September 10, 2024 – All About Jobs and Inflation

Economic Commentary

In exactly one week, the Federal Reserve’s Open Market Committee will be meeting and contemplating lowering short-term interest rates. For the past several weeks, the markets have been counting on the first decrease in rates since the Fed started the cycle of raising interest rates in March of 2022. All indications have been pointing to this rate decrease with the major question being a choice between a 0.25% or a 0.50% decrease. What could sway the Fed? Two major sets of data will be front and center before the eyes of the Fed during their meeting.

The first set of data was released on Friday in the form of the jobs report. The job market has been exceptionally strong for months and months and only recently has this momentum started to shift. In August the economy added 142,000 jobs, just slightly below expectations. In addition, the previous two months of reports were revised lower by a total of 86,000 jobs. The unemployment rate, which has been drifting higher, ticked down to 4.2% from 4.3%. Overall, this was seen as a report which was below expectations and will serve to increase the Fed’s chances of lowering interest rates.

Another aspect of the jobs data was the wage inflation picture. We saw wages rise 0.4% on a monthly basis. In addition, they rose 3.8% annually. Obviously, inflation is a key factor for the Fed and the persistent wage inflation may keep them from a larger rate decrease. Speaking of inflation, this week the consumer and producer price reports will be released. These represent the second set of data that the Fed will be analyzing closely when they meet next week. The Fed’s number one goal right now is taming inflation. But they won’t want to wait too long to lower rates if the economy is moving away from full employment. Next week should be interesting.

Weekly Interest Rate Overview

Freddie Mac reported that mortgage rates were stable in the past week – with recent lows in rates holding as the jobs report approached. 30-year fixed rates remained 6.35% from the week before. In addition, 15-year loans decreased to 5.47%. A year ago, 30-year fixed rates averaged 7.12%, over 0.75% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates remained flat this week as markets await the release of the highly anticipated August jobs report. Even though rates have come down over the summer, home sales have been lackluster. On the refinance side however, homeowners who bought in recent years are taking advantage of declining mortgage rates in order to lower their monthly payments.” 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

Almost 90% of metro markets (199 out of 223, or 89%) recorded home price gains in the second quarter of 2024, as the 30-year fixed mortgage rate ranged from 6.82% to 7.22%, according to the National Association of REALTORS®’ latest quarterly report. Thirteen percent of the 223 tracked metro areas experienced double-digit price gains over the same period, down from 30% in the first quarter. The median single-family existing-home price for the San Jose, California metro area was $2,008,000 – it’s the first time since NAR began tracking metro area single-family home prices in 1979 that a metro area’s median price exceeded $2 million. “The record-high home prices in most metro markets bring good and bad news,” said NAR Chief Economist Lawrence Yun. “It’s terrific news for homeowners who are moving ahead in wealth gains. However, it’s difficult for those wanting to buy a home as the required income to qualify has roughly doubled from just a few years ago.” Compared to one year ago, the national median single-family existing-home price grew 4.9% to $422,100. In the previous quarter, the year-over-year national median price increased 5%. Housing affordability worsened in the second quarter as mortgage rates increased. The monthly mortgage payment on a typical existing single-family home with a 20% down payment was $2,262, up 11.1% from the first quarter ($2,036) and 10.3% – or $212 – from one year ago. Families typically spent 26.5% of their income on mortgage payments, up from 24.2% in the previous quarter and 25.3% one year ago. “Housing affordability will improve in upcoming months,” Yun said. “Mortgage rates have fallen measurably, and more supply is reaching the market. Therefore, the income required to buy a home will decrease.” Source: NAR

More than half of current homeowners (55%) see home improvements or repairs as a good reason to access built-up home equity, according to Bankrate. The Federal Reserve calculates that Americans held a record of nearly $33 trillion in housing equity as of the first quarter of 2024. After home improvements or repairs, current homeowners also say they consider the following good reasons to tap home equity: debt consolidation (30%), paying tuition or other education expenses (16%), keeping up with household bills (16%), making other investments (16%) and taking a vacation (7%). Notably, nearly one in five homeowners said there is no good reason to tap home equity, the Bankrate report added. Overall, older homeowners are less likely to see any good reason to tap home equity than younger homeowners, and older homeowners are also less likely to see merit in tapping home equity for “non-essential” reasons. Overall, there was little variation among income levels as far as good reasons to tap home equity. But among those earning less than $50,000 annually, nearly one-quarter said they would tap equity to keep up with regular household bills (23%), compared to just 11% of those making $100,000 or more annually. “Because mortgage rates have doubled in the past few years, homeowners no longer are tapping equity through cash-out refinances,” Bankrate Analyst Jeff Ostrowski noted. “Instead, they’re leaving their 3% mortgages in place and taking home equity loans or home equity lines of credit to extract some of the value. Rates on home equity loans and HELOCs are about 9%, according to Bankrate data, compared to 7% for mortgages.” Source: The Mortgage Bankers Association — Editor’s Note: With mortgage rates dropping, cash-out refinances are increasing significantly since this article was published.

You should spend no more than 30% of your gross income on rent, according to many financial experts. But with rental rates increasing on what feels like a daily basis, is that still feasible in 2024? We put that very question to the test. To find out how much the average American is spending on rent in the United States, we analyzed two key metrics: median annual earnings for singles and average monthly rental rates in 100 major U.S. cities. From there, we calculated the average rent-to-income ratio in each city, based on the proportion of income going toward rent over the past five years. The results? Rent is increasing at a faster pace than income. The national rent-to-income ratio has increased by 2.7% over 5 years — from 27.5% in 2018 to 30.1% in 2022. Nationally, rent has increased by 32.6% over 5 years, while the median income has increased by 20.8%. If you’re looking to make your next move, it’s important to do adequate research on the city so you’re prepared well before you have to sign a lease. Everybody’s financial situation is different, but with proper budgeting and saving techniques, surviving the surge in rental rates is possible. “It’s important to be both realistic and forward-thinking,” says Erica Sandberg, BadCredit.org Financial Expert. “Yes, you need a place to stay, but if you know that the monthly rent will always be stressful, open yourself up to all financially healthy alternatives. Stop-gap measures, such as depending on credit cards or loans to meet expenses, are temporary and, ultimately, will become another expensive burden.” Source: Badcredit.org