July 25, 2023 – After a pause last month, would anyone be surprised if the Federal Reserve raised short-term rates by .25% again tomorrow?

Economic Commentary

Would Anyone Be Surprised? After a pause last month, would anyone be surprised if the Federal Reserve raised short-term rates by .25% again tomorrow? Not after hearing statements by Chairman Powell during the past month. As a matter of fact, he indicated that two increases in a row were on the table – though the Fed does not meet again in September. Why does the Fed continue to be so hawkish, especially in light of the progress we have seen in the fight against inflation?

The main reason is that the economy does not seem to be slowing down. So many were expecting a recession to start by now, but the economy keeps chugging along. The upward revision of the first quarter growth rate (GDP) to 2.0% was a surprise and is an important example, along with the strong jobs market. The Fed keeps waiting for the economy to cool down so that there is less demand for labor and goods.

But the economy is just being too stubborn. Even the real estate market is showing resiliency in the face of an inventory shortage and high mortgage rates, as new home sales are soaring. This shows that, if there were more homes available, more would be buying. Some had predicted that home prices would fall from their highs of last year, but actually recent data is showing that home prices are holding up nicely. If the Fed is surprised at the resiliency of the economy, we should not be surprised if the Fed tacks on one more rate increase.

Weekly Interest Rate Overview

The Markets. Rates eased last week in reaction to positive inflation news. For the week ending July 20, 30-year rates fell to 6.78% from 6.96% the week before. In addition, 15-year loans decreased to 6.06%. A year ago, 30-year fixed rates averaged 5.54%, more than 1.0% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “As inflation slows, mortgage rates decreased this week. Still, the ongoing shortage of previously owned homes for sale has been a detriment to homebuyers looking to take advantage of declining rates. On the other hand, homebuilders have an edge in today’s market, and incoming data shows that homebuilder sentiment continues to rise.” 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 number of Americans living with multiple generations under one roof has quadrupled, according to the Pew Research Center. More than 59 million people live in multigenerational households, or homes that include two or more adult generations. Whether it’s parents and adult children or a “skipped generation” consisting of grandparents and their grandchildren, these homes offer a unique dynamic that can be both rewarding and challenging. When asked about the familial makeup of the people in their home, respondents said parents and adult children were the most common familial roles represented. While many family members may take on the responsibility of multiple familial roles, everyone plays an important part in living communally. Of those surveyed, 60.9% identified their primary role as a parent or parental figure, and 35.6% identified as an adult child. Just 3.5% of those surveyed identified their main role as a grandparent or grandparental figure. On average, multigenerational homes consist of about four people. Often, as many as four generations live together in one home. Many individuals surveyed have been living in multigenerational homes for a significant portion of their lives, with 31.7% of respondents reporting a lifelong experience in this type of living situation. It’s evident that multigenerational living is not limited to any particular age group but encompasses individuals from various stages of adulthood. Some 48.8% said home affordability and saving money were their main concern when choosing where and how to live. Roughly 31.2 % of those surveyed said they wanted to spend more time with family and an estimated 27.9% said providing care for older family members was a significant factor. Of the 48.8% who said financial reasons were the main reason for multigenerational living, housing costs were the predominant concern. Interestingly, only 5.2% of those surveyed cited reduced cost of older adult care as a primary factor and just 2.5% cited childcare as their main motivation (7.7% in total). Source: MReport

Obtaining lots for new homes remains a challenge for many of NAHB’s builders, but the shortages are not as widespread as they were in 2021, according to responses to a recent NAHB survey. Nearly half (42%) of single-family home builders characterized the supply of lots simply as low, and another 25% said the supply was very low. That total (67%) is down from 76% who reported shortages in the September 2021 survey, but is still the second highest incidence of lot shortages on record since NAHB began collecting the information in 1997. The current percentage of builders reporting a shortage of lots is particularly high relative to the current level of production. Over the past six months, total housing starts have been hovering around an annual rate of 1.4 million. In comparison, in 2005 when total housing starts peaked at more than 2 million, 53% of builders were reporting lot shortages. One factor contributing to the lot shortage is availability of credit for developers. Loans to develop new residential lots were becoming both harder to obtain and more expensive over the prior year. Government regulation — which can lengthen and complicate the lot development process and add to its cost — is another factor. Another past NAHB study found that government regulation is responsible for roughly 42% of the cost of a lot for the average new single-family home. Source: NAHB

Americans seeking to move out on their own outnumbered available housing by almost 2 to 1 in 2021, according to a report. There were roughly 8 million individuals or families who lived in another person’s home in 2021 and just 3.7 million homes for rent or sale, Zillow revealed, leaving a deficit of 4.3 million homes. “The U.S. housing market is like a high-stakes version of the game musical chairs,” Orphe Divounguy, a senior economist at Zillow, said in a news release. “There are simply not enough homes for millions of people. Unless we address the shortage of smaller, more-affordable, starter-type homes, we risk leaving families without a seat — and it will only get worse over time,” he added. Zillow’s analysis notes that the crisis is hitting low-income families the hardest with 68 percent in this group sharing spaces. And the housing gap was greatest in some of the most expensive coastal cities. Housing affordability took a major hit during the pandemic as short supply met increasing demand. During the pandemic, both rents and sale prices soared. In the last year, typical rents rose by close to 5 percent — up to $2,048 per month — while the value of a typical home jumped to nearly $347,000, Zillow data showed. “Potential homebuyers have been watching rates closely and are waiting to come off the sidelines. However, inventory challenges persist as the number of existing homes for sale remains very low,” Sam Khater, Freddie Mac chief economist, said in a statement. “Though, a recent rebound in single-family housing starts is an encouraging development that will hopefully extend through the summer,” he added. Source: The Hill