May 7, 2024 – Jobs and the Fed.

Economic Commentary

It was a busy week with the jobs report and the meeting of the Federal Reserve Open Market Committee within days of each other. The Fed met first and they surprised nobody by leaving short-term rates where they were, though they announced that they would be selling off less of their holdings monthly. Recent strong economic news and stronger-than-expected inflation reports left no doubt that we are extending the “higher rates for longer” scenario. Several weeks ago, the markets were predicting the first cut in rates at the Fed meeting in June. Now the markets seem to be projecting September as the date with others predicting that the Fed may hold off until 2025.

Remember our thoughts about projections. They are often wrong. There is a lot of data to be released between now and those dates. Speaking of data, the April employment report was also released last week. Certainly, the torrid pace of job creation has been a significant contributor to the economic scenario the Fed is watching. What did April tell us? The market created 175,000 jobs and the headline unemployment rate rose to 3.9%. Thus, the jobs machine slowed a bit last month. In addition, the previous two months of gains were revised downward by 22,000 — making last month’s numbers even more moderate.

On the inflation front, wage growth came in 0.2% higher than last month and up 3.9% year-over-year. Overall, these numbers would make the “higher for longer” scenario a bit less likely if they are the start of a trend. Of course, there is another factor. If the war in Gaza explodes into a regional war which brings other countries into the conflict, there is no telling which way the Fed may have to act to counter such a crisis. Again, this is why predictions are so difficult. For now, we can say that the higher for longer scenario is the predominant Fed belief right now. But for how long, we can’t say..

Weekly Interest Rate Overview

The Freddie Mac weekly survey indicated that mortgage rates were still rising last week. However, rates did ease after the Fed meeting. The Fed did not lower rates, but they announced that they would be selling off less of their holdings monthly – easing up on their quantitative tightening program.  30-year fixed rates rose to 7.22% from 7.17% the week before. In addition, 15-year loans increased to 6.47%. A year ago, 30-year fixed rates averaged 6.39%, 0.83% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The 30-year fixed-rate mortgage increased for the fifth consecutive week as we enter the heart of Spring Homebuying Season. On average, more than one-third of home sales for the entire year occur between March and June. With two months left of this historically busy period, potential homebuyers will likely not see relief from rising rates anytime soon. However, many seem to have acclimated to these higher rates, as demonstrated by the recently released pending home sales data coming in at the highest level in a 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

According to Thumbtack Blog writer P.J. Linarducci (a Medium.com company) first-time homeowners are overwhelmed—they know what they want to find in a potential home, but they do not know the appropriate steps, and in what order, to take to achieve homeownership. Thumbtack completed market research on who potential homeowners are, their needs, their homebuying knowledge, and compiled all this information in order to bridge this gap. As part of this deep dive into consumer wants and knowledge, they asked 2,000 homeowners in the U.S. who recently bought their first home in the last five years about their goals, challenges, and experiences. Findings that stood out include:

• They are planning to stay in their homes for the long term—an average of 20 years.
• They expect to spend about $30,000 this year across repairs, maintenance, and improvements—a striking amount given the median U.S. household income of $74,580. In fact, Americans spend far more on housing-related expenses than any other category, with a rising share of their paycheck going to mortgages, especially for recent purchases.
• More than four out of five (83%) were surprised by the complexity of their homes after moving in and found home projects much more time-consuming than they anticipated.
• As digital natives, 88% want a mobile app to plan and manage their home projects.
• Homeownership desires: space for family, proximity to work and modern amenities.

According to Thumbtack, they asked homeowners in the 25 largest U.S. metropolitan areas about their level of knowledge when they first bought their home, their level of knowledge today, and how much they’d ideally like to know. Their responses showed a noted room for improvement. While most would be satisfied with a B- grade on readiness to care for and improve their homes, the national average stands at an F on move-in day and a D after years of ownership. Source: MortgagePoint

A National Association of Home Builders (NAHB) analysis found that new homes built in 2023 reached their smallest median size in 13 years. “Homeownership remains a goal for families who are eager to put down roots and have a place to call their own,” said NAHB chairman Carl Harris, a custom home builder from Wichita, Kansas. “Our nation’s builders are meeting the moment by finding solutions in home construction to allow for more individuals to purchase a home.” More than a third (38%) of builders say they built smaller homes in 2023, and more than a quarter (26%) plan to construct even smaller this year, according to NAHB. According to NAHB’s latest What Home Buyers Really Want study, there has been a downward shift in buyer preferences for home size in the last 20 years. In 2003, the typical buyer wanted 2,260 square feet; now, that number is 2,067 square feet. Data from the U.S. Census Bureau confirm new homes have been shrinking for nearly a decade. The average (median) size of new homes built in 2023 fell to 2,411 (2,179) square feet, the smallest since 2010. The drop was a continuation in a downward trend that began in 2015. The only year that saw home size increase during this period was 2021, due to the pandemic-induced desire for additional space to work/study from home and the low interest rate environment that allowed buyers to purchase those bigger homes. More than one-third of builders cut home prices in 2023. NAHB expects builders to continue offering smaller homes and more affordable designs as housing affordability remains a barrier to homeownership. Yet builders face supply-side challenges that continue to increase the cost of constructing homes, such as the scarcity of buildable lots, lack of skilled labor and restrictive codes. The median price of new homes in 2023 was $428,200, down 6% from 2022. Source: NAHB