July 16, 2024 – And Now For the Second Act

Economic Commentary

In our desire to experience lower interest rates during the second half of the year, two weeks ago we had the release of the first part of our economic “one-two” punch. As we reported, the jobs report indicated progress towards our lower rate goal. Next up? Our monthly reports on inflation. Last week we experienced the second leg of the equation with the release of the consumer and producer price indices.

First the Consumer Price Index showed that inflation at the retail level fell 0.1% from last month and rose 3.0% year-over-year. This was the first time that prices have fallen monthly in the U.S. since the start of the pandemic. Excluding the volatile components of food and energy, the monthly increase was 0.1% and the annual increase was 3.3%. On the wholesale side, the Producer Price Index gained 0.2% monthly and 2.6% year-over-year. The core PPI came in at no change monthly and 3.1% annually. The next question is—how do we interpret this data, especially coupled with the jobs report?

Overall, we had a moderate jobs report with wage inflation also moderating, but still above the Fed’s target. The inflation data was also seen as moderating. Taken together, these reports increased the chances that long-term interest rates will continue to fall in the coming months. The general forecast for the Fed’s meeting at the end of this month still predicts no change in short-term interest rates. However, there is increased hope that the Fed’s language will soften regarding future changes. And perhaps there is a glimmer of hope for a surprise reduction in July. As a reminder, long-term rates such as mortgage interest rates can move in anticipation of the Fed’s actions. Indeed, we have already seen some progress in this regard—though there is much more work to be done. 

Weekly Interest Rate Overview

Freddie Mac reported that mortgage rates reversed course by decreasing in the past week as the jobs report was moderate. Good inflation news after the survey was released caused rates to fall even more towards the end of the week. 30-year fixed rates fell to 6.89% from 6.95% the week before. In addition, 15-year loans decreased to 6.17%. A year ago, 30-year fixed rates averaged 6.96%, 0.07% higher than today – the first time it has fallen year-over-year in many, many months. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Following June’s jobs report, which showed a cooling labor market, the 10-year Treasury yield decreased this week and mortgage rates followed suit. There is also more inventory on the market, including a fair number of listings with price cuts, which is an encouraging sign for prospective buyers.” 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

The National Association of Realtors® released its latest forecast for the rest of 2024 and beyond. “The market is at an interesting point with rising inventory and lower demand,” said NAR Chief Economist Lawrence Yun. “Supply and demand movements suggest easing home price appreciation in upcoming months. Inevitably, more inventory in a job-creating economy will lead to greater home buying, especially when mortgage rates descend.” NAR predicts mortgage rates will remain above 6% in 2024 and 2025, even with the Federal Reserve cuts to the Fed Funds rate. The association forecasts that existing-home sales will rise to 4.26 million in 2024 (from 4.09 million 2023) and to 4.92 million in 2025 (from 2024). Housing starts are expected to rise to 1.382 million in 2024 (from 1.413 million in 2023) and to 1.492 million in 2025 (from 2024). NAR anticipates the median existing-home price will increase to a record annual high of $405,300 in 2024 (from $389,800 in 2023) and to $412,000 in 2025 (from 2024). NAR forecasts increases in the median new home price to $434,100 in 2024 (from $428,600 in 2023) and $441,200 in 2025 (from 2024). “The first half of the year did not meet expectations regarding home sales but exceeded expectations related to home prices,” explained Yun. “In the second half of 2024, look for moderately lower mortgage rates, higher home sales and stabilizing home prices.” Source: NAR

Two-fifths (39.7%) of new mortgages issued in 2023 went to homebuyers under 35, with 26.5% going to buyers aged 35 to 44. The 45-54 age group took out 16.1% of new mortgages, followed by the 55-64 age group (10.8%) and the 65-74 age group (5.4%). This is according to new research from Redfin. Over the previous five years, the age mix of homebuyers has remained constant, with younger Americans accounting for the majority of mortgage borrowers. As people get older, they are less likely to take out a mortgage. Per the report, there are multiple reasons why people under 45 are taking out most mortgages, including:

• Gen Zers and millennials are aging into homeownership; the median age of first-time U.S. homebuyers is 35. People tend to be in their late 20s or 30s when they buy their first home because that’s when homeownership becomes financially feasible and desirable: They’ve had time to save for down payments and qualify for mortgages, and they may be growing their families.
• Many people view real estate as a safer long-term place to park their money than the stock market or other traditional investments.
• Younger buyers are likely to take out loans rather than pay for homes in cash because they haven’t had much time to amass wealth and/or build equity from the sale of a previous home. Older buyers are more likely to pay in cash.

“First-time buyers aren’t as spooked by high rates as people who are trying to move up to a bigger or better home,” said Antonia Ketabchi, a Redfin Premier agent in Maryland. “High costs are still a challenge, but younger people are excited about the fact that they’re looking to buy their first home, and they’re not locked in by a low mortgage rate because until now they’ve been renting. Plus, they weren’t in the market three years ago when mortgage rates were sitting under 3%, so they don’t have an ultra-low point of comparison.” Source: Mortgage Point

Childhood is a mere memory for many, but the nostalgia of one’s childhood home carries over into adulthood, according to a Zillow study. Today, an estimated 44% of adults would purchase their childhood home if they could afford to. However, only half of all Americans said they could afford to buy their childhood home at today’s prices. “It appears younger generations aren’t just nostalgic for low-rise jeans and Barbie, but for a simpler time in their lives when home was a place of comfort and safety,” said Manny Garcia, a Senior Population Scientist at Zillow who conducted this research. “They may associate positive memories with their childhood home, having lived there without the burdens of rent, mortgage payments, maintenance, insurance or other housing hurdles. Today, a comparable home can feel out of reach, especially for younger adults who aspire to buy, but face steep affordability challenges.” Children from the 1980s and 1990s are the most likely to say they would buy their childhood house today—62% and 55%, respectively. Nonetheless, nearly half of those born in the ’80s (47%) and nearly two-thirds of those born in the ’90s (62%) believe they couldn’t afford it today. Younger generations may long for the housing market of their childhood, when prices were lower, but their parents most certainly encountered similar, if not worse, affordability issues in the early 1980s. Mortgage rates rose above 18% in 1981, bringing the average monthly mortgage payment to 55% of the national median income at the time. Today, a new mover’s mortgage load is approximately 40% of their typical income, which is still considerably above the 30% affordability criteria. Per the report, homebuyers now have easier access to affordable resources such as down payment assistance. Source: Zillow