🚩📈MORTGAGE RATES AND THE WAR ON INFLATION CONTINUES📈🚩
THIS WEEK’S MARKET MOVING NEWS FOR THE WEEK OF FEBRUARY 26TH
February 26, 2024
THE WAR ON INFLATION CONTINUES
The Federal Reserve has acknowledged that the economy is steadily expanding, with job gains remaining robust albeit at a moderated pace. Inflation, while showing signs of easing over the past year, still remains elevated. Maintaining the federal funds rate within the range of 5.25% to 5.5% since July 2023, the Federal Reserve's next meeting is scheduled for March 19-20, 2024, with expectations leaning towards potential rate cuts later in the year.
The battle against inflation persists, as indicated by the latest Consumer Price Index (CPI) report, which showed a 3.1% increase, slightly surpassing the anticipated 3.0%. Core CPI, excluding food and energy, also surpassed expectations, standing at 3.9%. Despite these figures, core inflation is at its lowest rate since August 2021.
Shelter costs, a significant component of the CPI, continue to exert upward pressure on inflation. January witnessed a 0.6% rise in shelter costs, contributing to a 6.0% increase over the past year. Excluding shelter costs, CPI would have risen by only 1.5% over the last year, remaining below the Federal Reserve's 2% target for the eighth consecutive month.
The lag in Shelter CPI, reflecting the previous surge in housing inflation from 2021-2022, remains a contributing factor to sustained high rates of inflation. However, as this lag diminishes, we can anticipate smaller increases in Shelter CPI and consequently, lower overall inflation rates.
On a positive note, food-at-home inflation, representing grocery prices, has only increased by 1.2% over the past year, marking the lowest figure since June 2021. With wages rising by over 4% in the same period, grocery costs have become more manageable. This marks the ninth consecutive month where wage increases have outpaced inflation, indicating favorable conditions for American workers.
According to Freddie Mac, the U.S. economy continues to expand, having added 2.7 million jobs in 2023. However, job growth is expected to moderate in 2024. While mortgage rates have remained stable since mid-December, the housing sector continues to be affected by higher rates, with total home sales projected to be the lowest since 2012. November 2023 witnessed a 1.2% decrease in total home sales compared to October 2023 and a 6.2% decrease compared to November 2022. Although mortgage delinquency rates have slightly increased, rising from 3.37% in Q2 2023 to 3.62% in Q3 2023, it's worth noting that there are no significant concerns, as highlighted in last week’s newsletter.
Upcoming Highlights for the Week Ahead:
· New Home Sales Data (Today): This report offers valuable insights into the housing market's vitality, a crucial element of the broader economy. Robust new home sales typically reflect consumer confidence and a thriving economy. Despite falling slightly short of expectations, January saw new home sales increase by 1.5% to an annual rate of 661K.
· CB Consumer Confidence Data (Tuesday): This data measures consumers' outlook on their financial prospects. High levels of confidence often translate into increased spending and economic expansion, while lower confidence may signal economic challenges ahead.
· US Q4 2023 GDP Data (Wednesday): Offering a comprehensive snapshot of the economy's performance in the final quarter of 2023, this data is instrumental in evaluating overall economic health and guiding policy decisions.
· January PCE Inflation Data (Thursday): The Personal Consumption Expenditures (PCE) Price Index serves as a crucial gauge of inflation, closely monitored by the Federal Reserve. This information aids in assessing inflationary pressures and can influence future monetary policy decisions.
· Earnings Reports from 10% of S&P 500 Companies: These reports shed light on the financial status and performance of major corporations, impacting stock prices and investor sentiment.
· 12 Fed Speaker Events Scheduled: Speeches by Federal Reserve officials offer insights into potential shifts in monetary policy, interest rates, and economic outlook, exerting influence on financial markets.
For instance, recent statements from two Fed members provide a glimpse into future monetary policy directions. Philadelphia Fed President Patrick Harker suggested that rate cuts may be appropriate later in the year, albeit not in the immediate future. Meanwhile, Christopher Waller's speech titled "What’s The Rush?" cautioned against premature rate cuts, emphasizing the importance of sustaining progress made in addressing inflation concerns.
It's important to bear in mind that headlines often aim to evoke reactions, so it's crucial to maintain perspective and refrain from attempting to time the market. Instead, focus on understanding the broader picture before making investment decisions.
FED MEETING RECAP
The minutes from the Federal Reserve's January meeting conveyed an overall positive outlook among members regarding the effectiveness of their policy actions in tackling inflation. They are of the view that they have reached the peak of the Federal Funds Rate for the current cycle. The Federal Funds Rate, which denotes the rate at which banks lend to each other overnight, stands as a pivotal tool utilized by the Fed to steer the economy, distinct from mortgage rates. Consequently, there appears to be no justification for further rate hikes.
From March 2022 to July 2023, the Fed executed eleven rate hikes aimed at tempering economic growth and addressing the persistent high inflation of recent years. The primary message from the meeting is that Fed members are awaiting additional data before contemplating any adjustments to monetary policy. They have underscored their intent not to initiate rate cuts until they possess greater assurance that inflation is steadily converging towards their 2% target.
This cautious approach has been echoed by various Fed officials recently, including Philadelphia Fed President Patrick Harker and Fed Governor Christopher Waller. It's noteworthy that the Fed's favored inflation metric, the Core Personal Consumption Expenditures (PCE), registered a decline to 2.9% annually in the most recent December report. The imminent PCE report for January, scheduled for release this Thursday, will be closely monitored, particularly in light of recent indications of higher-than-anticipated inflation in both the Consumer and Producer Price Indexes for the previous month.
WHY YOU SHOULD PAY ATTENION TO THE PCE REPORT
The Core Personal Consumption Expenditures (PCE) Price Index stands as the Federal Reserve's preferred gauge of inflation. This index excludes the prices of food and energy, which are typically more prone to volatility, aiming to offer a clearer depiction of underlying inflationary trends. Within its monetary policy framework, the Fed aims for a 2% annual increment in the Core PCE Price Index.
Forecasts from experts who interpret the Consumer Price Index (CPI) and Producer Price Index (PPI) into the PCE suggest that the core PCE index likely experienced a 0.4% rise in January, marking the most significant increase in a year.
Such an increase would maintain the 12-month rate at a stable 2.9%, while the headline figure is anticipated to decrease to 2.4%. Whenever the PCE figure comes in below expectations, it typically garners a positive response from the bond market. Consequently, there's hope for an improvement in mortgage rate sheets this week, with all eyes eagerly awaiting the PCE release scheduled for this Thursday.
INVENTORY AND HOME PRICES
Goldman Sachs' team of U.S. economic analysts has adjusted its long-term forecast for U.S. home prices, as measured by the Case-Shiller index, upwards. The revised projections are as follows:
An increase of 5.5% in 2024
A rise of 4.4% in 2025
A growth of 4.9% in both 2026 and 2027
These adjustments, reported by Lance Lambert of ResiClub, represent a significant change from the previous forecasts made in July 2023, which were as follows:
A growth of 1.3% in 2023
An increase of 1.7% in 2024
A rise of 2.4% in 2025
A growth of 3.8% in 2026
As of January 2024, nationally, home prices in the top 50 metropolitan areas have seen a month-over-month increase of 0.5% and a year-over-year rise of 6.7%.
This week witnessed an increase in the number of homeowners putting their properties up for sale, marking the most significant surge in new listings seen in two months. However, the persistently high mortgage rates continue to deter many potential buyers. New home listings have surged by 10% compared to the previous year, accompanied by a notable 6% rise in sale prices, representing the largest increase since October 2022.
Despite the availability of more homes on the market, buyer activity remains subdued. Mortgage applications have declined by 10% from the previous week, coinciding with average mortgage rates surpassing 7% for the first time since mid-December. Additionally, pending home sales have decreased by 7% compared to last year, continuing a trend observed since mid-January.
Buyers currently in the market are primarily seeking properties that are move-in ready, as they are hesitant to incur additional expenses on repairs and renovations atop already high monthly payments. Real estate professionals suggest that sellers may need to consider offering financial incentives to attract buyers in this high-rate environment, although the effectiveness of such incentives varies depending on the specific market conditions.
Illustrating the competitive nature of certain markets, in the Bay Area (CA) and Seattle, WA, last week, buyers found themselves outbid on properties priced over $1 million, with more than 20 competing offers. In such sought-after locations, well-priced turnkey properties often command significant attention, leaving little room for concessions or negotiations.
For those seeking to negotiate a seller credit or price reduction, targeting homes that have been on the market for 2-3 weeks without any offers may present opportunities for favorable terms. Many clients have also pursued the purchase of homes in their desired neighborhoods that may require subtle renovations to remain competitive and stay within their budget. To facilitate these renovations, they have opted for financing options tailored for such purposes, including FHA 203k loans or conventional financing options such as Fannie Mae Homestyle Renovation Loans or Freddie Mac CHOICE Renovation financing.
AFFORDABILITY IS STILL OUR BIGGEST CHALLENGE
Mortgage rates exert a significant influence on both homebuyers and sellers, contributing to dynamics such as the lock-in effect that keeps sellers cautious and inventory scarce. While buyers may secure approval for mortgages, they may not always proceed to make offers, influenced by shifts in mortgage rates which impact demand. It's unlikely that interest rates will revert to their historically low levels below 3% without a significant economic crisis. Consequently, the question arises: What measures are needed to enhance the affordability of homes for purchase?
To drive prices downward and enhance affordability, we would require a considerable increase in inventory, more than doubling the current levels to outpace buyer demand. This scarcity of inventory contributes to the current affordability challenges in the housing market. Thus, the opportunity for purchasing a home at a more affordable price may never be as favorable as it is presently.
Ultimately, the optimal time to buy a home is when it aligns with your financial capabilities and budget. Reflecting on historical trends, the average 30-year mortgage rates in the United States have fluctuated over the decades:
1970s: 8.9%
1980s: 12.7%
1990s: 8.1%
2000s: 6.3%
2010s: 4.1%
2020s: 4.6%
While the all-time low was recorded in January 2021 at 2.65%, mortgage rates reached a peak in October 2023 at 8.03%. Currently, the average rate stands at 7.09% for a 30-year fixed conventional loan, based on nationwide averages. These figures underscore the importance of carefully considering market conditions and personal financial circumstances when deciding on the timing of a home purchase.
COMMERCIAL- PROPERTY LOANS COMING DUE JUMP TO $929 BILLION
Approximately 20% of the outstanding debt on U.S. commercial and multifamily real estate, totaling $929 billion, is set to mature this year, necessitating refinancing or property sales.
This volume of loans reaching maturity has surged by 40% from a prior estimate by the Mortgage Bankers Association, which had pegged it at $659 billion. This increase is attributed to loan extensions and other delays rather than new transactions.
With the Federal Reserve indicating a halt to interest rate hikes, it is anticipated that more deals will be finalized this year, according to Jamie Woodwell, head of commercial real estate research at the bankers group.
Woodwell remarked, "Volatility and uncertainty surrounding interest rates, ambiguity regarding property values, and concerns about certain property fundamentals have hindered sales and financing transactions." He added, "This year's maturities, coupled with improved clarity in those and other areas, should begin to alleviate market bottlenecks."
Concerns are escalating among regulators and investors as building values decline, with about $4.7 trillion of debt from various sources being backed by U.S. commercial real estate. The escalating defaults and write-downs have affected lenders such as New York Community Bancorp, KKR & Co.'s commercial mortgage real estate investment trust, and holders of commercial mortgage-backed securities.
According to MSCI Real Assets, an estimated $85.8 billion of debt on commercial property was deemed distressed at the close of 2023, with an additional $234.6 billion potentially facing distress.
Data from Green Street in January reveals that commercial property prices have declined by 21% from the peak reached in early 2022, with office prices experiencing the most significant drop, plummeting by 35%.
Banks are faced with $441 billion of commercial property debt maturing this year, as reported by the mortgage bankers group. Of this, $234 billion is in securitized debt instruments such as CMBS, collateralized loan obligations, and asset-backed securities, while $168 billion pertains to loans due for nonbank lenders like debt funds.
The MBA highlighted that approximately 25% of office loans are due to mature in 2024. Office values have plummeted, and vacancies have surged due to the rise of remote and hybrid work arrangements.
There are concerns circulating about the possibility of a commercial real estate market crash akin to the residential real estate crash of 2008. With an increasing number of commercial loans reaching maturity this year, brokers like myself are exploring innovative approaches to assist those seeking refinancing or selling solutions. If you or any of your clients own commercial real estate and wish to discuss your options in depth, please feel free to click the link below to schedule a consultation. Your financial security is our priority, and we are here to provide personalized guidance tailored to your specific needs.
