October 24, 2023 – Why Predictions Don’t Work – Redux

Economic Commentary

For months we have been debating whether the Federal Reserve will raise rates one more time this year and more specifically when they meet next week. We analyze the data, listen to the speeches by members of the Fed and then prognosticate to our hearts content. Then something happens which reminds us that predictions are futile. In this case we had another devastating attack on a country across the globe.

Regardless of our perception, we do not exist independently in the world. We can’t control the price of oil by ourselves, nor world-wide inflation. Pandemics are spread around the globe and wars affect the entire world. The same with the growing prevalence of natural disasters. These events, whether man-made or naturally occurring, are terrible tragedies in which thousands of innocent lives are affected drastically. No one can predict when and how these awful events are going to take place. We can’t predict when these events will happen and we can’t predict how they will affect our economy, interest rates or inflation.

If the effects are negative in some way, we just need to be reminded that there are so many others who are being affected much more drastically. For more than the past century, we have been a world leader, and we are sure we will continue to lead as we help those around the world recover. From an economic standpoint, we have been publishing this economic commentary for 30 years and we have lost count of the times events such as these have reminded us that predictions are merely a guessing game in which real life gets in the way.

Weekly Interest Rate Overview

The Markets. Strong economic data sent rates higher yet again last week. For the week ending October 19, 30-year rates rose to 7.63% from 7.57% the week before. In addition, 15-year loans increased to 6.92%. A year ago, 30-year fixed rates averaged 6.94%, a bit over .50% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates continued to approach eight percent this week, further impacting affordability. Not only are homebuyers feeling the impact of rising rates, but home builders are as well. Incoming data shows that the construction of new homes rebounded in September but as rates keep rising, home builders appear to be losing confidence. As a result, construction could trend down in the short-term.”   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

There have never been more options available in home building than there are today, and yet site-built construction remains the predominant method of building single-family homes. According to analysis from the Urban Institute, site-built (also known as stick-built) construction accounts for 97% of new single-family homes. In fact, over the last two decades, factory-built homes fell from 5% to 3% of single-family home production, peaking just before 2008. Despite this trend, factory-built homes—also referred to as prefabricated, or “prefab,” homes—offer unique opportunities to address the nation’s housing supply challenges. “Factory-built has the potential to not only increase supply but also help solve affordability issues,” says Michael Neal, principal research associate and equity scholar at the Urban Institute. “Prefabricated houses are the best-kept secret in America,” says Sheri Koones, a prolific writer on the variety and value of prefab homes. Koones regularly encounters a general lack of knowledge and prevalent misconceptions among consumers. One common confusion is the difference between modular and manufactured homes. While both modular and manufactured homes are assembled in factories, they are built to two different codes. Manufactured homes, previously called “mobile homes,” are built on permanent metal chassis in compliance with the federal Manufactured Housing Construction and Safety Standards, also called the HUD code, which preempts state and local codes. Modular homes are built to the same International Residential Code, or IRC, as site-built homes and must conform to state and local regulations. Modular homes are being built and delivered across America. “We’re designing houses for literally all around the country,” says Geoffrey Warner, principal architect and owner of Alchemy, based in St. Paul, Minn. Primarily what has been driving modular is really the cost of land and the cost of construction. I think that people are starting to realize that modular makes sense because we’re experiencing labor shortages across the country.” Source: REALTOR® Magazine

Even with a maelstrom of trying circumstances in the residential market of late, real estate investors are optimistic about the months ahead, according to the Fall 2023 Investor Sentiment Survey from RCN Capital. Seventy-two percent of investors polled by RCN and market intelligence firm CJ Patrick Company said that market conditions for investing are actually the same or better than they were one year ago. Three-quarters of respondents indicated that they believe conditions will either remain stable or improve over the next six months. Investor views on the current landscape is decidedly rosier compared to the spring iteration of the survey. Forty-nine percent of the latest survey’s participants said conditions are better than they were a year ago, compared to just 30% in the spring. “Despite higher home prices, higher financing costs and limited inventory, real estate investors continue to express optimism about market opportunities today and in the months ahead,” said RCN Capital CEO Jeffrey Tesch. “Investors continue to play an important role in the housing market – according to a recent report from CoreLogic, more than one in four home sales is to an investor, and we continue to see interest from both rental property buyers and fix-and-flip investors in our business. “Interestingly, fix-and-flip investors seem much more optimistic about future opportunities – 50% of them believe that conditions will improve over the next six months compared to just 24% of rental property investors,” said Rick Sharga, CEO of CJ Patrick Company. “That may be an indication that flipping activity has bottomed out, but may also be a reflection of current challenges in the rental market, with rates continuing to decline even as more rental inventory comes online.” Enhanced optimism, however, doesn’t necessarily mean investors are playing looser with their funds. RCN’s survey suggests that investors still plan on being judicious with their capital, with just 22% planning to buy more properties than they did one year ago. Thirty-nine percent plan to buy the same number, with another 39% saying they will buy fewer properties than they did this time last year. Source: Scotsman Guide

A recent analysis from the Urban Institute details the priorities and measures experts are taking to help expand and sustain Latino homeownership nationwide. According to U.S. Census Bureau data, the Latino homeownership rate was 50.6% in 2021, representing the highest rate for Latinos since 2009. Latinos account for an increasingly large share of the population, particularly in younger generations poised to form households and enter prime homebuying years. “About 50 to 75% of the actual homeownership gap between white and Hispanic households can be accounted for by ‘endowments’—location, income, marital status, family composition, for example,” said Paul E. Carrillo, Professor of Economics at George Washington University. “To close the gap, we have two possible approaches. If income and education are a constraint, then we must go into those communities and fix those things. [And] we have to solve the remaining 25% of the gap that is unexplained.” For the momentum in U.S. homeownership to be sustained by Latinos, the finance, housing, and urban planning ecosystems need to adapt. Recognizing the importance of this inflection point and the potential for Latino families to realize homeownership’s promises and advantages, UnidosUS launched the Home Ownership Means Equity (HOME) initiative to increase the Latino homeownership rate. Urban Institute’s Laurie Goodman and Jun Zhu estimated in 2021 that between 2020 and 2040, approximately 70% of net new homeowners will be Hispanic, and no net new homeowners will be white. They also projected that by 2040, more than 20% of younger households—defined as households headed by those younger than 65—will be Hispanic. Source: MReport