📈A BIG WEEK IN JOB NEWS & MORTGAGE RATES📈
BIG WEEK AHEAD
December 4, 2023
The forthcoming week in the financial realm is poised to be data-intensive, particularly in the realms of housing and employment. On Tuesday, CoreLogic is slated to unveil its Home Price Index for October, delivering valuable insights into the present state of the housing market and potential patterns in property values. This will be closely succeeded by a series of significant labor sector reports. On the same day, the Job Openings and Labor Turnover Survey (JOLTS) report for October will provide a glimpse into job openings, shedding light on the dynamics of the labor market. The employment focus persists into Wednesday with the release of the ADP Employment Report for November, which specifically assesses private sector payrolls. This serves as a precursor to Thursday's update on the most recent Jobless Claims, a pivotal indicator of short-term employment trends. The week culminates in data on Friday with the Bureau of Labor Statistics' Jobs Report for November. This comprehensive report encompasses vital metrics such as Non-farm Payrolls and the Unemployment Rate, offering a broad overview of the nation's employment health.
These consecutive releases are poised to influence market sentiments and policy decisions, rendering them crucial for investors, homeowners contemplating sales, prospective buyers, and policymakers alike.
Key Events This Week:
1. JOLTs Jobs Data - Tuesday
2. ISM Non-Manufacturing PMI - Tuesday
3. ADP Nonfarm Employment Data - Wednesday
4. Initial Jobless Claims Data - Thursday
5. Consumer Sentiment Data - Friday
6. November Jobs Report – Friday
In recent days and weeks, there has been a substantial decline in mortgage rates, marked by swift changes. For instance, the average rate for a 30-year fixed mortgage has decreased from 8.03% to 7.125% within a month, representing the most significant drop since March. Despite the unexpected nature of this rate movement, several factors can be attributed to it based on recent economic developments.
The trajectory of mortgage rates in the near future may hinge significantly on the outcome of Friday's jobs report. Particularly, the nonfarm payrolls (NFP) figure in this report tends to exert a considerable influence on rates. Economists are anticipating an NFP around 180,000 jobs. The actual comparison of these numbers could lead to either the stabilization of mortgage rates or significant changes. For example, if the NFP falls well below expectations (below 100,000), the recent rate decline may persist. Conversely, if the figure surpasses predictions (approaching 300,000), there's a likelihood of a rapid increase in rates, potentially reversing the recent downward trend. The middle ground scenario, where NFP numbers fall in between, may result in minimal changes to mortgage rates. Consequently, there is a high probability of volatility in mortgage rates following the release of the jobs report.
PROJECTIONS:
ADP (Wednesday) - private sector only
We are expecting 128,000 job creations
Jobless Claims (Thursday)
Initial claims expected at 223,000
BLS (Friday)
180,000 job creations expected
153,000 private job creations
3.9% Unemployment Rate expected to be unchanged
The significance of Friday's report cannot be overstated. Should the new job creations fall below the anticipated 180,000 mark, there is a strong likelihood that mortgage rates will experience further improvement. Our attention is keenly focused on these developments, as they could have a substantial impact on the trajectory of mortgage rates.
ARE RATE CUTS BOUND TO CONTINUE?
Presently, there is a prevailing belief in the financial market that the Federal Reserve is on the brink of altering its approach. The current outlook suggests a 65% probability that the Fed will initiate its first rate cut in March 2024. However, it's prudent to approach these predictions with caution, as attempting to time the market is considered a risky endeavor.
The state of housing affordability in the United States is currently more challenging than during the peak of the last housing bubble. Allocating 44.7% of their income to afford a median-priced home represents an all-time high for the average American household. While the desire is for lower rates and stable prices, a more measured approach to rate cuts could contribute to maintaining a balanced supply and demand. The hope is that lower mortgage rates may be on the horizon, provided that the supply can keep pace with demand.
Fed Chair Jerome Powell emphasizes caution, stating, "It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy if it becomes appropriate to do so." This underscores the Fed's commitment to a careful and adaptable approach to monetary policy.
In the U.S., inflation is experiencing a gradual decline. The October Personal Consumption Expenditures (PCE) report, a pivotal metric for measuring inflation, revealed no change in overall inflation for the month and a decrease in the annual rate from 3.4% to 3%. The core PCE, excluding food and energy prices and closely monitored by the Federal Reserve, saw a slight increase of 0.2% in October. However, its annual rate dropped from 3.7% to 3.5%, marking the lowest figure in over two years. This development swiftly shifted the market's perspective on potential rate cuts.
The substantial reduction in inflation since its peak last year is evident, with the current overall rate at 3% and the core rate at 3.5%. Over the last six months, the core PCE has averaged around 2.4%, aligning closely with the Fed's target of 2%.
The recent positive shift in inflation dynamics could play a significant role in the Federal Reserve's decision to pause rate hikes at their upcoming meeting on December 13. This week's job-related news could further influence this decision, particularly if the numbers fall below expectations.
HOME VALUES
In October, Pending Home Sales, which are indicative of signed contracts on existing homes and serve as a predictor for future home sales, experienced a 1.5% decline from September. This represents the lowest level recorded since the National Association of REALTORS® began tracking this data in 2001. The deterrent effect of high mortgage rates coupled with a shortage of available homes has significantly impacted buyer activity. Lawrence Yun, Chief Economist at NAR, underscored the urgency of boosting housing supply to meet the prevailing demand. It's noteworthy that a three-month consecutive increase in mortgage rates understandably led to a slowdown in housing activity. With rates having improved over the past five weeks and an upswing in mortgage applications, an uptick in activity is anticipated.
In a similar vein, New Home Sales, reflecting signed contracts on newly constructed homes, experienced a 5.6% decline in October, reaching an annual pace of 679,000 units. Despite this dip and the influence of elevated mortgage rates, these figures still surpass those from August and markedly exceed last October's numbers. At the close of October, there were 439,000 new homes available for sale, of which only 76,000 were completed. The median sales price of new homes decreased to $409,300, reflecting a shift in the market toward the construction of more affordably priced homes. It's important to note that this change in median price does not necessarily indicate an overall decline in home prices but is a result of a greater number of lower-priced homes being constructed.
The current housing supply is 40% below its historical average, and home prices have surged to 80% above the 130-year historical average. Various indices, including Case-Shiller, FHFA, CoreLogic, Black Knight, and Zillow, confirm that home values have reached new all-time highs, rebounding from the downturn observed in the second half of 2022. Projected appreciation rates between 6-8% for this year, depending on the index, highlight the continued opportunity for building wealth through homeownership and appreciation gains. Emphasizing the importance and attainability of homeownership, the data suggests that now is an opportune moment for those considering approval for a home purchase.
To explore your potential approval and learn more, you can use the provided link to schedule a call.
GROWING WEALTH THROUGH REAL ESTATE
The 2022 Survey of Consumer Finances (SCF) underscores a significant wealth gap between homeowners and renters, revealing that the median homeowner possesses 38 times the household wealth of a renter. This trend persists across all income levels, emphasizing that homeownership is associated with higher wealth accumulation.
Even among families in the bottom 20 percent of incomes, the median net worth for homeowners is nearly $147,000, compared to just $3,400 for renters. Housing emerges as the most substantial component of net worth for the majority of households, and what's particularly intriguing is that the lower a household's income, the higher the proportion of their wealth is attributed to homeownership. For households with middle-range incomes, home equity represents about 37% to 68% of their total net worth. In contrast, for those in the top 10% income bracket, home equity makes up only about 23% of their net worth. This data underscores the pivotal role of homeownership in wealth accumulation, especially for lower and middle-income families.
The key takeaway is that the best time to buy is when you're purchasing within your means. It's crucial not to hesitate in exploring how much you can be approved for today, as homeownership continues to be a substantial factor in building and preserving wealth.
Don’t hesitate to reach out and find out how much you can be approved for today.
Beyond the Horizon: Navigating the Unique Terrain of
CRE Loan Financing Amidst Rising Interest Rates
The landscape of commercial real estate loans and transactions has undergone a significant transformation in the past two years, marked by 11 rate hikes in 20 months. The dynamic shift began after reaching record origination levels in 2021 amid nearly zero borrowing conditions. Present market conditions demand a more meticulous approach, with numerous factors influencing deal closures.
In 2021, CRE lending peaked at $891 billion before the Federal Reserve initiated aggressive interest rate hikes in March 2022 to combat inflation. This led to an 8 percent decline in loan volume last year, according to the Mortgage Bankers Association (MBA). Projections for 2023 indicate a substantial 46 percent decrease to $442 billion, as per MBA's updated baseline forecast released on Oct. 19.
Kyle Jeffers, Senior Managing Director and Co-Head of Originations at Acore Capital, notes a collective "gut check" within the industry, prompting a reevaluation of property valuations and a return to fundamental real estate analysis. Uncertainty about the trajectory and duration of interest rate increases has impacted property transactions, resulting in a dearth of price discovery in the market.
David Perlman, Managing Director and Head of the New York Office at Thorofare Capital, observes increased lender competition for acquisition loans, with fewer deals in play. Investors are now facing longer hold periods due to the higher cap rate climate resulting from elevated interest rates.
The dramatic fluctuations in interest rates, coupled with economic uncertainty, have led to tighter lending standards. Lower loan-to-value ratios and increased scrutiny on debt service coverage ratios (DSCR) are evident as sponsors strive to align rental incomes with underwriters' debt service standards.
Borrowers are navigating these challenges by seeking equity partners to meet financing requirements. Leverage levels in the current market are typically 5 to 10 percent lower than those in 2021, often ranging from 60 to 65 percent loan-to-value.
Melissa Farrell, Head of Debt Originations at PGIM Real Estate, emphasizes the impact of rising interest rates on loan terms, with a notable shift towards shorter loan terms and increased demand for preferred equity and mezzanine loans. Farrell underscores the importance of adapting underwriting approaches to the evolving market conditions.
As interest rates remain higher compared to early 2022, lenders are exercising caution with interest rate caps for deals involving floating-rate borrowing. Borrowers, in turn, are reconsidering floating-rate debt options in light of market volatility.
The demand for affordable housing persists, supported by tax credit equity and subsidies. Maintaining adequate reserves is crucial for affordable housing sponsors to navigate challenges posed by rising interest rates.
Looking ahead to 2024, lenders anticipate a rebound in volume as transaction activity picks up, providing sponsors with a clearer understanding of interest rate peaks. While the current environment presents fewer transactions, Acore Capital has managed to secure robust deals through its debt fund platform in 2023.
Despite higher interest rates, borrowing remains historically less expensive compared to previous decades. David Perlman emphasizes that capital interest in real estate endures, albeit at different valuation points and potentially longer hold periods. He predicts a return of sidelined players in 2024, increasing competition for loans and stimulating overall market activity.
Amid the evolving landscape, the real estate market is experiencing a paradigm shift in the lending landscape. Kyle Jeffers of Acore Capital remains optimistic, acknowledging that while the industry has undergone a substantial transformation, the next few years are poised to offer excellent lending opportunities. Jeffers points out a silver lining in the reduced competition for deals, as traditional banks have largely stepped back, granting lenders still in the game increased negotiating power for deal structures.
David Perlman underscores that, despite the higher interest rates compared to early 2022, the cost of borrowing remains historically favorable. He emphasizes the enduring interest of capital in real estate, predicting a resurgence of interest from investors in 2024. This resurgence, Perlman suggests, will not only revitalize lending activity but also intensify competition for loans, thereby stimulating the overall market.
Looking ahead, industry experts anticipate a rebound in transaction volume as investors gain a clearer understanding of interest rate peaks. The dynamic shifts in the market have prompted a recalibration of strategies, with a return to fundamental real estate analysis and a renewed emphasis on property valuations.
Melissa Farrell of PGIM Real Estate points out the importance of adapting to the changing market conditions, noting a shift towards shorter loan terms and increased demand for alternative financing solutions like preferred equity and mezzanine loans. This adaptability is crucial for investors seeking to navigate the uncertainties of the current real estate climate.
Maria Barry, Community Development Banking National Executive at Bank of America, highlights the resilience of the affordable housing sector. Despite challenges posed by rising interest rates, the sector has continued to thrive, benefiting from tax credit equity and government subsidies. Barry emphasizes the importance of maintaining adequate reserves to ensure the smooth progression of deals, even in the face of potential obstacles.
In conclusion, while the commercial real estate market has undergone substantial changes in response to interest rate hikes and economic uncertainties, industry experts remain optimistic about the future. The resilience of the market, coupled with adaptive strategies and a resurgence of interest from sidelined players, sets the stage for a dynamic and evolving real estate landscape in the coming years. As we move forward, the industry will continue to navigate challenges, capitalize on opportunities, and shape a new era in commercial real estate lending.
