🚨Rates Will Be HIGHER for LONGER Than We anticipated Week of 09.25-09.29.23🚨
September 25, 2023
This morning, we received insights from Chicago's Fed President, Austan Goolsbee, during his appearance on CNBC. Goolsbee reiterated the Federal Reserve's steadfast commitment to bringing inflation back down to its target rate of 2%. This reaffirms their current stance of maintaining the Fed Funds rate at its present level, with the possibility of an increase if inflation does not show a consistent downward trend. Goolsbee emphasized that allowing inflation to remain high poses the most significant threat to our economy and expressed confidence in the effectiveness of the Fed's approach.
While the bond market would welcome the news of "no more rate hikes in 2023," potentially leading to a decrease in mortgage rates, we have not reached that point yet. Goolsbee acknowledged that the economy may face challenges before it improves due to the strict monetary policy in place. Recession discussions have resurfaced, but it's worth noting that a mild recession could have the positive effect of improving borrowing costs, leading to increased demand for homes.
In my view, the message from Goolsbee was clear: the Fed is likely to maintain current interest rates for a more extended period rather than raising them further. We have yet to witness the full impact of consecutive rate hikes. For instance, the unemployment rate should have increased by now, but the resilient job market has defied expectations. The next job report, scheduled for release on October 6, will be closely monitored by the Fed.
A brief recap of last week's news reveals that despite implementing eleven rate hikes since March of the previous year, the Federal Reserve chose to keep its benchmark Federal Funds Rate within a range of 5.25% to 5.5% during their meeting last Wednesday. It's important to distinguish the Fed Funds Rate from mortgage rates, as it pertains to the interest rate for overnight borrowing by banks. The Fed's primary objective in raising the Fed Funds Rate is to manage economic growth and mitigate inflationary pressures while striving for "maximum employment and stable prices."
However, despite the decision to maintain the Fed Funds Rate, there are indications that the Fed may keep rates elevated for an extended period. According to the Fed's dot plot projections, there is an anticipated rate hike for this year, with the forecast now suggesting only two rate reductions in 2024, a decrease from the previous estimate of four.
Fed Chair Jerome Powell emphasized the Fed's unwavering commitment to achieving a 2 percent inflation target. The Fed will closely analyze incoming data in preparation for their next meeting and rate decision on November 1, with a specific focus on inflation and labor market indicators. However, it's important to note that recent job growth figures have been downwardly revised in subsequent reports, highlighting potential limitations in this data's accuracy for portraying the economic landscape.
While the Fed remains optimistic about stronger economic growth, exemplified by an upward revision of the 2023 GDP forecast to 2.1%, there are contrasting signals from the latest Leading Economic Indicators (LEI) from the Conference Board. These indicators recorded a 0.4% decline last month, marking the seventeenth consecutive month of decreases. In conjunction with factors like yield curve inversions, near-record high credit card debt, and the delayed impact of the Fed's rate hikes, this raises concerns that a recession may still be a possibility.
Although a recession typically has an adverse effects on the economy, one potential silver lining is that such periods often coincide with lower interest rates.
Keeping an Eye on PCE
The upcoming week will continue to revolve around housing, with several key events on the horizon. On Tuesday, we'll receive updates on home price appreciation for July, courtesy of Case-Shiller and the Federal Housing Finance Agency. Additionally, we can expect reports on August's New and Pending Home Sales, scheduled for release on Tuesday and Thursday, respectively.
Furthermore, Thursday will bring insights into the job market with the latest Jobless Claims data, along with the final reading for second-quarter GDP. To cap off the week, Friday will feature a crucial inflation reading through the Fed's favored measure, Personal Consumption Expenditures.
Understanding the numbers with the Labor Market
In the most recent week, there was a notable decline in Initial Jobless Claims, with a decrease of 20,000, marking an eight-month low. This resulted in 201,000 individuals filing for unemployment benefits for the first time. Additionally, Continuing Claims saw a drop of 21,000, with 1.662 million people still receiving benefits after their initial claim. This trend has been ongoing since early April when it reached its peak at 1.861 million. This decline suggests a combination of individuals finding new employment opportunities and benefits expiring.
However, it's essential to recognize that Initial Jobless Claims, while at a low level, typically function as a lagging indicator in the job market. Usually, before layoffs become prominent, there is a preceding decrease in job postings, reduced hiring activity, and a drop in work hours, as observed in recent reports. It will be of utmost importance to closely monitor any sustained increase in Initial Jobless Claims in the upcoming months, particularly since the Federal Reserve is diligently scrutinizing labor market indicators while contemplating further interest rate adjustments in the fall.
The Message We’ve All Been Waiting To Hear
NO MORE RATE HIKES, THE LABOR MARKET WEAKENING, AND INFLATION TRENDING DOWNWARD.
Jerome Powell stated he wants, “concrete evidence” that we’re headed closer to the target.
Economic Projections of Federal Reserve Board Members
How accurate have the Fed’s projections been historically?
Take a look at their September 2021 forecasts, a time when the Consumer Price Index (CPI) was already above 5%. During that period, the Federal Reserve was projecting rate hikes to reach only 1% by the end of 2023, with the expectation that inflation would swiftly return to the 2% target. They referred to this as "transitory."
Typically, knee-jerk reactions to Federal Reserve policy tend to push rates higher, instigating fear and causing both buyers and sellers to adopt a cautious stance. However, as information becomes clearer and more transparent, people are likely to regain confidence in participating actively in the real estate market. It is crucial for us to distinguish between Federal Reserve predictions and actual Federal Reserve policy. Just because there is a prediction of another rate hike in 2023 does not guarantee it, and, in my opinion, it appears unlikely.
We are currently witnessing the highest inflation rate in the United States since the early 1980s, with the Consumer Price Index (CPI) exceeding 9%, and a Federal Funds Rate that has surpassed 5%. Even when faced with glaring signs of elevated inflation, it's evident that the Federal Reserve didn't anticipate it. This raises questions about the reliability of their current forecasts. It becomes apparent that they aren't any better at predicting the future, especially concerning their own policy rates.
At this juncture, it's safe to conclude that the Federal Reserve's primary concern is to keep inflation in check, which is why they are maintaining a cautious approach. However, when economic data starts showing signs of deterioration, this narrative is likely to change rapidly, along with the Federal Reserve's forecasts for the future.
The Great Inventory Update
Existing home sales saw a 0.7% decline from July to August, with an annualized pace of 4.04 million units, according to the National Association of REALTORS® (NAR). In comparison to the same month last year, sales were down by 15.3%. This report primarily focuses on the closings of existing homes, a critical metric for evaluating the housing sector's overall health.
The central issue here is that home sales are facing significant constraints due to historically low inventory levels and higher mortgage rates. By the close of August, only 1.1 million homes were available for sale, a drop from 1.28 million the previous year, and nearly half the levels seen in 2019. It's important to note that the available inventory is even scarcer because many listed homes are already under contract and not genuinely available for purchase. In fact, there were merely 669,000 "active listings" by the end of last month.
Despite these challenges, homes are still selling rapidly, with an average time on the market of just 20 days. Lawrence Yun, Chief Economist at NAR, highlighted that "home prices continue to rise despite lower home sales" and stressed the need for supply to essentially double to moderate home price increases.
Regarding new home construction, Housing Starts, which gauge the initiation of construction on homes, fell by 11.3% in August, primarily in multi-family units, and single-family home starts also declined by 4.3%. Conversely, Building Permits, indicating future supply, increased by 6.9% from July, with permits for single-family homes reaching their highest level in a year.
In essence, the supply of homes is still lagging behind current and future demand. This supply-demand gap is driving up home values, and the ongoing shortage presents opportunities for those seeking to benefit from these price gains.
Lastly, the National Association of Home Builders (NAHB) Housing Market Index saw a five-point decline to 45 in September, falling below the breakeven level of 50 for the first time since April. This decrease in builder sentiment is attributed to rising mortgage rates, a shortage of workers and available lots, and ongoing shortages of distribution transformers. However, there is a silver lining for potential buyers, as 32% of builders reported price reductions, marking the largest share since December of the previous year.
DOES IT MAKE SENSE TO BUY NOW?
In every market, and for each individual, the answer varies. Schedule a meeting with me to assess the cost of delaying your decision in your specific market. We'll consider factors like inflation and tailor our analysis to homes within your price range. Additionally, we can evaluate the expenses associated with waiting, such as comparing renting costs to buying, even with slightly higher interest rates.
It's important to recognize that real estate remains a secure long-term investment. One of the primary advantages of owning a home is the opportunity to accumulate equity. With each mortgage payment, you chip away at the principal balance of your loan. Furthermore, if your home's value appreciates over time, your equity can grow even more. This equity serves as a valuable asset, accessible through home equity loans or lines of credit or realized when you sell the property.
Homeownership offers a sense of stability and control that renting often lacks. When you own a home, you have greater autonomy to personalize and utilize the space according to your preferences. You don't need to worry about landlords increasing rent or imposing restrictions on your living arrangements. Additionally, owning a home fosters a sense of community and belonging, as you become an integral part of a neighborhood and can establish enduring relationships with neighbors.
It's essential to understand that the current interest rate environment is temporary, whereas the scarcity that makes real estate a sound investment is not. Homeownership is becoming a luxury, and there's no immediate solution to housing affordability. Inventory cannot magically increase to drive prices down. I encourage you to do the math, and if it aligns with your financial goals, consider taking the leap into homeownership.
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LET'S DISCUSS YOUR OPTIONS...
Headlines often create confusion, and the concept of affordability is deeply personal. Let's set up a time to connect, and together, we can proactively plan for your financial future. During our conversation, we will delve into the following key topics:
1. Credit: We'll discuss how your credit score can influence your purchasing power and explore strategies to enhance your creditworthiness as you prepare to make a home purchase.
2. Down Payment Assistance Programs: I'll provide insights into the various nationwide programs that can assist you with your down payment.
3. Debt Ratios: We'll demystify how debt ratios are calculated and their significance in the homebuying process.
4. Student Loans: If you have student loan payments that are currently deferred, we'll explore whether you can still pursue homeownership.
5. Down Payment Requirements: We'll clarify the down payment requirements for your specific situation.
6. Payment Ranges: I'll guide you in understanding what you can comfortably afford, ensuring that your mortgage payments align with your financial goals.
7. Entrepreneurs: If you're an entrepreneur or self-employed, we'll discuss mortgage options tailored to your unique income structure.
8. Q&A Session: I'll draw upon my 10 years of experience to address any questions you may have, helping you feel confident and well-prepared as you embark on your journey to find a home.
Don't hesitate to jot down any questions you may have in advance; I'm here to provide expert guidance and support as you navigate the path to homeownership.
