September 13, 2022 – Since we could not decide as to whether we are in a recession right now, many have adopted the term “housing recession” instead.

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Economic Commentary

Housing and Recessions. Since we could not decide as to whether we are in a recession right now, many have adopted the term “housing recession” instead. While we are not sure what constitutes a housing recession, we really need to view today’s real estate market in terms of where the market is coming from. Certainly, the past few years have been red hot in the real estate sector.

Today, the market is not as hot. But “not as hot” is a long, long way from a housing recession. For one, housing prices are still holding up well, which is quite surprising considering the steep increases of the past two plus years. Secondly, we still have a general housing shortage in the United States because we have not built enough homes to keep up with our household formation. Demographics do not lie.

However, one point is clear. As housing goes, so does the economy. We have had robust economic growth since the pandemic-induced recession in no small part due to tremendous demand for real estate. Now that this demand has cooled somewhat, it makes sense that our economy would slow down. And if and when there is a recession, we would expect that housing will be the primary sector expected to help us get the economy going again. As housing goes, so does the economy.

Weekly Interest Rate Overview

The Markets. Mortgage rates rose again in the past week as Fed members continued to deliver hawkish speeches to prepare the markets for further rate increases.  For the week ending September 8, 30-year rates rose to 5.89% from 5.66% the week before. In addition, 15-year loans climbed to 5.16% and the average for five-year ARMs increased to 4.64%. A year ago, 30-year fixed rates averaged 2.88%, more than 3.00% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates rose again as markets continue to manage the prospect of more aggressive monetary policy due to elevated inflation.”  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

After two years of unprecedented growth, home values fell slightly from June to July, according to the latest market report from Zillow. The market is quickly rebalancing, gradually returning back to pre-pandemic norms with buyers’ purchasing power being diminished by nearly two years of double-digit price growth and higher mortgage rates —resulting in competition for homes dropping off. The typical U.S. home value declined by 0.1% —or $366— month-over-month in July and now stands at $357,107, as measured by the raw Zillow Home Value Index (ZHVI). Monthly growth in this metric has relaxed since reaching a recent peak of 1.9% in April, slowing to 1.2% growth in May and 0.8% growth in June. It’s not unusual for home price growth to decelerate this time of year, but the small decline is the first monthly dip since 2012. The nation’s typical home value is up 16% year-over-year and 44.5% since July 2019. “Home values flattening so quickly after recent record growth might surprise, but it’s a badly needed rebalancing that gives home buyers more options, more time to shop and more negotiating power,” said Zillow Chief Economist Skylar Olsen. “This slowdown is about discouraged buyers pulling back after the affordability shock from higher rates. As prices soften, many will renew their interest, and we will continue our progress back to ‘normal.’ With buyers ready in the wings once confidence returns, homeowners can expect to keep the majority of the equity gains they’ve seen in the last two years.” Home values measured by raw ZHVI fell from June to July in 30 of the 50 largest metro areas, an increase from 13 the previous month. Home shoppers still on the hunt have more time to find and consider their options and have a better chance of seeing price cuts. Listings’ median days to pending jumped by two days in July to 10 — still nearly two weeks less than in July 2019. Source: MReport

Redfin, said real estate investors purchased 87,500 U.S. homes in the second quarter, up 11% quarter over quarter and 5.9% year over year. That’s down from a high of 93,700 in the third quarter of 2021, the height of the pandemic-driven homebuying frenzy. Still, investors are buying far more homes than they were before the pandemic; they purchased roughly 60,000 homes per quarter in 2019. The report said investor market share has also started to level off but remains above pre-pandemic levels. Investors bought 19.4% of homes that sold in the second quarter, down slightly from a record 20.1% in the first quarter, the first drop after nearly two straight years of increases. But it’s up from 16.2% a year earlier and roughly 15% per quarter in 2019. In dollar terms, investors purchased a record $60.1 billion worth of real estate in the second quarter, up from $50.5 billion in the first quarter and $54.5 billion a year earlier. “The cooldown in the overall housing market motivates some investors and scares others off,” said Redfin Senior Economist Sheharyar Bokhari. “Investors are contending with sky-high home prices, just like other buyers. Those who plan to turn homes into rentals are still in the market because high rental payments help offset the cost of the home, and the home will likely grow in value over time. Others are motivated by discounts from home builders looking to sell off extra inventory as individual buyers pull back. But investors in the flipping business have quicker turnaround times, so they’re shying away because the prospect of falling home prices means they may lose money when they relist in six months or a year.” Source: Redfin.com

For renters encountering soaring housing costs in US city centers, decamping to the suburbs no longer offers much of a reprieve. The price advantage of renting in the suburbs versus downtowns has shrunk by 53% from three years ago, according to a report Wednesday from Realtor.com. While suburban renters used to save 12% compared to city dwellers in July 2019, they now pay only 5.8% less. The shift is a blow for apartment hunters already squeezed by escalating costs and few options for relief. The median US rent jumped 12% in July from a year earlier to $1,879, Realtor.com data showed, the 17th straight monthly record. “Whether in a downtown area or suburb, staying put or making a change, renters are stuck between a rock and a hard place when it comes to affordability,” Danielle Hale, Realtor.com’s chief economist, said in the report. “Put simply, renters are feeling it everywhere.” The suburbs grew in popularity during the pandemic as urbanites who could suddenly work from anywhere fled cramped downtown apartments for more space. With the price differential narrowing, people outside downtown areas now pay about $107 a month less on rent, compared with $175 in 2019. The trend is starting to turn as bosses call workers back to downtown offices and other renters simply want a return to vibrant city life, Hale said. The cost of renting in urban areas jumped 13% in July, compared with just under 12% in the suburbs. This is a reversal from January 2021, when urban rent fell 2.5% and suburban rent rose 3.9%. Source: Bloomberg Financial

 

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