elevated.  Certainly, this gives the Fed some food for thought when they meet in a few weeks. 

Speaking of inflation, this week we will see the Consumer and Producer Price Indices. These indices are also watched by the Fed very closely. Last month, the May numbers showed inflation easing a bit more. We sure could use some more good news this month if the Fed would consider extending their pause when they meet in two weeks, something now considered unlikely. If they decide to wait until the next meeting in September, we can officially call it a summer vacation instead of a pause! But first, the inflation data.

Weekly Interest Rate Overview

The Markets. Rates continued to rise as the jobs report approached. The increases continued after the survey was released on Thursday in reaction to a strong ADP private payroll report. For the week ending July 6, 30-year rates rose to 6.81% from 6.71% the week before. In addition, 15-year loans increased to 6.24%. A year ago, 30-year fixed rates averaged 5.30%, more than 1.5% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates continued their upward trajectory again this week, rising to the highest rate this year so far. This upward trend is being driven by a resilient economy, persistent inflation and a more hawkish tone from the Federal Reserve. These high rates combined with low inventory continue to price many potential homebuyers out of the market.”  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

Professional investors might be tapering down their home purchases, which could be a good development for frustrated homebuyers who find it hard to compete with investors’ lofty, quick-close, all-cash offers. Investors who typically rent out their properties to tenants purchased 8.2% of homes in December 2022, according to the Realtor.com® Spring 2023 Investor Report. That was down from the peak in February 2022 when they bought up 8.9% of homes on the market. However, it was a bit higher than in December 2021. The report suggests investors took a bit longer to respond to surging mortgage interest rates than homebuyers did as the majority made all-cash offers. The report focused on investors who purchase property to hold and rent out and excluded home flippers as much as possible. “We have seen that investor activity has started to come down, which means that the typical homebuyer would be competing with fewer investors,” says Hannah Jones, an economic data analyst at Realtor.com. “We heard this over and over during the pandemic. A family is looking to buy a home but they got outbid by investors.” From January to June 2022, investors made up 8.5% or more of all home sales. But by June, mortgage rates were pushing higher, rents appeared to have peaked, cutting into potential landlord profits, and “the economic outlook became more uncertain and fears of a possible recession loomed,” the report states. Notably, it’s not just homebuyers who are better able to compete now. Smaller investors, typically those with fewer than 50 properties, are also buying up more homes since the larger ones pulled back last summer. In December, mom-and-pop real estate investors made up 72.8% of all investor purchases, up from a low of 52.6% the previous October. Source: Realtor.com

A slowdown in renovation projects is settling in after a pandemic-fueled boom, but there are plenty of reasons why the pullback may not last long. During the pandemic, Americans became ultra-focused on upgrading their homes, taking on remodeling and DIY projects in record numbers. But as recession fears mount, more homeowners are putting on the brakes and showing less willingness to dole out large amounts of money on home improvement projects. Despite several possible reasons for the remodeling slowdown, it won’t be a bust, experts say. As we come out of the pandemic, people have more activities to engage in outside the home, removing some of the urgency to remodel that owners felt when they were stuck at home. Yet, there are some factors that may keep the remodeling sector strong in the long run. Faced with few housing options on the market, many homeowners may feel stuck. As they stay in place, they may desire to upgrade their current home to accommodate their lifestyle and needs for longer than they intended. In addition, the median age of a home in the U.S. is 39 years old. As homes age, they often need repairs or updates to maintain their value. Nearly 30% of homeowners updated their plumbing, followed by electrical and home automation upgrades, according to a recent Houzz survey. Source: Realtor Magazine

A vast and growing majority of adults support adding more homes to their neighborhoods in response to the housing affordability crisis according to research from Zillow. Record-low inventory — triggered by a lost decade of home construction that caused a shortfall of 1.35 million new homes, fierce competition spurred by historically low interest rates, and now inflation — has made it harder for people across the country to buy or rent a home. Monthly mortgage costs have nearly doubled during the pandemic, according to Zillow research, making homeownership much more expensive for potential buyers. This housing crunch also extends to renters, with the typical rent price nationwide reaching more than $2,000 a month — 25% more than what they would have expected to pay in the months before the pandemic. Zillow’s latest analysis has found increased public support for more density as a way to improve affordability. Support is strongest for new accessory dwelling units (ADUs), duplexes or triplexes in residential neighborhoods. Small, medium and large apartment buildings received majority support if built near transit and recreation amenities. “More and more people understand that the key to stopping runaway housing costs is to build more homes,” said Manny Garcia, senior population scientist at Zillow. “There is majority support among renters and homeowners, higher and lower wage earners, suburban and urban households, who all say we need more housing and support it in their neighborhoods.” Allowing ADUs, duplexes and triplexes in zones previously limited to single-family houses is often referred to as “modest densification,” creating “missing middle” housing types that fall between single-family homes and large multifamily apartment buildings. Relaxing zoning rules to allow more housing supply is the best way to address the nation’s ongoing housing affordability crisis, according to an independent panel of economists and housing experts. Close to two-thirds of respondents to Zillow’s most recent survey are concerned about the cost of housing in their neighborhood. A large majority, 70%, of all respondents believe adding duplexes and triplexes would help address this concern by improving housing affordability. About 75% of respondents support building even larger housing types, such as small to medium-sized apartment buildings, to help create more affordable housing options if built close to frequent transit, parks and recreation. The chart below breaks down the support by housing type if built near such amenities. Source: LBM Journal