May 14, 2024 – Higher For Even Longer

Economic Commentary

It was just early last year that the markets introduced the concept of higher interest rates for a “longer period of time.” With the economy continuing to grow briskly and inflation coming down, but at a slower pace, there was no reason for the Federal Reserve to rush things. Thus, we pushed off predictions for a rate decrease. “Wait until 2024” became the rallying cry. Then came 2024 and guess what? Inflation progress leveled off and the economy has kept growing.

So, instead of a rate decrease in March, the markets delayed their prediction until June. Then the prevailing prediction became the second half of the year. Now we are stuck with a new concept – “higher for even longer.” Concerning this concept, we would like to say that “higher for even longer” is not the same as higher rates forever. Far from it. We can’t predict when, but interest rates will eventually come down. As a matter of fact, just a few weeks ago we saw the first evidence of an economic slowdown. The advanced measure of economic growth for the first quarter was under 2.0%.

This number is subject to revision, but a slowdown in growth would be welcome news for inflation fighters. We also saw a slowdown in hiring last month. Of course, it would be nice to see some additional progress on the inflation front. Tomorrow we will see the release of the Consumer Price Index for April. Unlike two years ago, we are not that far from the Fed’s goal of 2.0% inflation—we have come over 80% of the way. One last note—because of “higher rates for longer,” – when rates do fall, we now expect there will be a stronger refinance market than was expected at the beginning of this journey. Not as strong as the pandemic refinance demand, but the savings should be substantial if and when the drop happens.

Weekly Interest Rate Overview

Freddie Mac reported that rates decreased last week in reaction to the Federal Reserve’s decision to sell less of their portfolio each month, plus the weaker than expected jobs report. 30-year fixed rates fell to 7.09% from 7.22% the week before. In addition, 15-year loans decreased to 6.38%. A year ago, 30-year fixed rates averaged 6.35%, 0.74% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “After a five week climb, mortgage rates ticked down following a weaker than expected jobs report. An environment where rates continue to hover above seven percent impacts both sellers and buyers. Many potential sellers remain hesitant to list their home and part with lower mortgage rates from years prior, adversely impacting supply and keeping house prices elevated. These elevated house prices add to the overall affordability challenges that potential buyers face in this high-rate environment.” 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

Many homeowners who sold their properties during the previous year will enjoy a significant tax benefit on their homeownership investment. Since 1997, homeowners can exclude housing capital gains for up to $500,000 (or $250,000 for a single filer) when they sell their houses. For anything below the exemption limit, homeowners do not even need to report the sale to the IRS. CoreLogic says that strong price growth during 2021 and 2022 is leading a growing number of homeowners to find for the first time that they may owe taxes on excess capital gains beyond the exemption limits, due to property values doubling, tripling or even quadrupling over the years since they bought the home. Between 2000 and 2003, a few years after the passage of The Taxpayer Relief Act of 1997, only about 38,000 home sales per year, or 1.3% of existing home sales, had gross capital gains that exceeded the exemption limit. From 2017 through 2019, numbers hovered at below 130,000 annually and represented about 3% of annual existing home sales. However, in the peak year of 2022, more than 300,000 home sales had gross capital gains above the $500,000 exemption limit, a staggering 140% increase from pre-pandemic levels. In Q2 2022, when home price acceleration rose to the pandemic-cycle peak, sales of homes that exceeded the capital gains limit reached 9.1% of quarterly existing home sales. In 2023, these sales dropped by 25% from 2022 to slightly shy of 230,000 but were up by 80% from 2019. At the end of 2023, home sales that required capital gains payments stood at 7.9%, 150% higher than the 2017-2019 average. Source: National Mortgage Professional

Proximity to good schools has long been a deciding factor for home buyers. An increasing number of house shoppers, however, are looking for schools that specialize in fetching rather than phonics. Pets, according to real estate agents and industry officials, cannot be ignored when shopping for a home. As the number of households with children decline and those with pets rise, pet-friendly homes and neighborhoods are in demand. Households with children younger than 18 dropped from 48 percent of the market in 2002 to 40 percent in 2022, according to Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors. Families with pets have increased from 56 percent in 1988 to 70 percent in 2022, according to NAR research. “We saw a lot of people adopt pets during the pandemic and then suddenly that puppy grows and you need to find a bigger home and a yard to accommodate that larger dog, or even cats needing to find a space for the litter box and space for them to roam,” Lautz said. Research by Zillow confirmed the effect of the pandemic on pet ownership. It found nearly three-fourths of home buyers and 57 percent of renters in 2021 reported owning one pet, said Amanda Pendleton, Zillow’s home trends expert, up from 64 percent of buyers and 51 percent of renters a year earlier. According to the American Pet Products Association (APPA), nearly 87 million U.S. households have at least one pet. Dogs dominate, showing up in more than 65 million households. Cats are found in 46.5 million homes. For dog owners, a fenced yard remains a leading consideration, but that is only a starting point. “What we’re really seeing in our research is that people are looking for more space, particularly pet owners,” Pendleton said. “And it’s not just outdoor space, it’s indoor space as well.” Buyers with pets are more likely than non-pet buyers to purchase homes with more than 3,000 square feet of space, Pendleton said. Homes with fenced yards, Zillow research shows, sell an average of three days faster than non-fenced homes. Access to parks or trails also ranks high on the wants list. “One of those things moving up in importance is walkability, having a place that someone can easily pop outside and walk a dog, important proximity to the vet and dog parks are also important,” Lautz said. Source The Washington Post

With home prices surging and inventory scant, many buyers are beginning to accept that they may not find a move-in-ready property. More than half of prospective home buyers say they’d consider purchasing a fixer-upper, whether it needs a small cosmetic lift or large structural updates, according to a new RE/MAX survey. Further, 80% say they may adjust their homebuying plans in the next year, whether that means reconsidering the type of home they purchase, getting more creative with financing—such as borrowing money from family—or even co-buying with others, the survey shows. “Affordability remains a key concern for home buyers as home prices, interest rates and inventory continue to fluctuate,” says RE/MAX President and CEO Nick Bailey. “Despite today’s economic environment, it’s clear that homeownership is still a priority for many, and the results of our survey prove that buyers are willing to go outside their comfort zone to reach their goal.” Indeed, 73% of respondents surveyed indicated they’d consider purchasing a fixer-upper because of the potential for a lower listing price, the RE/MAX survey shows. A majority of respondents say they’d likely spend less than $70,000 on repairs and renovations; 10% say they’d be willing to spend up to $90,000. A fixer-upper can be significantly cheaper to buy than a move-in-ready home, but buyers need to budget for the cost of renovations. Real estate professionals can show their value by helping clients choose projects based on potential ROI. Source: REALTOR® Magazine