July 18, 2023 – For the first time in approximately 3.5 years, we are now guessing whether the Fed will act to raise interest rates.

Economic Commentary

Let the Guessing Games Begin. For two years from the inception of the pandemic, the Federal Reserve kept short-term interest rates close to zero. Then as the pandemic waned and the economy bounced back, the Fed went on an inflation fighting campaign and they raised rates at ten straight meetings over a 15-month period. At the last meeting in June, they finally took a breath and paused. This means for the first time in approximately 3.5 years, we are now guessing whether the Fed will act to raise interest rates.

Last month in testimony before Congress, Fed Chair Powell was clear that they were not finished raising interest rates as the fight against inflation has seen progress, but there was a way to go before we bring inflation back to the target of 2.0%. Thus, the monthly progression of inflation is being watched like a hawk – in this case an inflation hawk. Last week we saw the release of the Consumer and Producer Price Indices, which both showed inflation easing monthly and year-over-year. We have not reached the Fed’s goals, but we are inching closer each month.

While these numbers are important, there are other indicators the Fed is watching. For example, wage inflation and the Personal Consumption Expenditures Price Index (PCE). The PCE will be released at the end of the month together with data on personal spending. Wage inflation comes early in August with the jobs report. A lot of numbers to consider and the Fed does not meet in August. Could they move to raise rates one more time in July because there will gap between meetings? Let the guessing games begin!

Weekly Interest Rate Overview

The Markets. Freddie Mac’s weekly survey showed rates rising again last week; however, they eased significantly after the inflation reports were released, which was not captured in the survey data. For the week ending July 13, 30-year rates rose to 6.96% from 6.81% the week before. In addition, 15-year loans increased to 6.3%. A year ago, 30-year fixed rates averaged 6.51%, approximately 1.5% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates increased to their highest level since November 2022, the last time rates broke seven percent. Incoming data suggest that inflation is softening, falling to its lowest annual rate in more than two years. However, increases in housing costs, which account for a large share of inflation, remain stubbornly high, mainly due to low inventory relative to demand.” 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

Fannie Mae recently relaunched a series of survey questions–most recently asked in the fourth-quarter 2020–about how consumers define “the good life.” The agency’s takeaway? Little has changed, and aspirations to homeownership remain high, despite rising interest rates and home prices. Between Q4 2020 and Q4 2022, the percent of consumers who cited owning a home as an important factor in “the good life” (defined by Fannie Mae as “the life they’d like to have”) remained flat, at 87% and at No. 6 on the respondents’ list. In a similar vein, 94% said living in a location they like was part of “the good life,” down a little bit from 96% in 2020. Topping the list was “being financially secure” and “being in good health,” both at 98%. One of the few notable changes over the past two years is related to the perception of renting vs. owning, per a perspective piece from Fannie Mae’s Kevin Tillmann, Market Research Senior Associate, National Housing Survey, and Steve Deggendorf, Market Research Senior Director. Researchers asked respondents what benefits come from buying over renting a home. “Having less stress” brought up the rear at 66%, but still a 10-percentage-point jump from 2020. “It was particularly true among renters (60% in 2022 compared to 40% in 2020). One possible explanation is that many renters have experienced significant rent price increases and, despite declining home purchase affordability, view a fixed mortgage payment as less stressful,” Tillmann and Deggendorf said. “Another is that homeownership may be perceived as offering greater privacy and security than renting, a lifestyle benefit that may have proved especially desirable three years into a pandemic.” The top three concepts in which buying was viewed as preferable to renting were: control over what you do with your living space (94%); a sense of privacy and security (91%) and having a good place for your family/to raise children (90%). The study also broke down some demographics, finding a greater share of Hispanic renters (92%) consider homeownership to be important compared with Black renters (79%) and White renters (74%). Source: The Mortgage Bankers Association

The Joint Center for Housing Studies of Harvard University reported that despite the remodeling market hitting $567 billion in 2022, homes today are older than at any time ever recorded and in growing need of critical replacements and maintenance. Also, more investment is needed to better prepare against disaster, improve energy-efficiency and meet accessibility of an aging population. The report, Improving America’s Housing 2023, authored by Carlos Martin, Project Director, Remodeling Futures Program, says the pandemic brought the widespread adoption of remote work, growth in home equity and savings and the aging of the housing stock boosted annual spending on improvements 24% between 2019 and 2021 to $406 billion. More than one in five projects costing $50,000 or more were paid for with home equity. During the pandemic, homeowners used their time on DIY projects. Between 2019 and 2021, spending for DIY improvements grew 44% to a record height of $66 billion. “While many homes require critical improvements and repairs, those most in need of updates are often occupied by households least able to afford the expense,” said the report. “Deteriorating housing systems and equipment threaten the health and safety of older, lower-income homeowners, while the burden of high improvement and repair costs jeopardizes the current stock of affordable housing. Greater public funding for home retrofits and repairs will be vital for addressing unmet needs and longstanding inequities.” With the aging of the housing stock, spending on energy-related improvements such as roofing, HVAC, and windows and doors tripled from 2001 to 2021, to $111 billion or 34% of market spending, up from 28% in 2001. Additionally, the rising number and severity of climate-related disasters is increasing home restoration spending. In 2021, homeowners spent $18 billion for disaster repairs, well above the real annual spending of $12 billion averaged in the 2000s. Source: MReport

One-third (33.4%) of U.S. home purchases were made in cash in April, up from 30.7% a year earlier and comparable with February’s 33.5% share, which was the highest in nine years. The data in this report is from a Redfin analysis of county records across 40 of the most populous U.S. metropolitan areas, going back through 2011. An all-cash purchase is one in which there is no mortgage loan information on the deed. All-cash purchases are making up a bigger portion of the homebuying pie because elevated mortgage rates are deterring homebuyers who take out mortgages more than they’re deterring all-cash buyers. Overall home sales were down 41% from a year earlier in April in the metros included in this analysis, compared with a 35% decline for all-cash sales. High rates can still be a deterrent for all-cash buyers because their money may be better spent on investments that benefit from high rates, like bonds. Inflation has pushed up savings interest rates over the last year as well. “A homebuyer who can afford to pay in all cash is weighing two potential paths,” said Redfin Senior Economist Sheharyar Bokhari. “They can use cash to pay for the home and avoid high monthly interest payments or take out a loan and pay a high mortgage rate. In that case, they could use the money that would have gone toward an all-cash purchase to invest in other assets that offer bigger returns, which could partly cancel out their high mortgage rate.” Competition among homebuyers is another noteworthy reason for the uptick in all-cash sales. A lack of homes for sale is prompting competition in some metro areas, motivating buyers to make all-cash offers to win homes. A surge in competition is the main factor in the jump in cash purchases during the pandemic homebuying boom in 2021–but at that time, low mortgage rates were causing bidding wars by attracting an influx of buyers. Source: Mortgage Ledger