October 3, 2023 – What is a Soft Landing?

Economic Commentary

What is a Soft Landing? The vast majority of analysts forecasted a recession in the second half of 2023. We are now more than half-way through the second half and there are no signs of a recession, except in the housing sector. However, the economy continues to slow down from the solid growth of the first half of the year. Now most economists are saying that there is a good chance of a soft landing. But what exactly is a soft landing and what would it look like for the consumer?

From Investopedia — A soft landing in the business cycle is the process of an economy shifting from growth to slow-growth to potentially flat, as it approaches but avoids a recession. It is usually caused by government attempts to slow down inflation. Thus, a soft landing would be characterized by lower inflation and economic growth of zero to 1.0% per quarter. The classic definition of a recession would be two consecutive quarters of negative economic growth. We saw that during the pandemic induced recession, but those were certainly unprecedented circumstances.

The next question is — will inflation come down during a soft landing? If inflation returns to the Fed target of 2.0%, it is much more likely that interest rates will also come down. If inflation stays high during a soft landing, then we are talking about the phenomenon of “stagflation.” Assuming stagflation is not in the cards and rates come down, we can add one more question. Would lower rates immediately supercharge the economy again? Certainly, there is a lot of pent-up demand in the real estate sector. We believe that the last quarter of this year and the first quarter of next year will be very telling with regard to answering these questions…

Weekly Interest Rate Overview

The Markets. Rates continued to rise last week as the threat of a government shutdown roiled the markets and members of the Fed continued to spew hawkish statements. The increases continued despite economic reports showing the economy cooling a bit. For the week ending September 28, 30-year rates rose to 7.31% from 7.19% the week before. In addition, 15-year loans increased to 6.72%. A year ago, 30-year fixed rates averaged 6.70%, just over 0.5% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The 30-year fixed-rate mortgage has hit the highest level since the year 2000. However, unlike the turn of the millennium, house prices today are rising alongside mortgage rates, primarily due to low inventory. These headwinds are causing both buyers and sellers to hold out for better circumstances.” 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

Coming up with a large chunk of cash for a down payment is likely the first thing that comes to mind when people think of buying a house one day. But you probably don’t need as much money as you think. The idea of the 20% down payment as a standard dates back to the Great Depression, when mortgages were usually shorter than the 30-year term that is standard today. That’s a daunting figure at today’s prices. The typical house in the U.S. has a median price of around $400,000. Applying the 20% rule would mean you’d need $80,000. Close to 40% of Americans who don’t own a house point to a lack of savings for a down payment as a reason, according to a new CNBC Your Money Survey conducted by SurveyMonkey. But in reality, “the typical first-time buyer has a down payment well under 20%,” said Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors. More often, Lautz said, people come up with just 6% or 7% as a down payment on their first home. During the first quarter of 2023, the typical down payment on a single-family home represented 7.5% of the median price, according to ATTOM, a real estate data company. In that case, on the median-priced house in the U.S., you’d need around $24,000. Better still, there are programs available that may help many would-be homeowners put down even less. Some federal government-supported programs allow you to buy a house with no down payment, or a very low one. The U.S. Department of Agriculture, the Federal Housing Administration and Department of Veterans Affairs, among others, have programs with low down payments. Even as home prices and interest rates have risen, “homeownership is still the best option for building equity long-term,” said Daniel Brennan, director of MaineHousing. Some states, cities and other groups have programs that award grants to homebuyers that bolster their down payment or help cover closing costs. Source: CNBC

Owning a home is often considered a cornerstone of the American dream, symbolizing stability, independence, and a sense of accomplishment. But despite the widespread aspiration for homeownership, many Americans lack the necessary knowledge of basic concepts integral to this dream. Lombardo Homes conducted a study in which they highlighted the gaps in knowledge of many Americans when it comes to home-buying, renovating, and building. From misconceptions about mortgage terms to unfamiliarity with home maintenance essentials, the study reveals the need for accessible and comprehensive homebuyer education to empower individuals on their path to realizing the American dream. As for America’s knowledge about homeownership, there’s also some room for improvement. Lombardo asked 25 multiple-choice questions related to being a homeowner and used their responses to calculate a grade percentage on an A-F academic scale. To answer a question correctly, more than 50% of respondents had to select the right answer on the quiz. Unfortunately, America has some studying to do as it only scored 14 questions right and ultimately “failed” the quiz. Respondents received its best marks in the home buying section, answering 7-of-10 questions correctly. America knows the purpose of a pre-approval letter, what home equity is, the current interest rate for a 30-year mortgage, and who traditionally pays the real estate agent’s commission on a home sale. But quiz takers underestimated how much it costs to buy a home in 2023—according to the Federal Reserve, the median home sales price in the first quarter of 2023 was $436,800. Only 24% answered that correctly. The worst scores came from the section about home renovating and maintenance, with only 3-of-7 questions answered correctly. While respondents did know what HOA stands for (homeowners association), and the average lifespan of a standard asphalt shingle roof (20 years), respondents didn’t know how long a traditional tank-type water heater should last (8-12 years), or the name of the material typically installed directly over the exterior wall framing of a house (sheathing). Source: MReport

Fueled by a resurgent stock market and rising home values, US household wealth hit a record $154.3 trillion during the second quarter of this year, according to federal data. Consumer wealth has now completely recovered from the recent inflation-driven drop in stock prices and real estate holdings. Household and nonprofit net wealth increased by $5.5 trillion, or 4%, between the end of March and the end of June, Federal Reserve data released showed. This follows an increase of $3 trillion during the first three months of the year. The data is not adjusted for inflation. This bump in wealth was driven mostly by a surge in the value of Americans’ stock market investments, which grew by $2.6 trillion during the quarter. Real estate holdings, including the value of homes, increased by $2.5 trillion. Household wealth now stands about $2 trillion above the prior record of $152 trillion set in early 2022 — which should give consumers a cushion to weather future economic storms and a potential uptick in unemployment. The stock market has rebounded in tandem with the US economy. Goldman Sachs recently cut its view on the probability of a US recession over the next 12 months to just 15%, down from 35% earlier this year. There are rising hopes of a soft landing, where inflation is tamed but a recession is avoided. Source: CNN