🚨📈Mortgage Rates Take a Dip: What's on the Horizon?📈🚨
LET'S RECAP THE RECENT DIP IN MORTGAGE INTEREST RATES
November 06, 2023
For several months, we've discussed the Federal Reserve's unwavering commitment to maintaining a tight policy to achieve their 2% inflation target. With a substantial surge in new job creation in September, we needed a significant development to indicate any weaknesses in the labor market, thus preventing a further rise in mortgage rates. That critical development has now occurred, and here's a brief overview.
The most recent report from the Bureau of Labor Statistics has delivered a stark contrast to the optimistic projection of 180,000 new jobs for October, revealing only 150,000 jobs created – the smallest increase since June. It's noteworthy that the reports for August and September have been revised downward by a total of 101,000 jobs, a common practice in these reports.
This report presents two narratives: the Business Survey and the Household Survey. The Business Survey, which generates the headline job figure through estimations like the birth/death model, suggests an optimistic addition of 412,000 jobs in October. However, given the current economic pressures and the high costs associated with starting a business, this figure appears inflated.
On the flip side, the Household Survey, which more directly measures employment by contacting households, paints a different picture, indicating a loss of 348,000 jobs.
An often overlooked but significant detail is the reduction in the average weekly hours worked. When applied across the entire workforce, this slight reduction in hours is equivalent to the loss of 2 million jobs.
In the private sector, ADP's Employment Report shows that only 113,000 jobs were added in October, falling short of expectations and confirming that wage growth is at its slowest pace in two years. Nela Richardson, ADP's chief economist, suggests that the labor market is decelerating, though it still maintains enough momentum for robust consumer spending. Wage increases have also moderated, indicating a potential easing of wage-related inflation pressure. While reduced optimism about future bonuses and raises is not ideal, it signals a potential slowdown in spending. It's important to remember that as individuals have access to more money, their spending tends to increase, driving up inflation.
The Job Openings and Labor Turnover Survey (JOLTS) saw a slight uptick in job openings to 9.55 million, but this figure may be somewhat inflated due to the increase in remote job postings across various states. Nevertheless, this year's numbers are down by 1.3 million compared to the previous year.
Lastly, initial jobless claims have shown a modest increase to 217,000, but the more telling figure is the rise in continuing claims, which now stands at 1.82 million people – a level not seen since last spring.
In summary, the current job market is multifaceted, with some indicators suggesting ongoing strength in consumer spending, while others indicate a cooling in job creation and wage growth. We are closely monitoring the labor market because we are well aware that the Federal Reserve is doing the same. Fed Chair Jerome Powell seeks "concrete" evidence that rate hikes are effectively slowing down the economy.
WHAT'S ON THE HORIZON?
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.
THE TWO R'S: RECESSION AND REAL ESTATE
The Case-Shiller Home Price Index, widely regarded as the premier benchmark for tracking changes in home values, has documented a notable 0.9% increase in nationwide home prices from July to August, after accounting for seasonal adjustments. This latest uptick marks the index's seventh consecutive month of gains. In a complementary manner, the Federal Housing Finance Agency's (FHFA) House Price Index reported a 0.6% rise in home prices for August. It's worth noting that the FHFA index concentrates on tracking price changes in single-family homes with conforming loan amounts, typically representing the more modest segment of the housing market. This index excludes cash purchases and jumbo loan transactions, which partly accounts for variations from the Case-Shiller Index data.
Home prices, as indicated by influential sources like Case-Shiller, FHFA, CoreLogic, Black Knight, and Zillow, have surged to unprecedented heights, rebounding robustly from the downturn experienced in late 2022. Based on the appreciation rates recorded through August, forecasts suggest that home values could increase by 6-8% this year, depending on the specific index being referenced. These trends underscore the sustained opportunity for wealth accumulation through property ownership and the ongoing appreciation of home values.
Buying a home is smart.
Data from the National Bureau of Economic Research reveals that there have been eight recessions since 1960, typically lasting about a year on average. The Great Recession was an exception, extending for six quarters. During these recessions, housing production and new home sales consistently saw declines. Specifically, housing starts decreased by an average of 20%, and new home sales dropped by 15% during these periods. Since 1980, real home prices also experienced an average annual decrease of 5% during recessions.
However, there were exceptions to this pattern. In the 2001 recession, for instance, home sales didn't decline; they increased, and real home prices remained stable, while housing starts only fell by 5%. It's important to note that housing activity typically begins to slow down before a recession. In the two quarters leading up to the last eight recessions, housing starts fell by an average of 16%, and new home sales dropped by 19%, even as GDP continued to grow.
Goldman Sachs predicts that housing starts will plummet to their lowest level since the early 1990s next year. Builder confidence is low due to high borrowing costs. The theory is that a recession could trigger panic-selling or a significant increase in inventory, potentially driving home prices down. In today's housing market, over 30% of mortgage-holders have rates below 3%, and 90% have rates below 6%. A recession could lead to a quick improvement in mortgage rates, potentially boosting demand.
Will home prices drop?
Over the past year, the total inventory of homes on the market, including those under contract, has decreased by 3.7%. This decline represents the sixth consecutive month of year-over-year reductions in total listings, though the pace of the decline is moderating.
Pending listings, which are homes under contract but not yet sold, have decreased by 7.6% compared to the previous year. This decrease suggests a cooling real estate market, as sales fell to an annual rate of 3.96 million in September.
The number of newly listed homes for sale also dropped by 3.2% from the previous year, showing an improvement from the 9.1% decrease seen in September. The month-over-month decline in new listings for October was only 2.6%, smaller than the average 5.8% decline typically observed since 2017. High mortgage rates are likely deterring some potential sellers due to the "lock-in" effect of the low rates they currently have.
Among the 50 largest metro areas, there is a 6.7% year-over-year decrease in home listings. These metro areas collectively show a substantial 38.4% drop in inventory compared to pre-pandemic levels. The South is the only region with a slight increase in listings (3.3%), while the Midwest (4.8%), Northeast (10.4%), and West (24.7%) all experienced declines, with active listings across all regions down by 30% to 60% from pre-pandemic figures.
In these metro areas, new listings decreased by 5.3% year-over-year in October. The largest declines in new listings were observed in the West (-10.2%), with significant drops also seen in the Midwest (-6.2%), South (-3.6%), and Northeast (-2.3%).
Inventory decreased in 33 out of the 50 largest metros compared to the previous year. Some Southern metros, such as Memphis, New Orleans, and San Antonio, saw increases of over 20%. However, despite these increases, inventory levels generally remain lower than pre-pandemic numbers. Only Austin and San Antonio showed inventory levels in October that were higher than the average seen from 2017 to 2019.
Here is our current situation today:
- Existing home inventory: 1,130,000
- Under contract: 393,000
- Active Listings: 737,000
The average days on the market for homes is 21.
For significant declines in home prices to occur, there needs to be an excess of inventory. If there are no clear indications of supply surpassing demand, it's unlikely that home prices will decrease, even during a recession.
Demand rises are borrowing costs come down. There are many buyers approved and watching closing for lower rates.
Recession signal: The Unemployment Rate is now 0.5% above the cycle low reached back in April (3.4%). Historically, that 0.5% move higher has occurred near the start of a recession. See the chart below
The Federal Reserve's goal of achieving 2% inflation may come sooner than expected in the event of a recession. While Jerome Powell has stated that the risk of a recession is not currently on the table, some world leaders express a different perspective. Lark Fink, CEO of BlackRock, emphasized that geopolitical risks are increasingly prevalent, leading to rising fear and diminishing hope. This rising fear can lead to reduced consumption and spending, which in turn can contribute to recessions. If the climate of fear persists, the likelihood of a European recession and a U.S. recession grows.
It's important to note that the region's oil sector represents a significant portion of the market.
Here are the current market expectations for the trajectory of the Fed Funds Rate:
- Dec 13, 2023: Pause
- Jan 31, 2024: Pause
- Mar 20, 2024: Pause
- May 1, 2024: 25 basis points (bps) Cut to 5.00-5.25%
- Additional cuts to 4.06% by Nov 2025
These expectations suggest that mortgage rates may improve in the future. It's essential to stay prepared and be ready for potential changes in the market.
RENT VS OWN- IS IT 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.
WASHINGTON STATE- KING COUNTY
DALLAS, TX
SACRAMENTO, CA
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With gratitude,
Alexandria Ware
