🚨A BIG WEEK OF MARKET MOVING NEWS! 🚨
THIS WEEK'S MARKET MOVING NEWS
October 31, 2023
The Federal Reserve is firmly committed to maintaining a 2% target inflation rate. As per Jerome Powell, the option of implementing rate cuts will only be considered when the Fed has solid and consistent evidence of inflation decreasing. So, how did we arrive at a 5% likelihood of a rate cut this week? This question arises despite positive trends in core inflation.
What would it require to prompt such a move?
In September, the prices measured by the Consumer Price Index (CPI) rose by 0.4%, following a 0.6% increase in August. Various items, including gas, electricity, and fuel, experienced price hikes, while natural gas prices declined. If we exclude the often-volatile food and energy components, the CPI increased by 0.3% in September, mirroring the August figure, with food prices increasing by 0.2%.
The most notable price increases in September were observed in housing and gasoline. However, prices for used cars and clothing registered declines. Housing costs, a significant component of the CPI, surged by 0.6% in September, following a 0.3% rise in August. Rental prices, in particular, have been steadily increasing at an average of 0.5% per month for the past nine months.
Housing comprises approximately 30% of the value in the "basket of goods" evaluated by the Bureau of Labor Statistics when calculating the CPI.
Assessing the past year, the CPI in September increased by 3.7%, matching the August figure. Excluding food and energy, the CPI rose by 4.1% over the past year, which represents a somewhat slower pace. Food prices experienced a 3.7% increase in the past year, while energy prices declined by 0.5%.
The National Association of Home Builders (NAHB) compares rental inflation to overall inflation to gauge the state of the rental housing market. In September, this specific rent index increased by 0.2%. Rent accounts for 11% of core CPI, and the Owner's Equivalent Rent (which represents what homeowners could charge for renting their homes) constitutes 32% of core CPI.
Core inflation, which excludes food and energy, is the Federal Reserve's preferred measure. Housing is a substantial component of this metric. Core Personal Consumption Expenditures (PCE) has decreased to 3.7%, its lowest point since May 2021. Progress is ongoing, and further improvement is anticipated as data related to housing, which has been lagging, catches up.
The positive news is that inflation is showing signs of improvement.
However, the downside is that this improvement may no longer be sufficient, given the presence of a resilient job market and the looming risk of rising inflation.
This week's key events and economic reports to watch include:
Yesterday (October 30th):
- Bank of Japan Meeting: The Bank of Japan's meeting, scheduled at 10:30 PM EST, could have an impact on the bond market. Expectations are that the bond market may react negatively to this report. This meeting can influence global financial markets.
Today (October 31st):
- Case Shiller Home Price Index (HPI): This report tracks the monthly change in the value of single-family homes in the United States. It provides insights into the state of the housing market, which is a key economic indicator.
Wednesday (November 1st):
- Mortgage Applications: This report provides data on mortgage loan applications and can offer insights into the real estate and housing market.
- ADP Employment Report: The ADP employment report offers a preview of the official government jobs report and can provide an early look at employment trends in the U.S.
- JOLTS (Job Openings and Labor Turnover Survey): JOLTS data provides information on job openings, hires, and separations, offering insights into labor market dynamics.
- Federal Reserve Meeting: The Federal Reserve's meeting begins on October 31st and continues on November 1st. The outcome of this meeting will be closely watched for any changes in monetary policy or signals from the Fed regarding its economic outlook and policy intentions.
Friday (November 3rd):
- BLS Jobs Report: The Bureau of Labor Statistics (BLS) releases the monthly jobs report, which includes data on nonfarm payrolls, unemployment rate, and wage growth. This report is closely watched by economists, investors, and policymakers as it provides a comprehensive view of the U.S. labor market.
In my view, any indication of weakness in these employment reports could be seen as "positive" news by the Federal Reserve, further underscoring the effectiveness of its restrictive policy. The JOLTS survey is a monthly assessment of job openings, hiring activities, and job separations in the United States, published by the U.S. Department of Labor's Bureau of Labor Statistics. Notably, in September, job growth exceeded expectations, with 336,000 jobs added, marking the highest figure since January. This was a substantial increase compared to the 227,000 jobs added in August, and it's worth mentioning that the job figures for both July and August were revised upward. A significant portion of the September job growth emanated from the leisure and hospitality sector, contributing 96,000 jobs, surpassing their average over the past year. The unemployment rate remained steady at 3.8%, with approximately 6.4 million people unemployed. Expectations had been for the addition of 170,000 new jobs and an unemployment rate of 3.7%. Given these figures, it's evident why the unexpected 336,000 job gain had such a surprising impact, causing a reaction in the bond market and leading to an increase in mortgage rates. This marks the 33rd consecutive month of job growth in the United States, reflecting a robust job market that bolsters consumer confidence and sustains economic activity.
We will closely monitor subsequent job reports for any indications of weakness.
ELEVATED INVENTORY LEVELS
For the first time since July 2022, there has been an uptick in the number of homes listed for sale, with new listings on the rise. This modest increase of 0.3% occurred over the four weeks leading up to October 22. Several homeowners are opting to sell, either due to their belief that mortgage rates will remain stable for the foreseeable future or concerns that delaying the sale might lead to a decline in home prices. Last year, a decline in new listings coincided with a surge in mortgage rates, and the initial reaction to such rate increases tends to create a sense of immobilization.
Homebuyers, who have witnessed a consistent decrease in available homes for about 18 months, are relieved to see a growing inventory, even though some remain cautious about making purchases. The demand for new mortgages is currently at a 30-year low. Although demand has waned, many potential buyers are proactively seeking pre-approval and closely monitoring the market. There has also been a slight rise in the number of homes going under contract, which is partly attributed to the influence of builder incentives in driving sales.
Many real estate experts concur that some homeowners are selling their properties out of concern about declining home values, while others are aiming to capitalize on an anticipated upswing in demand. A valuable piece of advice for sellers is the recognition that timing the market is an intricate task. Effective pricing and preparation for negotiations are key. In several markets, home prices continue to climb, and mortgage rates remain elevated, causing affordability concerns to remain at the forefront and keeping some potential buyers on the sidelines. Over the past four weeks, approximately 7% of homes listed have seen price reductions, marking the highest percentage to date.
For buyers who are approved and prepared to make strong offers, this presents an opportune moment to target homes that have lingered on the market for ten or more days without receiving offers. In such cases, negotiating for a price reduction or credits to enhance affordability could be successful. It's important to bear in mind that, as history suggests, when interest rates eventually decline, which they are likely to do, demand will surge, potentially driving prices higher. The issue of affordability is a recurring concern that impacts both home prices and mortgage payments in the current market climate.
RENT VS. OWN – IS IT REALLY WORTH IT?
Is it truly a more advantageous choice to lease over the long run? Certainly, if your goal is to secure a reduced monthly payment and you intend to allocate a portion of the savings towards investments, then it can be a favorable option.
Benefits of Homeownership:
1. Building Equity: Over time, homeowners build equity as they pay down their mortgage and as the property appreciates in value.
2. Stability: Homeowners enjoy stability in their monthly payments (with fixed-rate mortgages) and don't face rent increases or eviction by landlords. Even when there’s a hardship, there are programs in place to help you keep your home.
3. Tax Benefits: Many homeowners can deduct mortgage interest and property taxes from their taxable income, leading to potential tax savings. The difference is incredible. When applying the income tax benefits of ownership, you can save $500 - $2000 a month in taxes and increase your take home pay. Ask your CPA for a calculation that applies to you personally with all variables considered.
4. Control Over Space: Homeowners have the freedom to customize and make improvements to their property without needing a landlord's permission. You can add an ADU and create an income producing space, or convert your garage to the studio you’ve always dreamed of having.
5. Price Appreciation: Homes often increase in value over time, potentially offering a return on investment when sold. Observe home prices and how they’ve increased over time. The average cost of a home in the US in 1995 was $128,000. The average today is $412,000.
6. No Landlord: Owning a home means not having to deal with landlords, allowing homeowners full control over their living space. Sure, you wont have someone to call when the dishwasher breaks, but you also don’t need permission to paint a room or hang a TV.
7. Long-term Cost Efficiency: While there are upfront costs, homeownership can become more cost-effective than renting in the long run, especially if rental prices rise. Take a look at the numbers below.
8. Sense of Pride: Homeownership is often viewed as a significant accomplishment, giving many a sense of pride and belonging. It feels good.
9. Community Connection: Homeowners tend to be more invested in their communities, leading to deeper social ties and civic participation. Community garage sales, babysitting, walking to school, sharing resources, and building relationships.
10. Potential for Legacy: Homes can be passed down through generations, offering a tangible asset and potentially building generational wealth. For many of us, homeownership is the first and only means to building generational wealth. I know its not getting easier to buy, which makes it more valuable than it is right now.
Indeed, in the immediate term, renting may offer a more economical option, but it involves significant trade-offs. The concept of mandatory savings inherent in mortgage payments is a key reason why homeowners typically accumulate 40 times the net worth of renters.
THE NUMBERS NEVER LIE
Schedule a meeting with me to demonstrate the actual expenses associated with renting as opposed to homeownership within your specific market. Keep in mind that the likelihood of interest rates returning to 2-3% in the near future is minimal, if it ever occurs again. Nevertheless, it's essential to make an informed decision that aligns with your objectives and comes with a well-defined strategy.
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With gratitude,
Alexandria Ware
