May 17, 2022 – Does Negative Growth Indicate Recession? Starwest Mortgage Economic, Interest Rate, and Real Estate Report

May 18, 2022 @ 1:09 am Posted by starwest 0 [hupso]

Economic Commentary

Lately, market analysts have been predicting a recession in our not too distant future. And right on cue, the first reading of economic growth for the first quarter of the year comes in at a negative 1.4%. Since the general definition of a recession is two quarters of negative economic growth, we must ask the question—has the recession already started, as opposed to the forecast of sometime next year? Generally, we think not.

For one, the job market is still very strong. In the first quarter of the year, the economy added almost two million jobs. And last month we started the second quarter by adding well over 400,000 jobs in April. While we are still recovering jobs lost during the last recession, we generally don’t add hundreds of thousands of jobs per month during a recession. Secondly, consumer spending continued to be strong during the first quarter of the year, including a 1.1% increase in March. Consumer spending accounts for two-thirds of our economic activity.

Thus, the final question is – if there are plenty of jobs being added and consumers are spending, how could the economy experience negative growth in the first quarter? Tim Quinlan, Senior Economist at Wells Fargo Economics said it best — “Net exports robbed the GDP bank in the first quarter, slicing 3.2 percentage points off of the headline growth rate. Inventories and government spending cuts took another 0.8 points and 0.5 points, respectively.” These items tend to fluctuate from quarter-to-quarter and if consumers continue to spend, we are not likely to see two negative quarters in a row. That does not mean that the economy won’t slow down as the Fed hikes rates. But for now, any slowdown is more likely to be felt later in the year.

Weekly Interest Rate Overview

The Markets. Mortgage rates continued to rise in the past week, though they eased near the end of the survey period. For the week ending May 12, 30-year rates rose to 5.30% from 5.27% the week before. In addition, 15-year loans decreased to 4.48% and the average for five-year ARMs climbed to 3.98%. A year ago, 30-year fixed rates averaged 2.94%, over 2.00% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Homebuyers continue to show resilience even though rising mortgage rates are causing monthly payments to increase by about one-third as compared to a year ago. Several factors are contributing to this dynamic, including the large wave of first-time homebuyers looking to realize the dream of homeownership. In the months ahead, we expect monetary policy and inflation to discourage many consumers, weakening purchase demand and decelerating home price growth.” 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

Zillow, Seattle, said homes with eco-friendly features can sell faster than expected, indicating that today’s buyers are seeking out and competing for more-sustainable homes. The Zillow analysis found homes with electric vehicle charging stations and drought-resistant landscaping can sell more than nine days faster than similar homes. Features that offer some protection from climate disasters and other natural hazards, such as hurricane shutters or stilts, can help a home sell for more money. “Climate change is impacting what buyers are looking for in a home and how they want to live,” said Amanda Pendleton, Zillow home trends analyst. “A previous Zillow survey found nearly two-thirds of young adults believe climate change will impact their homes or communities in their lifetime. Those generations are now aging into their prime home-buying years, conscious of their ecological footprint and making purchase decisions based on their beliefs, values and principles.” Zillow research found large shares of buyers seriously consider flooding (55%), tornadoes (41%), hurricanes (35%), and earthquakes (29%) when choosing a home. The frequency of these severe weather events and other natural hazards is putting a price premium on homes that have features designed to protect against such disasters. Features that reduce monthly energy bills can help a home sell faster and, sometimes, for more money. Homes with listing descriptions that mention double-pane windows can sell a week faster than similar homes and for 1% more than expected. Homes with solar panels can sell for 1.4% more. Listings that tout programmable thermostats, smart sprinkler systems and smart lights can sell up to six days faster than expected. Source: Zillow

Homebuyers favor slightly smaller homes today than they did during the height of the COVID-19 pandemic, purchasing homes that are smaller by 1.8%, or 31 square feet, online real estate brokerage firm Redfin reported. “Buyers are purchasing smaller homes because, usually, the bigger the home the more expensive it is,” said Redfin Chief Economist Daryl Fairweather. “Even though we’re starting to see signs the housing market is cooling down, it’s still difficult for buyers on a budget to find everything they’re looking for in a home. “That’s because there’s still a very limited supply of homes for sale, along with sky-high prices for the ones that are on the market and rising mortgage rates. If buyers don’t want to compromise on location, they probably need to settle for a smaller home,” she added. Redfin said the median price per square foot for a house increased 20.1% to a record $230, from about $183 in March 2021. Homebuyers purchased bigger homes at the beginning of the pandemic because they needed more space for home schooling and remote work, Redfin said. Just prior to the pandemic, the typical home that sold had about 1,713 square feet. As the pandemic set in, people started buying homes that were about 4.5% larger, with about 1791 square feet, Redfin said. Source:

As home sales surged and prices soared, real estate investors were no small part of the mix. CoreLogic says the share of home sales going to investors, large and small, climbed steadily during the pandemic, rising from around 14 percent in the spring of 2020 to a peak of 26.9 percent last October. The data in the CoreLogic report, authored by economist Thomas Malone, is too limited, covering only the fourth quarter of 2021, to draw any solid conclusions, but they may be an early indication that investors are rethinking their business strategies. Moore says that, after accounting for the largest share of home sales transactions in CoreLogic’s records in October, the investor portion slipped the following month for the first time since July 2020. It wasn’t a big decline, 1.5 percentage point, but by year-end the share of home purchases was at 20.4 percent. Moore adds that, while the percentage share fell, the absolute number of homes purchased was in line with historical winter investor activity. It is the large or institutional buyers who appear to have decreased their purchases since October. Large investors are those who retain 100 or more properties and their share of investor purchases declined from just shy of 26 percent in September to 20 percent in December 2021. Small investors, the so-called moms and pops who own three to ten properties, maintained the same 50 percent share of purchases that they had in December 2019 while the share of investor purchases by medium sized investors (10 to 99 properties) peaked at 34 percent at the beginning of 2021 then fell to 27 percent by late summer. Both small and medium investors increased their shares slightly at the end of the fourth quarter. Source: Mortgage News Daily

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