July 30, 2024 – Will It Take a Recession?

Economic Commentary

For most of last year, it was apparent that the Federal Reserve wanted the economy to stop growing so fast. Though you would never hear them say that they were trying to force us into a recession, certainly forecasters were predicting a recession. But the recession never came as the economy and especially the American consumer provided some formidable resilience. Month-after-month we expected the economy to slow down, yet this never happened.

Well, finally there are signs of a slower economy. Of course, this happens after the economic prognosticators have all but buried the word recession and replace it with the phrase “soft landing.” And as the economy and inflation slows, we hear the same refrain from the members of the Fed – we are not stopping until our inflation work is done. While this is commendable, we would like to remind our readers that the Fed has a history of waiting too long to get things started and then waiting too long to end their activities.

The inflation we witnessed was world-wide based upon effects of the pandemic. The world economies halting on a dime and then starting up again armed with lots of stimulus in the form of government spending and low interest rates. Should the Fed have started raising rates from zero more quickly? Probably. Will they hold higher rates longer than they should, thereby risking a recession? We hope not. The Fed is meeting as we publish this newsletter. It will be interesting to see what they say.

Weekly Interest Rate Overview

Freddie Mac reported that mortgage rates were stable in the past week. The survey was released before the Commerce Department issued a solid economic growth reading of 2.8% for the second quarter.  30-year fixed rates rose one tick to 6.78% from 6.77% the week before. In addition, 15-year loans increased slightly to 6.07%. A year ago, 30-year fixed rates averaged 6.81%, roughly the same as today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates essentially remained flat from last week but have decreased nearly half a percent from their peak earlier this year. Despite these lower rates, buyers continue to pause, as reflected in tumbling new and existing home sales data.”  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

As housing prices increase, some are opting to buy a home with a friend instead of a romantic partner. According to a survey released by JW Surety Bonds earlier this year, 15% of Americans have co-purchased a home with someone other than their romantic partner, and another 48% said they would consider it. In the survey, 67% of respondents said sharing costs was a perceived benefit of co-buying. A majority of respondents also said that affording a better home and investment opportunities were also perceived benefits of co-buying. Between 2020 and 2022, the average sales price of a home in the U.S. jumped from $383,000 to $525,000, according to government statistics. Although housing prices have since dropped to about $513,000, interest rates remain elevated. Niles Lichtenstein, CEO of Nestment, helps pool together buyers to purchase a home. He said there are questions to ask before embarking on such a commitment. “In a lot of places, solo homeownership is just incredibly difficult,” he said. “We’re coming at this from educated backgrounds, but actually co-buying is a very difficult, complex process, which is why we built what we built.” The survey noted, however, that 79% believed interpersonal conflict would be a potential drawback of co-buying a home. A majority also cited legal and financial complications and potential financial losses as other potential downsides. Niles Lichtenstein agreed there are questions to ask before embarking on such a commitment. “Usually what happens is we’d like people to go through a five-step process in terms of a road map of understanding,” he said. “The first is around aligning on goals. Are your goals the same? Is it about cash flow? Is it about equity? Is it about lifestyle? Then financial projections. Understanding how you can actually build those financial projections.” The next step, he says, is helping people through the legalities of co-buying a home. Lichtenstein said, “All of those things are just a really important way to filter through the process. When it comes to traits itself, I think you tend to want to look for opportunities where you all have shared something before, like if someone still owes you for that Uber, that might not be the right person.” Source: Scripps News Life

According to a new report from StorageCafe, people have been looking for an alternative to busy urban areas and the suburbs have stepped up their game as of late. Point-and-case, suburban areas across the country are now growing faster than major cities, providing plenty of room to grow their families and for those seeking a better semblance of a work-life balance. As the current housing market is still seeing skyrocketing home prices and limited inventory, these are the main reasons that are driving people out of urban areas and into the suburbs and beyond. RentCafe further stated that millennials are the most active generation in terms of both moving and homebuying. They are also leading the resurgence and revival of suburban living, just as they once spurred the urban boom in the 2000s. For millennials, most of whom are in the parenting stage of their lives, the need for larger homes and outdoor spaces is paramount. This shift is further compounded by the rise of remote work (mainly spurred by the pandemic), which has diminished the necessity of living close to urban job centers, making suburban and exurban living more feasible and attractive than ever. But it’s not just Gen Y seeking a slower pace of life—Gen Zers are seeking a similar pace of life as well. They are generally well-versed in assessing housing woes based on their predecessors’ experiences. States with lower densities or rural charm have started to appeal to these youngsters. Housing inventory in exurbs grew by an average of 15% over the past 10 years, outpacing suburbs at 14% and principal cities at 10%. Population growth in exurbs (16%) also surpassed that of suburbs (13%) and principal cities (9%), highlighting a broader demographic shift. Self-storage, which typically follows housing development and population trends, has stayed ahead of the curve, with most relocation hubs offering plenty of storage options. Source: StorageCafe

According to findings in the Q1 2024 Verisk Remodel Index, the cost of home repairs and remodeling in Q1 of 2024 continued to increase, rising by 0.59% from the prior quarter, and just over 4% from the first quarter of 2023. Costs once again set new highs for the past decade, rising approximately 61% from Q1 of 2014. The Verisk Remodel Index tracks costs on 31 different categories of home repair, comprising over 10,000 line items, ranging from appliances to windows. Data are compiled monthly in more than 430 local market areas across the country. “Repair costs rose in each of the 31 categories of home repair that are included in our Index, but the rate of increase continues to be slow down from the more rapid increases we had during and immediately after the COVID-19 pandemic,” said Greg Pyne, VP, Pricing for Verisk Property Estimating Solutions. “Labor costs appear to be coming down slightly as well, which has an impact on the overall cost of home repairs.” Quarterly costs rose in all 31 categories included in the Verisk Remodel Index. The cost of framing was still slightly lower on an annual basis, and the only covered category that was not higher than in Q1 of 2023. Framing was the only one of the six largest categories of expenditure to decline on an annual basis. The other four–cabinets, siding, paint, wood look flooring, and plumbing–all rose between 2.5% and 5.5% over the past 12 months. The cost of exterior doors rose the most compared to the last quarter, increasing by over 3.7%. Only two other categories had a quarterly increase of at least 1%—tile flooring at 1.55%, and interior home painting at 1.03%. Source: MortgagePoint