September 17, 2024 – It is Time!

Economic Commentary

We have received news that the job market has slowed down – including a major downward revision of jobs over the past year to the tune of 818,000 jobs. We have seen major progress on the war against inflation. The most recent consumer price index came in at 0.2 % monthly and 2.5% over the past year. The core numbers excluding the volatile components of food and energy were reported at 0.3% monthly and 3.2% annually – slightly higher than forecasts. Therefore, the stage has been set for the Fed to lower rates, however the higher than expected core numbers might make a larger cut less likely.

And the stage is in the form of a meeting of the Federal Reserve’s Open Market Committee which starts today and concludes early tomorrow afternoon. The markets are betting on a rate decrease announcement. As we have pointed out previously, we don’t believe that long-term rates will necessarily fall because of this action because long-term rates have already dropped in anticipation of the Fed announcement – including sharply lower mortgage rates.

This speculation could be wrong on two accounts. First, if the Fed lowers rates by 0.5% instead of the anticipated 0.25%. Secondly, if the Fed in their post meeting announcement declares that more rate cuts are on their way, this could prompt the bond markets to react again in anticipation of future Fed activity. Of course, there is always the chance that the Fed could disappoint the markets by not taking any action, which in turn could cause a negative reaction by the markets. If that happens, hopefully a positive statement about the future could be issued which might mitigate that possibility.

Weekly Interest Rate Overview

The Markets. Freddie Mac reported that mortgage rates fell to the lowest level in 18 months last week as the next meeting of the Federal Reserve approached. 30-year fixed rates fell to 6.20% from 6.35% from the week before. In addition, 15-year loans decreased to 5.27%. A year ago, 30-year fixed rates averaged 7.18%, almost 1.00% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates have fallen more than half a percent over the last six weeks and are at their lowest level since February 2023. Rates continue to soften due to incoming economic data that is more sedate. But despite the improving mortgage rate environment, prospective buyers remain on the sidelines, as they negotiate a combination of high house prices and persistent supply shortages.” 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

Existing-home sales improved in July, breaking a streak of four consecutive monthly declines, according to the National Association of REALTORS®. Three out of four major U.S. regions registered sales increases while the Midwest remained steady. Year-over-year, sales rose in the Northeast and West but retreated in the Midwest and South. Total existing-home sales – completed transactions that include single-family homes, townhomes, condominiums and co-ops – ascended 1.3% from June to a seasonally adjusted annual rate of 3.95 million in July. Year-over-year, sales fell 2.5% (down from 4.05 million in July 2023). “Despite the modest gain, home sales are still sluggish,” said NAR Chief Economist Lawrence Yun. “But consumers are definitely seeing more choices, and affordability is improving due to lower interest rates.” Total housing inventory registered at the end of July was 1.33 million units, up 0.8% from June and 19.8% from one year ago (1.11 million). Unsold inventory sits at a 4.0-month supply at the current sales pace, down from 4.1 months in June but up from 3.3 months in July 2023. The median existing-home price for all housing types in July was $422,600, up 4.2% from one year ago ($405,600). All four U.S. regions posted price increases. Source: National Association of Realtors

A report from Redfin revealed that investor purchases of residential properties were up 3.4% annually in the second quarter, marking the largest year-over-year leap in investor buys in two years. Investors purchased one out of every six homes (roughly 16.8%) sold from April through June. That’s up from 16% in the same period last year and the second highest second-quarter share on record, trailing only 2022. Market share for investors has crept upwards because they’ve been far more active than regular homebuyers in leaving the sidelines, in large part because most of them (almost 70%) pay in cash and are less sensitive to interest rates. Investors spent approximately $43 billion on properties nationwide in the second quarter. That dollar value is up 13.7% from the second quarter of 2023, also the largest annual jump in two years. “One reason real estate investors are coming out of hibernation is to take advantage of robust demand from renters,” said Sheharyar Bokhari, senior economist at Redfin. “Elevated home prices and mortgage rates have pushed homeownership out of reach for a lot of Americans, which is fueling demand for rentals. Investors, many of whom can afford to pay in cash to avoid the sting of high mortgage rates, are cashing in on that demand.” Returns on homes sold by investors are still trending higher than pre-pandemic levels, although profit margins are down year over year (58% in Q2 2024 compared to 62.1% in Q2 2023). But just 5% of homes sold by investors generated a loss, down from 5.8% one year earlier — and also below pre-pandemic norms. Source: Scotsman Guide

The housing crunch has been well documented in high-cost big cities, where rents and mortgages break the bank. Now it has moved into the rest of the country. The culprit is too little housing, and it began two decades ago. In the three years leading up to the Great Recession, homebuilders started about two million homes a year. That number plunged during the crisis and never fully rebounded. Since 2010, builders have started about 1.1 million new homes a year on average — far below the 1.6 million needed to keep up with population growth. America is millions of homes behind, and it gets worse each year. Cities and states understand they have a housing problem. To increase the pace of construction, many have cut back regulatory barriers — like zoning and environmental rules — that make housing slow and expensive to build. Since 2018, for instance, several states have passed laws to allow duplexes and small apartment buildings in neighborhoods that once contained only single-family homes. But the nation’s housing shortage isn’t only about zoning in cities. Builders simply aren’t putting up subdivisions at the rate they once did. They’re cautious about overbuilding after the losses they incurred in the 2008 crisis, and they’ve become reluctant to invest and expand before they know they have a winning hand. Land developers — companies that take a piece of dirt and add basic infrastructure like streets, plumbing and power, creating the lots where new homes are built — have also cut back. The number of vacant developed lots, or places where a homebuilder could start construction tomorrow, is still 40 percent below its pre-Great Recession level, said Ali Wolf, chief economist at Zonda, a data and consulting firm. As part of a nationwide shift, housing assistance used to focus on poverty. Now it’s also becoming a middle-class support program. Cities and states are changing where and how housing is built; Republicans and Democrats agree on the urgency, and housing was a theme at both political conventions this summer. But those changes will be measured in decades because we fell so far behind. Source: The New York Times