October 17, 2023 – Bear Markets

Economic Commentary

Bonds are in a significant bear market. A bear market in bonds is different than the typical bear market we discuss – which is the stock market. While both are characterized by a drop in prices (for stocks it is typically 20%) – a bear market in stocks is typically accompanied by a declining economy and a bear market in bonds is typically accompanied by an overheated economy which is associated with an elevated threat of inflation. Note that the decline in bond prices means that rates are increasing.

Of course, these are not your typical bear markets. While stocks did fall from their peak in 2022 by more than 20%, they had risen over 50% in the previous four years and much of this increase was fueled by artificially low interest rates. As interest rates moved up to a more normal range, this stimulation was removed from the markets. Higher inflation caused by several factors, including these low rates, persisted and caused the downward momentum in bonds to continue to gather speed rather than leveling off.

Most analysts agree that we are either at or near the end of the Fed’s tightening cycle. And we had the government shutdown averted (for now) and some good inflation news. But bond market analysts are not looking at the “better times ahead” signals – another characteristic of a bear market. Possibly because every speech by the members of the Fed highlights that there is more work to be done in order to bring inflation under control. Moving out of a bear market outlook requires a change in perception. There is always that old market model – when there are no sellers left, the market will change. All bear markets end, and we hope that this bear market ends sooner than later because consumers could use some lower rates. And when they turn, they often turn quickly.

Weekly Interest Rate Overview

The Markets. Rates rose again last week, but eased back a bit in reaction to the crisis in Israel as the survey period came to a close. Slightly higher than expected inflation data released last week did not help, though the trend continued to moderate. For the week ending October 12, 30-year rates rose to 7.57% from 7.49% the week before. In addition, 15-year loans increased to 6.89%. A year ago, 30-year fixed rates averaged 6.92%, a bit over .50% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “For the fifth consecutive week, mortgage rates rose as ongoing market and geopolitical uncertainty continues to increase. The good news is that the economy and incomes continue to grow at a solid pace, but the housing market remains fraught with significant affordability constraints. As a result, purchase demand remains at a three-decade 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

August saw an unusually hefty bump in home prices, marking the fourth straight month with a new record peak, according to the latest ICE Mortgage Monitor Report from Black Knight. On a seasonally adjusted basis, home prices rose 0.68% month over month in August — a gain that Black Knight described as “exceptionally strong” for the month. Likewise, the non-seasonally adjusted monthly gain in August was 0.24%, up more than 60% from the August average for the last 25 years. National home prices, seasonally adjusted, are now 2.5% above their 2022 high-water mark. Two-thirds of major markets have hit their previous highs, and nearly half of major markets saw August increases of at least 0.75%. More gains are projected on the way, according to Andy Walden, vice president of enterprise research strategy at Intercontinental Exchange (which formally acquired Black Knight recently). “After essentially flattening earlier this year, year-over-year home price growth has been reaccelerating for the last few months. … August marked the second consecutive month in which annual [home price appreciation] trended higher in every one of the 50 largest U.S. markets, mirroring the sharp reacceleration we’re seeing at the national level,” Walden reported.“ Already baked-in price gains mean further acceleration may be on the horizon. If adjusted home prices were to freeze where they are now, it would result in annual [home price appreciation] rising above 5% by year’s end, given the strong price increases seen earlier this year.” Source: Scotsman Guide

Foreign investors, who typically pay cash for U.S. real estate, are spending even more on properties than domestic buyers. NAR data reveals who these international clients are and what areas of America they’re targeting. The number of homes purchased by international buyers has fallen to its lowest level in at least 14 years as foreign investors grapple with market headwinds, according to data from the National Association of REALTORS®. High home prices and low inventory forced international buyers to purchase 14% fewer properties over the last year, shows NAR’s report, 2023 International Transactions in U.S. Residential Real Estate. Real estate pros say the reasons their international clients ultimately decided not to buy in the U.S. include property costs (30%), inability to find a suitable property (27%) and inability to obtain financing or qualify for a mortgage (20%). “Sharply lower housing inventory in the U.S. and higher borrowing costs across the world have dented international buyers for two straight years,” says NAR Chief Economist Lawrence Yun. “However, recovering international travel following the end of the pandemic will bring more foreign transactions in the coming months and years.” But international buyers who are still purchasing U.S. real estate are spending more than domestic buyers, often paying cash and targeting the priciest areas in the nation. The average purchase price for a foreign buyer rose to $639,900 over the past year, marking a 7% increase, NAR’s data shows. The median purchase price for an international home buyer was $396,400, higher than the $384,200 for all properties sold. Forty-two percent of international buyers pay cash compared to about a quarter of the overall market. About half of international buyers purchased a property to use as a vacation home, rental or both compared to 16% among all existing-home buyers. Source: REALTOR® Magazine

The share of distressed property auction buyers who say they are owner-occupants nearly doubled over the last year, boosted by a game-changing government policy that took effect last August. The increasing share of owner-occupant buyers is also evidence that extremely tight housing inventory is prompting more retail buyers to take on the additional challenges that come with buying a distressed property at auction. Meanwhile, innovation-driven transparency is helping to make distressed property auctions more accessible for these owner-occupant buyers as well as for local community developer buyers who, it turns out, sell most of their renovated foreclosures to owner-occupants. Fifteen percent of distressed property buyers described themselves as owner-occupants, according to a March 2023 survey of nearly 450 buyers using the Auction.com platform. That was nearly double the 8% of buyers who described themselves as owner-occupants in a February 2022 Auction.com buyer survey. “My wife and I currently live in an Auction-purchased home,” said Dwayne, a survey respondent from Maryland. “We also have a very happy renter of half of our home.” Source: Auction.com