June 13, 2023 – Fifteen months ago, the Federal Reserve Board’s Open Market Committee met and raised short-term interest rates for the first time in almost four years.

Economic Commentary

Here Comes The Fed. Fifteen months ago, the Federal Reserve Board’s Open Market Committee met and raised short-term interest rates for the first time in almost four years. Since then, there has been an automatic rise in short-term rates each time they have met – ten times in all. In a previous commentary we spoke about the tide turning – inflation moderating, the real estate market slowing and banks straining under the pressure of high rates. Well, this week we will see if the tide has really turned.

What would the evidence be? Simply this – the Fed could put a pause into effect. While no one is expecting them to lower rates at this point, a simple pause will give a message to the markets regarding this turning tide. Now, even if the Fed does pause, it is not expected that they will declare that their period of rate hikes is over. They will look for additional data and evidence before making this determination. In reality, they need to pause in order to stop raising rates. Thus, regardless of what they say, it is a necessary step.

This is not to say that the Fed will pause. Several members of the Fed have declared that there has not been enough progress against inflation to justify stopping at this point. But again, there are other factors in play, such as regional banks suffering under the weight of rate increases. We expect there will be a healthy debate on this topic today and tomorrow. And when the final decision is announced, it may not be a unanimous decision. Just the fact that there will be some supporting a pause would be evidence of a turning tide. And remember, long-term rates such as mortgages often react before the Fed takes action. Thus, if the sentiment weighs heavily on a pause, mortgages could lead the way downward, at least a bit.

Weekly Interest Rate Overview

The Markets. Rates eased in the past week as the debt ceiling “crisis” was resolved at least for now. The strong jobs report for May served to mute the response to the debt ceiling solution, with the Fed scheduled to meet this week. For the week ending June 8, 30-year rates fell to 6.71% from 6.79% the week before. In addition, 15-year loans decreased to 6.07%. A year ago, 30-year fixed rates averaged 5.23%, more than 1.0% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates decreased after a three-week climb. While elevated rates and other affordability challenges remain, inventory continues to be the biggest obstacle for prospective homebuyers.” 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

Despite continued affordability challenges, the American dream of homeownership is not dead for Gen Zers and Millennials, who believe their path to get there will be challenging and may even require some luck. A new report from Zillow finds that 52% of Gen Zers, and 57% of Millennials who don’t currently own a home believe they’d need to win the lottery to afford one. Outside of winning the lottery, large shares of both generations (95% of Gen Zers and 94% of Millennials) say they would have to make some life changes in order to make their dream of homeownership a reality. About 40% of Millennials say they would need to get a second or third job, and 28% of Gen Zers say they’d have to make a career change in order to afford a home right now. “These findings highlight the gap between Gen Z and Millennials’ dream of owning a home and their ability to actually make it happen,” said Zillow’s Home Trends Expert Amanda Pendleton.” Survey respondents stated that when it comes to a down payment, 36% of Gen Zers say they’d give up their beloved social media if it meant having enough cash to put down on a starter home. Generation Zers and Millennials are optimistic about the future, as two-thirds of those polled say it’s realistic to think they can buy a home within the next five years. Source: MReport

Findings from a recent national poll conducted by Morning Consult for the National Association of Home Builders reveals that 30% of American adults typically work from home at least two days a week could offer clues to the long-term financial health and value of commercial office space in the United States. How this share evolves over time, whether it drops due to employers tightening work-from-home policies or it grows due to more employees earning the benefit not to commute five days a week, will factor into the future office market outlook across the nation. The three characteristics that make the least amount of difference when it comes to working from home are employment sector, housing tenure and gender. For example, 45% of government workers report being able to work from home at least twice a week, not significantly different from the 41% in the private sector. Similarly, tenure makes little difference: 33% of homeowners can work from home this frequently, compared to 28% of renters. And though gender is somewhat more significant, the gap is still below 10 percentage points, as 35% of men report being able to work from home at least two days a week, compared to 26% of women. In contrast, the three demographic characteristics that make the biggest difference are generation, income and education level. While 45% of millennials, 35% of Gen Zers, and 31% of Gen Xers can work from home at least twice a week, the share is only 15% among boomers. And not surprisingly, the ability to spend less time commuting to work is positively correlated with income and education level. Among adults with annual incomes below $50,000, only 22% can work from home at least twice a week, compared to 33% for those earning $50,000 to $100,000, and 46% for those whose incomes exceed $100,000. Education has a similar effect: 25% of adults with less than a college education reported typically working from home at least two days a week, compared to 39% among those with a bachelor’s degree, and 44% among those with a graduate degree. Source: NAMB Eye on Housing Blog

Family-related moves have picked up since the onset of the pandemic. Zillow’s Quarterly Survey of Homeowner Intentions and Preferences (QSHIP) found that at the beginning of 2023, 42% of homeowners considering selling in the next three years cited growing family size as a reason for moving. This is consistent with the increase seen during the second year of the pandemic when most COVID-19 restrictions began to lift, with the proportion rising from 26% to 40% between March and December 2021. Although the percentage of homeowners reporting growing family size as a reason for moving dipped in June 2022, the data suggests a sustained trend into 2023 of households moving for growing families. The percentage of homeowners living with children who planned to sell jumped from a consistent 13% in 2021 to 22% in June 2022. By the beginning of 2023, 29% of homeowners living with children intend to sell and move. Households with two or more children are driving these trends. In March 2023, homeowners living with two or more children were more likely to have plans to sell in the next three years than households with only one child or no children. 35% of homeowners living with two or more children plan to sell their home compared to 11% of households with no children and 18% of households with one child. The housing needs that come with a growing family (e.g., a larger home or neighborhoods with child-friendly amenities) can often be met by moving locally. Local moves tend to be less disruptive to a family’s routines and established ties in the area, including not only friends and family but also children’s caretakers and classmates, make staying close more desirable. Homeowners with children are more likely to be considering shorter distance moves, defined as less than an hour away from their current home. 84% of homeowners living with children, compared to 48% of those living without children, are considering moving locally. This is unsurprising, given that longer-distance moves have historically been motivated by employment opportunities. Source: Zillow