June 4, 2024 – Is Two Months a Trend?

Economic Commentary

The Federal Reserve’s Open Market Committee (FOMC) meets again next week. Some months ago, market analysts were 50/50 on a bet regarding a decrease in short-term rates at the Fed’s June meeting. Then came some very strong jobs reports and also some stronger-than-expected inflation news, causing the odds to drop below 25%. There have been plenty of statements by Fed members cautioning that rates will have to stay higher for longer –

Fed Chair Jerome Powell reiterated May 14 that inflation is falling more slowly than expected, likely keeping interest rates elevated for an extended period…CNBC

That statement was made one day before the April Consumer Price Index was released. That data showed some improvement in the inflation picture, though the improvement was minimal. This was followed by the Fed’s favorite inflation index released last week showing that inflation was stable at a level higher than the Fed’s target. Thus, we had a more moderate jobs report in early May. This was followed by a slight improvement in the inflation trend.

What if the economy added a small or even a moderate amount of jobs in May when the employment report is released on Friday? Would that be enough for the Fed to reverse course? We doubt that would be the case. However, it might be enough for the Fed to soften their “higher for longer” language. If this happens, then the end of July meeting of the FOMC could put a rate decrease in play – if we continue to get some good inflation news. The next Consumer Price Index is to be released on the second day of their meeting next week. The period from this Friday to the end of next Wednesday should be interesting.

Weekly Interest Rate Overview

The Markets. Rates reversed course after easing for the past few weeks.  Stronger economic news and continued harsh statements by Fed members highlighted the week, though a downward revision in the measure of economic growth for the first quarter did cause rates to ease later in the week after the survey was completed.  30-year fixed rates rose to 7.03% from 6.94% the week before. In addition, 15-year loans increased to 6.36%. A year ago, 30-year fixed rates averaged 6.79%, 0.24% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Following several weeks of decline, mortgage rates changed course this week. More hawkish commentary about inflation and tepid demand for longer-dated Treasury auctions caused market yields to rise across the board. This reality, as well as economic signals that have moved sideways over the last few weeks, have resulted in mortgage rates drifting higher as markets continue to dial back expectations of interest rate cuts.”  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

Consumers are putting down more money to buy a home — but the typical down payment is still much less than you might expect. The average down payment was 13.6% in the first quarter of 2024, according to a new report by Realtor.com. The median down payment amount was $26,000. Both figures are up year over year but down from peaks in the third quarter of 2023, the report says. At that point, buyers put down an average of 14.7% or a median of $30,400. Even at recent elevated levels, the average down payment is still well below 20%, a share that people typically think of as the gold standard when buying a home. But 20% is not always necessary, experts say. There are a lot of reasons why people have gravitated toward the idea of putting 20% down, like trying to avoid mortgage insurance or lessen monthly payments, said Mark Hamrick, senior economic analyst at Bankrate.com. “But by no means is this essentially the law of the land,” Hamrick said. One way to reduce your monthly mortgage payment is by putting down more money and borrowing less. But for many households, trying to get a higher down payment can be challenging, said Danielle Hale, chief economist at Realtor.com. Having enough savings for a down payment is a big hurdle for most buyers. Close to 40% of Americans who don’t own a house point to a lack of savings for a down payment as a reason, according to a 2023 CNBC Your Money Survey conducted by SurveyMonkey. But the reality is, you don’t need 20%, experts say. “Not only is it possible to buy a home with less than 20% down, but this data show that a majority of buyers are in fact doing so,” Hale said. “It’s definitely not required.” Some loans and programs are available to help interest buyers purchase homes through lower down payments. For example, the Department of Veterans Affairs offers VA loan programs that enable those who qualify to put down as little as 0%. Loans from the U.S. Department of Agriculture, referred to as USDA loans, are geared toward helping buyers purchase homes in more rural areas, and they also offer 0% down payment options. Federal Housing Administration loans, which can require as little as 3.5% down for qualifying borrowers, are available to first-time buyers, low- and moderate-income buyers, as well as buyers from minority groups. Those are “designed to help close homeownership gaps among those targeted populations,” Hale said. Even with a conventional loan, buyers’ required down payment could be between 3% and 5%, depending on their credit score and other factors. “There are options,” Hale said. Source: CNBC

Real estate investors purchased 44,000 homes in the first quarter, an increase of 0.5% year over year, according to Redfin. The increase is a modest one, but it’s the first upward movement since the second quarter of 2022, per Redfin’s data. Investor activity appears to be stabilizing after a rubber-band period during and after the pandemic; investor buys of residential properties more than doubled during the COVID-era housing boom, only to plummet by almost 50% last year. Investor buys bottomed out in the first quarter of 2023, but with home prices and rents back on the upswing, the housing market is once again growing more appealing to home investors. “Investor activity is steady,” said Connie Durnal a Redfin agent based in Dallas. “When home prices got crazy high during the pandemic, investors sold out. But several months ago, they started to ramp back up. I’m not seeing a lot of home flippers in our market, but there are a lot of investors looking for single-family homes to rent out, which are in short supply.” Indeed, investor purchases of single-family homes were up 3.9% annually in the opening quarter of 2024, the first increase in almost two years. Strong rent growth and low tenant turnover in the single-family rental market has investors increasingly moving toward single-family purchasing. Interestingly, while the increase in investor activity is putting investors in bidding wars with primary home buyers, the dynamic between the two buyer groups is shifting. “The balance of power between investors and regular buyers is changing,” said Amira Elgoneimy, a Redfin agent in New Jersey. “When there’s a bidding war for a home, it has become more common for the winner to be the person who actually plans to live in the home. Individual buyers are sitting on a lot of cash from the sale of their previous house and pandemic savings, so they’re willing to pay a little more upfront than investors, who have to be mindful of margins.” Source: Scotsman Guide

Every part of Barbara Peraza-Garcia and her family’s single-room apartment in Seattle has a double or even triple purpose. The 180-square-foot (17-square-meter) room is filled with an air mattress where she, her partner and their children, ages 2 and 4, sleep. It’s also where they play or watch TV. At mealtimes, it becomes their dining room. It’s a tight squeeze for the family of asylum seekers from Venezuela. But at $900 a month — more than $550 less than the average studio in Seattle — the micro-apartment with a bare-bones bathroom and shared kitchen was just within their budget and gave them a quick exit from their previous arrangement of sleeping on the floor of a church. “It’s warm. We can cook ourselves. We have a private bathroom. It’s quiet,” said Peraza-Garcia, whose family came to the U.S. to escape crime in Venezuela and so she could access vital medication to combat cysts on her kidney. “We can be here as a family now.” Boarding houses that rented single rooms to low-income, blue-collar or temporary workers were prevalent across the U.S. in the early 1900s. Known as single room occupancy units, or SROs, they started to disappear in the postwar years amid urban renewal efforts and a focus on suburban single-family housing. Now the concept is reappearing — with the trendy name of “micro-apartment” and aimed at a much broader array of residents — as cities buffeted by surging homelessness struggle to make housing more affordable. “If you’re a single person and you want a low-cost place to live, that’s as cheap as you’re going to get without trying to find a subsidized apartment,” said Dan Bertolet, senior director of housing and urbanism for the non-profit research center Sightline Institute. Source: AP