November 28, 2023 – The Home Stretch

Economic Commentary

Thanksgiving is over. That means we are in the home stretch of the year. From a business perspective, many within the real estate industry will be happy for this year to end. There is no guarantee that next year will be better, but most analysts are pointing towards a gradual improvement in the real estate market next year spurred on by moderately lower interest rates. Certainly, lower rates would be most welcome.

What makes us think rates will be lower next year? Without going through ten or so technical explanations, we will cite the untechnical “law of averages.” Rates have been rising for just about two years now and we are due for a turnaround. This does not mean that interest rates are due to fall sharply, but at this level, there is greater chance of a decline than there is an increase. Of course, there are x-factors we must consider. Some of these are known, for example there are two wars being fought overseas. These wars could expand, or they hopefully will end.

Other known factors are the periodic threats of a government shutdown and a Presidential election year. Unknown factors? Will inflation ease and will the job market slow down? The jobs report for November will be released next week. And the following week we will have the last meeting of the Fed Reserve Open Market Committee for the year. That is always fun. Then there are factors we don’t even know about because they have not happened. After all—who predicted the pandemic three-plus years ago? And who would have thought the pandemic would ignite a hot real estate market? Our advice? Enjoy the rest of the year and especially the holidays. And be prepared for anything.

Weekly Interest Rate Overview

The Markets. The Freddie Mac Mortgage Rate Survey revealed another week of lower rates heading into the Thanksgiving holiday.  At this point, the markets are expecting the Federal Reserve to hold rates steady again when they meet in December. For the week ending November 22, 30-year rates fell to 7.29% from 7.44% the week before. In addition, 15-year loans decreased to 6.67%. A year ago, 30-year fixed rates averaged 6.58%, more than 0.5% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates continued to decrease heading into the Thanksgiving holiday. In recent weeks, rates have dropped by half a percent, but potential homebuyers continue to hold out for lower rates and more inventory. This dynamic is reflected in the latest data showing that existing home sales have fallen to a thirteen-year low.” 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

Down Payment Resource (DPR), a provider of homebuyer assistance program data and solutions, reports that homebuyer assistance program administrators are responding to the mounting home affordability crisis by rapidly rolling out new homebuyer assistance programs and funding buydowns, as there are now 2,256 homebuyer assistance programs available to help people affordably finance homes, an increase of 54 programs over Q2’s totals. “Most first-time homebuyers are well aware that interest rates are hitting generational highs, but what they are not hearing is that there are 2,256 homebuyer assistance programs available to help,” said Rob Chrane, Founder and CEO of Down Payment Resource. “Program providers are working around the clock to ensure the programs they offer meet the needs of their markets. For this reason, many programs now allow funds to be used for buydowns and other popular financing strategies that take the edge off monthly mortgage payments.” DPR’s Q3 2023 Homeownership Program Index report examines the 2,256 homebuyer assistance programs that were active as of October 25, 2023, and found two hundred and ninety-five programs will fund buydowns which allow borrowers to lower their interest rates by paying an upfront fee. Plus, two hundred and fifty-three programs will fund permanent buydowns which allow borrowers to lower the interest rate over the life of the mortgage loan by paying an upfront fee. Fifty new agencies began offering programs. More agencies have stepped up to administer homebuyer assistance programs as affordability worsens. Now, a total of 1,373 agencies provide assistance to aspiring homeowners, a 3.78% increase over the previous quarter. Source: DSNews

More than three-and-a-half years after Covid struck, the US still has around 2 million more retirees than predicted, in one of the most striking and enduring changes to the nation’s labor force. The so-called Great Retirement induced by Covid-19 is evident in the divergence between the actual number of retirees and that predicted by a Federal Reserve economic model. While down from a 2.8 million gap late last year, it remains elevated today and has even risen from 1.7 million in June. “While the gap seemed to be closing earlier in the year, it seems to have widened slightly since then,” said Miguel Faria-e-Castro, economic policy adviser at the Federal Reserve Bank of St. Louis. “As of September, we estimate about 1.98 million excess retirees.” Before the pandemic, the participation rate for workers aged 65 and older reached 20.8% before dropping two-and-a-half percentage points by July 2021. The rate has since risen a percentage point to 19.3% but remains well below the pre-pandemic high. The lack of older workers is creating some shortages. In Michigan, a state law was tweaked to make it easier for teachers to “un-retire” without risking their pensions. Before this summer’s rise in excess retirees, there was speculation that a whole “un-retirement” wave was under way. But that seems to have not been the reality. For many older Americans, leaving the labor market is a one-way street. While many may miss the routine and stimulation — and want to resume work for financial reasons — rejoining the workforce can be difficult. Skills atrophy, work connections rapidly fade and job seekers may confront ageism, all making it harder for many older workers to find a job. In 2022, the mean duration to find a job for people aged 65 and older was 31.6 weeks, 9 weeks longer than the overall average. Source: Bloomberg

A First American Financial Corporation Economic Insights Blog authored by Economist Ksenia Potapov explores the demographics between Boomers and Millennials. According to Potapov, demographic trends are a fundamental driver of housing demand and supply and analyzing them can help anticipate how many people will need housing, as well as roughly when, where and what kind of housing. As millennials continue to age into their prime home-buying years, boomers are aging out. This brings up the question of how demographics will shape housing demand and supply dynamics in the coming years? For a variety of reasons, the homeownership rate for millennials lags behind their generational predecessors. “At age 30, the millennial homeownership rate is approximately six percentage points lower than that of their generational predecessors, Generation X, at the same age,” Potapov said. “That’s largely because millennials have prioritized their education, which takes time and money, and have delayed marriage and family formation, which are motivators for and are correlated with homeownership. Previous generations made these lifestyle choices in their 20s, millennials are making them in their early-to-mid 30s. As evidence of this trend, the homeownership rate gap between 40-year-old millennials and Generation X is significantly narrower, at just two percentage points.” Today, the amount of boomers is dwarfed by the number of millennials, who are now aging into their 30s. According to the U.S. Census Bureau projections, the number of 30-to-39-year-olds will continue to increase to at least 2030. Additionally, millennials’ higher educational attainment is translating into higher earning power, a strong determinant of homeownership. As of 2022, over half of millennial households were homeowners, which still leaves many more young households who want to make the same transition. According to Potapov, the aging-out transition will be a trend to watch over the coming years. The homes sold by boomers will need work: approximately 942,000 single-family homes owned by a head of household that is over the age of 60 are considered “inadequate” dwellings, according to the 2021 American Housing Survey (AHS). This leaves about 32 million homes considered adequate. “Even so, many of the structures considered adequate would still likely need updating and remodeling to be brought up to date and be attractive to potential buyers,” Potapov said. Finally, Potapov says that demographic forces are hard to outrun. “The demographics for home buying will remain very favorable in the coming years. Today, the housing market suffers from a shortage of housing inventory—a deficit of approximately 2 million housing units in early 2023—due to a combination of decade-long underbuilding and a demographic wave of demand from millennial home buyers,” Potapov concluded. Source: MReport