November 8, 2022 – The Fed Has Spoken – Again. This was the sixth time the Fed raised their benchmark rates this year.

Economic Commentary

The Fed Has Spoken – Again. We must sound like a broken record. The Federal Reserve meets. The Fed raises short-term rates. The Fed says — we are going to raise rates until inflation gets under control. Wash, Rinse, Repeat. This was the sixth time the Fed raised their benchmark rates this year, with the most recent four times each being a robust 0.75% increase. All we can ask at this point is – are our clothes clean yet?

Inflation and higher interest rates are not a laughing matter. There is no doubt that the interest rate increases are aimed at slowing the economy. Up until now, the jobs creation machine has not slowed down much. The report this past Friday showed a gain of 261,000 jobs and an unemployment rate of 3.7%.  The numbers were a bit higher than expected and not in any way indicative of a recession.  If the Fed was looking for a pause, they are not seeing it in these numbers – especially wage growth which was still robust.  

One thing for sure is that higher interest rates are slowing the previously red-hot real estate market. This is actually good news because the pace of home price gains was not supportable in the long run. However, we believe that real estate drives the economy. And the current slowdown in real estate will filter through very quickly. The question is—when the Fed sees this pause, will they take their foot off the pedal? We believe they will and would not be surprised to see the pace of rate increases wane as soon as December. Stay tuned.

Weekly Interest Rate Overview

The Markets. Rates moved down last week, but moved up as the survey period ended and the Fed made their announcement. For the week ending November 3, 30-year rates fell to 6.95% from 7.02% the week before. In addition, 15-year loans decreased to 6.29% and the average for five-year ARMs eased one tick to 5.95%. A year ago, 30-year fixed rates averaged 3.09%, more than 3.75% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates continue to hover around seven percent, as the dynamics of a once-hot housing market have faded considerably. Unsure buyers navigating an unpredictable landscape keeps demand declining while other potential buyers remain sidelined from an affordability standpoint. Yesterday’s interest rate hike by the Federal Reserve will certainly inject additional lead into the heels of the housing market.” 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. ***Freddie Mac is making changes to the format of the weekly survey in November***

Real Estate News

First-time homebuyers have returned to the housing market, and those who can afford a home are finding success. In fact, the share of buyers purchasing a home for the first time has rebounded to pre-pandemic levels, now representing 45% of all buyers. That’s up from 37% of buyers surveyed last year, according to Zillow’s 2022 Consumer Housing Trends Report. This may be attributed directly to declining home values and a cooling market, allowing new buyers to survey their housing options. Zillow says the share of first-time buyers plummeted during the pandemic, as first-time shoppers lost out to older, repeat buyers who were able to tap the equity in their existing homes and use cash to make a stronger offer. “First-time buyers now appear to be making relative gains as high mortgage interest rates disproportionately encourage current homeowners to stay put,” said Manny Garcia, a Zillow population scientist. “The flow of homes into the market is slowing, suggesting homeowners are likely comparing their current low mortgage rate to today’s rates and deciding not to move. While rising mortgage rates are hurting affordability for all buyers, first-time buyers may be less deterred by higher rates because they’re comparing a monthly mortgage payment to what they’re paying in rent.” Recent Zillow research from August found that those affordability challenges have driven up demand for the lowest-priced homes in each market. While there are fewer buyers overall, first-time buyers may find more competition for starter homes. Today’s market rebalancing has the potential to especially benefit these buyers and grant them the flexibility to shop without trying to time the purchase of their new home with the sale of an existing home. Zillow noted that listings typically lingered 16 days on the market in August before going under contract, compared to eight days in June, meaning buyers have twice as much time to decide on a home compared to this time last year. Source: National Mortgage Professional

CoreLogic has released its latest Single-Family Rent Index (SFRI) analyzing the latest figures on rent growth for August 2022, which found that rent growth has slowed for the fourth consecutive month to an annual rate of 11.4%. The SFRI revealed that U.S. single-family home rental costs posted an overall 11.4% year-over-year increase in August, marking the fourth straight month of annual deceleration. Even so, rental costs remained elevated, with annual growth running at about five times the rate than in August 2020 in the midst of the COVID-19 pandemic. A shortage of available rental units continues to fuel price growth, although inflation and worries over a looming recession should begin to temper increases. “Single-family rent prices in August were 26% higher than before the onset of the pandemic, adding an average of $400 per month to tenants’ monthly costs and compounding other household expenses caused by inflation,” said Molly Boesel, Principal Economist at CoreLogic. “While annual rent growth is projected to continue increasing throughout the rest of 2022, those gains will likely moderate further in 2023.” Source: MReport

There’s some encouraging news in NAR’s latest housing report, though sales of existing homes are still falling amid economic uncertainty. Home sales continued sliding in September as home buyers retreat from the market amid near-7% mortgage rates and mounting recession fears. Total existing-home sales—comprising transactions for single-family homes, townhomes, condos and co-ops—dropped 1.5% last month compared to August and were down nearly 24% year over year, the National Association of REALTORS® reported. Meanwhile, the Commerce Department reported that housing construction is significantly waning, and home builders warn of more pullbacks ahead. However, despite weaker sales, bidding wars remain strong because of limited inventory. More than a quarter of homes on the market are selling above list price, NAR Chief Economist Lawrence Yun says. “The current lack of supply underscores the vast contrast with the previous market downturn from 2008 to 2010, when inventory levels were four times higher than they are today,” he adds. Further, home prices are proving resilient against the market slowdown. The median price for an existing home across all housing types was $384,800 in September, up 8.4% compared to a year ago. All four major regions of the U.S. saw prices climb. Still, the median home price has fallen from a record high of $413,800 in June. NAR notes that the decline follows typical seasonal trends. Source: NAR