March 14, 2023 – Still No Answer. Almost one quarter of the year is finished, and we still do not have an answer.

Economic Commentary

Still No Answer. Almost one quarter of the year is finished, and we still do not have an answer. By now we were supposed to be experiencing the start of a “mild” recession. Yet interest rates have risen since early February because the economy is too hot, threatening our progress on the war against inflation. Kind of confusing to understand where the economy is heading, but we would be surprised that it would not slow down if rates stay elevated.

The Federal Reserve meets next week and we will get a gander as to what they think a week from tomorrow, when their decision is released. Before the January jobs report was released, the markets were betting on another .25% increase in short-term rates and some analysts were predicting that this would be the last increase for some time. And some were predicting the Fed would be lowering rates by the end of the year. After that report, some were predicting that a .50% hike is on the table and that a few more increases are on the horizon. Just more reasons for the focus on the February jobs numbers.

Did the report bring us back closer to the expected mean?  Not really.  The increase of just over 300,000 jobs last month was an indication that the jobs market remains strong. Plus, last month’s data was not adjusted down significantly.  The unemployment rate rose to 3.6% from 3.4%, indicating more workers have reentered the workforce, another good sign. Finally, the all-important wage growth came in slightly better than expected.  Today we have the release of the consumer price index and the wholesale inflation index will also be released this week.  All in all, plenty of fodder for the Fed to chew on. Hopefully they won’t swallow too hard!

Weekly Interest Rate Overview

The Markets. Strong words by Federal Reserve Chairman Powell in front of Congress kept upward pressure on mortgage rates as the jobs report approached. For the week ending March 9, 30-year rates rose to 6.73% from 6.65% the week before. In addition, 15-year loans increased to 5.95%. A year ago, 30-year fixed rates averaged 3.85%, more than 2.5% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates continue their upward trajectory as the Federal Reserve signals a more aggressive stance on monetary policy. Overall, consumers are spending in sectors that are not interest rate sensitive, such as travel and dining out. However, rate-sensitive sectors, such as housing, continue to be adversely affected. As a result, would-be homebuyers continue to face the compounding challenges of affordability and low inventory.” 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 Census Bureau’s Housing Vacancy Survey reported the U.S. homeownership rate at 65.9% in the last quarter of 2022, which is statistically unchanged from the fourth quarter reading (66%). It is 0.4 percentage points higher than the rate in the fourth quarter of 2021. The national rental vacancy rate dipped slightly to 5.8%, and the homeowner vacancy rate inched down to 0.8%. The homeowner vacancy rate is still hovering near the lowest rate in the survey’s 66-year history (0.9%). The covid-induced data collection restrictions have ended in all areas as of the last quarter of 2021. However, technical issues involved with data collection changes limit useful comparisons of the data during the pandemic with the prior data series. The first three quarters of 2021 likely return the series to a more apples-to-apples comparison with the prior history of the series. The homeownership rates of adults in all age groups increased over the last year, except those householders aged 65 years and over experienced decrease. The homeownership rates among households aged 35-44 registered the largest gains among all age groups, from 61.4% to 62.2%, followed by householders aged 45-54 with 0.6 percentage point increase from 70% to 70.6%. Households aged less than 35 and the group aged 55-64 experienced a modest 0.4 percentage point increase separately. Homeownership rates of householders aged 65+ showed a decline of 0.4 percentage points. The survey revealed that the count of total households increased to 129.3 million in the fourth quarter of 2022 from 127.6 million a year ago. The gains are largely due to strong owner household formation (1.6 million increase), while renter households increased 151,000. Source: NAHB

Home builders are using the heck out of mortgage rate buydowns to bring would-be buyers to the table. Individual sellers, not so much. The latest study from the National Association of Home Builders shows that one in four builders is buying down the rate for customers who sign on the dotted line. But John Burns Real Estate Consulting says that percentage is much higher among its builder clients. In a recent national survey, three out of four confirmed they are paying lenders to lower their buyers’ loan costs to make their payments more affordable. But in what is perhaps an offhand comment in a recent newsletter, the Irvine, Calif.-based marketing firm noted that “few sellers are offering these savings to prospective buyers.” Why this phenomenon is occurring wasn’t noted. According to the Burns firm, about a third of the surveyed builders are buying down buyer’s mortgage rates for a full 30 years. To do that, they’re paying the roughly 5 to 6% of the sales price up front to the lender, effectively prepaying the interest on the loan. For those who can’t qualify, builders are switching to full-term buydowns so their customers can make the grade. To do so, though, is expensive. To cut the rate on the $340,00 house in the example used above, the cost is $16,300. On a $590,000 house, it would be a whopping $28,300. A slightly lower percentage are opting to reduce the rate for the first two years of the mortgage, while the remaining were identified as offering a one-year buydown or another, less common form of alternative financing. Source: Lew Sichelman, Published in National Mortgage Professional 

Despite many American home-improvement projects being driven by an expected increase in home value, new data shows that this may be more wishful thinking than reality. On average, home improvement recoups less than 70% of the costs they take to finish them. Amid rising mortgage rates and an uncertain housing market, many Americans have opted to remodel their homes rather than search for a new one, with most citing home-value improvement as the principal reason behind the decision. The remodeler sentiment, while prone to fluctuations, remained positive throughout 2022, buoyed by continued demand for work-from-home arrangements and an aging housing stock. But Today’s Homeowner with Danny Lipford has published a study entitled ROI of Your Home Remodel to investigate the numbers – or more specifically, the returns on investment – underneath the remodeler sentiment. It studied the geo-specific costs and values of over 30 home-improvement projects across more than 1,200 US markets and ultimately found that none of them showed a return on investment above 100%, while barely a third (12) recouped 75% of all costs. The Today’s Homeowner study found that home-improvement projects only recouped 69% of costs on average, with a garage door replacement coming out as the top home-improvement investment (100% of costs recovered) and a finished basement ranking worst (22%). The average ROI for exterior projects such as a garage door and wood window replacements or a porch addition was generally 23% higher than the ROI of interior projects like kitchen and bathroom remodels. ROI of Your Home Remodel also observed that home remodelers looking to sell their upgraded homes were better off investing in the exterior of their home than the interior. Realtor Suzanne Coddington of Dickens Mitchener called it curb appeal. Source: Mortgage Professional America