March 26, 2024 – Fed: Nothing Doing.

Economic Commentary

There is so much anticipation with every meeting of the Federal Reserve’s Open Market Committee, which meets around eight times per year. The analysts are over the top with predictions of actions and then they obsess on every word of their post meeting announcements. And a few weeks later, when the minutes of the meeting are released, it all starts over again. In the interim, the members of the Fed make speeches around the country and appear before Congress giving updates on their policy and their view of the economy. And every time they talk, the markets are affected.

But the truth is that the Fed has made no rate decisions for the better part of a year. They do continue activity, such as buying or selling Treasuries and mortgage-backed securities. These purchases, or more recently, lack of purchases, can affect interest rates significantly. So, it is not like they are doing nothing, but in essence they are doing nothing, and the markets are absolutely obsessed with predicting when they will act again. In this case, they are waiting for the Fed to lower short-term rates for the first time since the pandemic.

So, what did the Fed do last week? Nothing. But the words kept flowing and the market analysts are hanging on every word. The message is the same – the Fed needs more evidence that inflation is subsiding before they act unless the economy shows signs of slowing. And thus, far we have not seen enough evidence of a slowdown. We have a slew of data coming in the next week or so—including personal spending, the personal consumption inflation index and the jobs report. So perhaps this data will help spur the Fed to do what we have been waiting for. Or at least sound more optimistic that it is coming.

Weekly Interest Rate Overview

The Markets. Mortgage rates rose in the past week as the Fed meeting approached. Though they did ease a bit after the rate survey period ended and the Fed issued their announcement.  For the week ending March 21, 30-year fixed rates rose to 6.87% from 6.74% the week before. In addition, 15-year loans increased to 6.21%. A year ago, 30-year fixed rates averaged 6.42%, 0.45% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “After decreasing for a couple of weeks, mortgage rates are once again on the upswing. As the spring homebuying season gets underway, existing home inventory has increased slightly and new home construction has picked up. Despite elevated rates, homebuilders are displaying renewed confidence in the housing market, focusing on the fact that there is a good amount of pent-up demand, an ongoing supply shortage and expectations that the Federal Reserve will cut rates later in the year.”   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

A panel of housing experts expects annual national home price growth of 3.8% this year and 3.4% in 2025, according to the Q1 2024 Fannie Mae Home Price Expectations Survey. Fannie Mae and Pulsenomics polled more than 100 experts across the housing and mortgage industry and academia for their forecasts of national home price percentage changes as measured by the Fannie Mae Home Price Index to create the HPES. Their consensus for national home price growth is higher than last quarter’s expectations of 2.4% for 2024 and 2.7% for 2025. Additionally, a higher percentage of panelists indicated higher upside risk to their home price forecasts–41 percent in the first quarter compared to 26 percent in fourth-quarter 2023–with a majority citing ongoing housing supply constraints and lower mortgage rates as their basis for that belief. The panel also projects a median 30-year fixed mortgage rate of 6% by the end of 2024. “On average, our panelists continue to expect home price growth to decelerate this year, but their overall outlook was revised upward this quarter, with most now reporting greater upside risk to home prices than downside risk,” said Hamilton Fout, Fannie Mae vice president of economics. “If mortgage rates move toward the panel-predicted six percent median rate by the end of 2024, we would expect this to be supportive of continued home price growth, particularly given the persistent supply-side challenges facing the housing market.” Terry Loebs, founder of Pulsenomics, added: “This is a positive outlook for those who already own a home, but as the dearth of listings boosts both prevailing values and expected future prices, the affordability concerns of prospective homebuyers are unlikely to fade soon.” Source: Fannie Mae

The median age of owner-occupied homes is 40 years old, according to the latest data from the 2022 American Community Survey. The U.S. owner-occupied housing stock is aging rapidly especially after the Great Recession, as the residential construction continues to fall behind in the number of new homes built. New home construction faces headwinds such as rising material costs, labor shortage, and elevated interest rates nowadays. With a lack of sufficient supply of new construction, the aging housing stock signals a growing remodeling market, as old structures need to add new amenities or repair/replace old components. Rising home prices also encourage homeowners to spend more on home improvement. Over the long run, the aging of the housing stock implies that remodeling may grow faster than new construction. New construction added nearly 1.7 million units to the national stock from 2020 to 2022, accounting for only 2% of owner-occupied housing stock in 2022. Relatively newer owner-occupied homes built between 2010 and 2019 took up around 9%. Owner-occupied homes constructed between 2000 and 2009 make up 15% of the housing stock. The majority, or around 60%, of the owner-occupied homes were built before 1980, with around 35% built before 1970. Source: National Association of Home Builders

There’s this consensus that people who come from money are at an advantage, Redfin’s chief economist, Daryl Fairweather, explained—but it made her think: how does family money play out in the housing market, she told Fortune. Redfin conducted a survey of recent movers earlier this year and found that 38% of more than 500 buyers under the age of 30 either used a cash gift from a family member or an inheritance to afford their down payment, making them what Fairweather calls, “nepo-homebuyers” (clearly a play on nepotism—giving power/favors to relatives), which she’d recently written about as a Forbes contributor. “I think the reason that matters so much in this housing market is because of how expensive housing has become,” Fairweather told Fortune. “It seems like the only way to kind of get your foot in the door to the housing market is to have some help,” or have an exceptionally high-income, particularly at a younger age, she added. Housing affordability is deteriorating, and it’s worse now than at the height of the housing bubble, following an over 40% increase in home prices coupled with mortgage rates that have more than doubled. For many, homeownership is becoming out of reach – especially the down payment required. For many, that’s not feasible, and it doesn’t take into account what would be a substantially larger monthly mortgage payment now that mortgage rates are higher. “If you’re trying to get into the housing market, and because of how high interest rates are, because of how high home prices are, you have to be like the exception to the rule in terms of your earnings to get into the housing market if you don’t come with cash,” Fairweather said, and that cash typically comes from parents or other family members. Fairweather was a nepo-homebuyer herself. Back in 2015, when she was 27-years-old, her mom sold her condo and gave Fairweather the money to put toward a downpayment, so that she could own a home. “Had it not been for her doing that, it would have taken me years to be able to afford a home of my own,” Fairweather said, later adding that “year after year, prices kept going up.” Source: Fortune