🚩MORTGAGE RATES ON THE RISE AGAIN🚩
WHY ARE MORTGAGE RATES GOING UP AGAIN?
February 5, 2024
Following a series of assertive interest rate hikes initiated in March 2022 to temper economic growth and curb inflation, the Federal Reserve has chosen to maintain the benchmark Federal Funds Rate within the range of 5.25% to 5.5%. This decision, consistent over the past four meetings, signifies a pause in the rate elevation strategy implemented from March 2022 to July 2023. The Federal Reserve assesses that it may have reached the pinnacle of the current rate cycle. However, the Fed adopts a cautious stance on rate reductions, indicating a willingness to consider cuts only when there is heightened confidence in inflation steadily converging towards the 2% target.
The Core Personal Consumption Expenditures index, a crucial inflation gauge monitored by the Fed, demonstrated a year-over-year increase of 2.9% in December, indicating progress toward the inflation target.
During a recent press conference, Fed Chair Jerome Powell acknowledged the positive inflation data in the past six months but tempered expectations for immediate rate cuts. Powell stressed the necessity for more positive data before contemplating rate reductions, particularly emphasizing the upcoming March 20 meeting as premature for such actions. This stance is reinforced by robust job market figures, revealing an impressive addition of 353,000 jobs in January, surpassing expectations. Despite these strong numbers, Powell and other Fed officials remain cautious, citing potential future revisions and the intricate interplay of various economic factors.
The labor market data offer nuanced insights beyond the headline numbers. While the Business Survey, contributing to the headline job growth figure, indicates substantial employment gains based on estimations and modeling, the Household Survey presents a contrasting picture, reporting a loss of 31,000 jobs. This disparity underscores the complexity of the labor market and the different methodologies used to assess employment. Moreover, a reduction in average weekly hours to the lowest level since 2010, excluding the pandemic period, suggests a subtle tightening of labor conditions, potentially leading to significant job losses when scaled across the entire workforce.
Additional insights from the ADP Employment Report suggest a sluggish start to 2024, with only 107,000 new jobs added in January, primarily in service-providing industries. Wage growth has also moderated, with the gap between job stayers and changers narrowing, implying reduced incentive for job switching—a trend that could impact labor market dynamics and inflation.
While advancements in inflation and the possibility of a soft economic landing provide some optimism, the Federal Reserve's cautious approach reflects the intricate interplay of labor market dynamics, inflationary pressures, and economic growth prospects. The Fed's future actions are likely to closely align with unfolding economic data, with a specific focus on sustained progress towards inflation targets and a balanced approach to fostering economic stability.
December's Job Openings Unexpectedly Rise:
The December Job Openings and Labor Turnover Survey (JOLTS) unveiled an unexpected uptick in job openings, surging from 8.925 million in November to 9.026 million. The hiring rate experienced a slight increase from 3.5% to 3.6%, while the quit rate remained steady at 2.2%, indicating a consistent inclination among workers to seek new employment opportunities without requiring substantial inducements from employers. However, it is crucial to acknowledge certain reservations regarding the precision of the data.
The surge in remote work has contributed to job postings being disseminated across multiple states more frequently, introducing a potential inflationary factor to the reported job openings. This overcounting raises concerns that the labor market may not be as robust as the numbers suggest, particularly in light of recent layoffs announced by several prominent companies.
Unemployment Claims Increase Again:
In a recent update, the weekly tally of Initial Jobless Claims reached its highest point since November, with 224,000 individuals initiating claims for unemployment benefits. Continuing Claims also experienced an uptick, with 1.898 million people still receiving benefits after their initial filing. This signals a worrisome trend, as both Initial and Continuing Jobless Claims have surged to levels near those observed three months ago. Adding to the concern, the latest Job Cuts report from Challenger, Gray & Christmas highlighted a substantial increase in announced layoffs in January compared to December, indicating the potential continuation of elevated unemployment claim figures.
These unfolding events serve as critical indicators for both the economy and policymakers, including the Federal Reserve, as they assess the labor market's health and contemplate the broader implications for overall economic strategies.
Why is this important?
A robust labor market tends to be inflationary since employed individuals are actively spending money. Although inflation is showing signs of improvement, the unemployment rate has once again decreased. This prompts the Federal Reserve to refrain from implementing rate cuts, underscoring the resilience of the economy. The shift in expectations regarding rate cuts, with diminishing side bets, has led to a decline in the bond market and a subsequent increase in mortgage rates. The Federal Reserve is mindful that premature rate cuts could jeopardize the positive strides made in addressing inflation, while delayed cuts may weaken the economy. From a logical standpoint, the likelihood of rate cuts in March is now less than 20%, with the expectation that such adjustments might occur later in the year if the unemployment rate gradually rises.
The Unemployment Rate has sustained a remarkable streak, remaining below 4% for 24 consecutive months, marking the longest duration since the late 1960s. Notably, US Average Hourly Earnings witnessed a significant increase of 4.5% over the past year, surpassing expectations for a 4.1% rise.
However, juxtaposed against this positive economic backdrop is the recent list of layoffs over the last three months:
Twitch: 35% of workforce
Hasbro: 20% of workforce
Spotify: 17% of workforce
Levi's: 15% of workforce
Xerox: 15% of workforce
Qualtrics: 14% of workforce
Wayfair: 13% of workforce
Duolingo: 10% of workforce
Washington Post: 10% of workforce
eBay: 9% of workforce
PayPal: 9% of workforce
Business Insider: 8% of workforce
Charles Schwab: 6% of workforce
Macy's: 4% of workforce
BlackRock: 3% of workforce
Citigroup: 20,000 employees
UPS: 12,000 employees
Deutsche Bank: 3,500 employees
Pixar: 1,300 employees
Salesforce: 700 employees
American Airlines: 650 employees
January 2024 witnessed a total of 82,000 layoffs, making it the second-worst January since 2009. This is a noteworthy development, especially in contrast to the creation of 353,000 jobs in the same month in the United States. This dichotomy suggests a trend worth observing and analyzing in the broader economic landscape.
THE HOUSING MARKET UPDATE
The housing market in 2023 has displayed intriguing patterns, as evidenced by the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index, both signaling a sustained uptrend in home prices, reflecting a period of continual appreciation.
In particular, the Case-Shiller Index revealed a 0.2% increase from October to November, with home values in November showing a year-over-year uptick of 5.1%. Meanwhile, the FHFA index registered a 0.3% ascent from October to November and a substantial 6.6% year-over-year surge, consistently setting new records monthly since February. These indices collectively suggest a projected 6-7% rise in home prices for the entire year of 2023, emphasizing real estate's enduring role as a wealth-building asset.
Additional insights from Redfin contribute to this narrative, with the Redfin Home Price Index (RHPI) noting a more modest increase of 0.4% in December, marking the smallest growth in six months. This suggests a subtle cooling in price growth during this period. Furthermore, the real estate landscape has witnessed noteworthy fluctuations across different U.S. metros, with some areas experiencing price declines while others showcase significant gains, reflecting the diverse dynamics of local markets.
Despite the volatility in interest rates, the overarching trend remains that home prices are on an upward trajectory. Affordability remains a persistent challenge, and homeownership is increasingly perceived as a luxury in the current real estate landscape.
WEALTH STRATEGY FOR THE WEEK OF FEBRUARY 5TH-9TH
Were you aware that it's possible to purchase a home with just a 3.5% down payment using a renovation loan? RE/MAX data suggests that almost 80% of potential homebuyers are open to modifying their plans to secure a property.
Key findings from the survey are as follows:
1. Fixer-upper Homes: 56% of respondents express interest in fixer-upper homes due to lower costs, the opportunity to renovate from scratch, and flexibility in location. The majority would allocate less than $70K for repairs, showing a preference for foreclosed homes.
2. Tiny or Prefabricated Homes: 39% consider these housing options for affordability and lower maintenance, with 84% favoring prefabricated homes due to their more budget-friendly pricing.
3. Down Payment Below 20%: 34% of buyers are open to smaller down payments, driven by considerations of affordability and the availability of loan types that do not necessitate a 20% down payment.
4. Multi-family Homes: 28% would opt for multi-family homes to own an investment property, share mortgage costs, or live in proximity to family and friends while maintaining separate living spaces.
5. Condos/Townhomes: Chosen by 28% for their affordability, lower maintenance requirements, advantageous locations, and benefits associated with homeowners associations.
6. Purchasing with Family or Friends: 28% would contemplate joint purchases with family or friends to share costs and afford more in the housing market.
7. All-cash Purchases: 21% prefer all-cash purchases to sidestep loan processes and mortgage rates, believing it provides a competitive advantage.
8. Borrowing from Family or Friends: 17% would consider borrowing, primarily from parents, to assist in the home purchasing process.
9. Super Commuting: 13% are willing to endure commutes exceeding two hours for improved affordability and the ability to choose a preferred location.
In essence, these survey insights provide a comprehensive understanding of the considerations and preferences driving homebuyers' decisions in the current real estate landscape.
