This morning we heard from Chicago’s Fed President,  Austan Goolsbee on CNBC. He reiterated the Fed’s commitment to get inflation back down to it’s target rate of 2%. This stance supports keeping the Fed Fund’s rate where it is now, and a potential increase if inflation doesn’t continue to trend downward. Goolsbee said the biggest threat to our economy is to allow inflation to remain high. He appeared confident in their approach and said, “its working.” 

Although the bond market would respond well to hearing “no more rate hikes in 2023”, driving mortgage rates down, we are not there yet. Goolsbee admitted the economy will get worse before it gets better as a result of maintaining strict monetary policy. Recession talk is back on the table, and it wouldn’t necessarily be a bad thing. A mild recession would improve borrowing costs, demand for homes would rise. 

In my opinion, the message was clear, they will be holding rates where they are longer, as opposed to going higher. We have yet to see the full impact of consecutive rate hikes. For example, by now the unemployment rate should have increased, but the resilient job market has shocked us all. The next job report is due October 6, and the Feds will be watching closely. 

A quick recap of last week’s news: 

After implementing eleven rate hikes since March of the previous year, the Federal Reserve decided to maintain their benchmark Federal Funds Rate within a range of 5.25% to 5.5% during their meeting last Wednesday. It's crucial to note that the Fed Funds Rate pertains to the interest rate for overnight borrowing by banks and should not be confused with mortgage rates. The Fed's primary objective in hiking the Fed Funds Rate is to restrain economic growth and mitigate inflationary pressures. “Maximum employment, and stable prices.”

Despite their decision to keep the Fed Funds Rate unchanged last week, there are indications that the Fed may opt to keep rates elevated for a more extended period. According to the Fed's dot plot projections, there is one more rate hike anticipated for this year. Moreover, the forecast now suggests 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 their 2 percent inflation target. The Fed will closely scrutinize incoming data in preparation for their next meeting and rate decision scheduled for November 1, with particular attention to inflation and labor market indicators. However, it's worth noting that recent job growth figures have been downwardly revised in subsequent reports, with, for instance, June's initially reported 209,000 new jobs being halved to just 105,000 jobs. This underscores the potential limitations of this data in providing an accurate economic snapshot.

The Fed is optimistic about stronger economic growth, as evidenced by their upward revision of the 2023 GDP forecast to 2.1%, more than double the June estimate of 1%. However, this outlook stands in stark contrast to the latest Leading Economic Indicators (LEI) from the Conference Board, which recorded a 0.4% decline last month, marking the seventeenth consecutive month of decreases. This indicator, in conjunction with factors like yield curve inversions, near-record high credit card debt, and the delayed impact of the Fed's rate hikes, raises concerns that a recession may still be a possibility.

While a recession is generally detrimental to the economy, one silver lining is that such periods tend to coincide with lower interest rates.

MARKET MOVING NEWS THIS WEEK: PCE

Another housing-centric week is ahead, starting Tuesday with an update on home price appreciation for July via Case-Shiller and the Federal Housing Finance Agency. August’s New and Pending Home Sales will also be reported on Tuesday and Thursday, respectively.

Also on Thursday, look for the latest Jobless Claims and the final reading for second quarter GDP. A crucial inflation reading will be delivered on Friday via the Fed’s favored measure, Personal Consumption Expenditures.

The Labor Market: 

In the latest week, Initial Jobless Claims dropped by 20,000, hitting an eight-month low, with 201,000 people filing for unemployment benefits for the first time. Continuing Claims also decreased by 21,000, with 1.662 million individuals still getting benefits after their initial claim. This number has been gradually decreasing since early April when it peaked at 1.861 million, indicating a combination of people finding new jobs and benefits expiring.

The main point here is that although the low level of Initial Jobless Claims suggests a robust job market, these filings are typically a lagging indicator. Typically, before layoffs happen, we observe a decline in job postings, hiring, and a reduction in work hours, all of which have been noted in recent reports. It will be crucial to watch for any sustained increase in Initial Jobless Claims in the coming months, especially since the Fed is closely monitoring labor market indicators as they consider further interest rate hikes in the fall.

THE MESSAGE WE NEED TO HEAR: 

NO MORE RATE HIKES, THE LABOR MARKET WEAKENING, AND INFLATION TRENDING DOWNWARD. 

Jerome Powell wants, “concrete evidence” that we’re headed closer to the target. 

How accurate have the Fed’s projections been historically?

See below, for their September 2021 forecasts when CPI was already above 5%. Back then the Fed was forecasting rate hikes to only 1% by the end of 2023, with inflation coming right back down to 2%. hey called it, “transitory.”

Most knee jerk reactions to Fed policy drives rates up, causing fear and keeping buyers and sellers on the sidelines. As the information clears up, people will feel more confident participating in the real estate market. Our job is to know the difference and communicate it accurately. A Fed prediction, is not Fed policy. Another rate hike in 23 is not guaranteed, and in my opinion, not likely. 

“The highest inflation rate in the US since the early 1980s (>9% CPI) and a Fed Funds Rate above 5%. So even when higher inflation was staring them right in the face, the Fed didn’t see it coming. Which is why you probably shouldn’t put much weight on their current forecasts. They can’t predict the future any better than anyone else, even when it comes to their own policy rates.

The best we can say today is that the Fed wants to keep their foot on the brake as inflation remains the greater concern. But when the economic data starts to deteriorate, that narrative will likely change in a hurry, and with it the Fed’s forecasts about the future.”

INVENTORY NEWS 

Existing home sales dropped by 0.7% from July to August, reaching an annualized pace of 4.04 million units, as reported by the National Association of REALTORS® (NAR). Compared to August of the previous year, sales were down by 15.3%. This report focuses on closings of existing homes, a crucial measure for assessing the housing sector's health.

The key point here is that home sales are being constrained by record low inventory and higher mortgage rates. By the end of August, there were only 1.1 million homes available for sale, down from 1.28 million a year earlier and nearly half the levels seen in 2019. It's worth noting that the available inventory is even scarcer because many homes listed are already under contract and not truly available for purchase. In fact, there were only 669,000 "active listings" at the end of last month.

Despite these challenges, homes are still selling quickly, with an average time on the market of just 20 days. NAR's Chief Economist, Lawrence Yun, pointed out that "home prices continue to rise despite lower home sales" and emphasized that "supply needs to essentially double to moderate home price gains."

In terms of new home construction, Housing Starts, which measure 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%. On the other hand, Building Permits, which indicate future supply, increased by 6.9% from July, with permits for single-family homes reaching their highest level in a year.

The bottom line here is that the supply of homes still lags behind current and future demand. The disparity between supply and demand is driving up home values. The ongoing shortage of supply is a significant factor in the continued appreciation of home prices, presenting opportunities for those looking to benefit from these price gains.

Lastly, the National Association of Home Builders (NAHB) Housing Market Index declined by five points to 45 in September, falling below the breakeven level of 50 for the first time since April. This drop in builder sentiment is attributed to rising mortgage rates, a shortage of workers and buildable lots, and ongoing shortages of distribution transformers. However, there is a positive aspect for potential buyers, as 32% of builders reported cutting prices, 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 is different. Meet with me to analyze the cost of waiting in your market. We will adjust for inflation, and look at the numbers based on homes in your price range. We can also look at the cost of waiting by comparing the cost to rent instead of buying, despite higher rates. 

Real estate remains a safe long-term investment. 

One of the most significant benefits of homeownership is the opportunity to build equity in your home. As you make mortgage payments, you're gradually paying down the principal balance of your loan. Additionally, if your home appreciates in value over time, you can build even more equity. This equity can serve as a valuable asset that can be tapped into through home equity loans or lines of credit, or it can be realized when you sell the property.

Homeownership provides a sense of stability and control that renting does not. When you own a home, you have more control over how you want to use and customize the space. You don't have to worry about landlords raising rent or imposing restrictions on your living arrangements. Owning a home can also provide a sense of community and belonging, as you become a part of a neighborhood and can establish long-term relationships with neighbors.

This interest rate environment is temporary. The scarcity that makes real estate work as a solid investment is not. Buying a home is becoming a luxury and there is no immediate solution for housing affordability. Inventory cannot magically increase driving prices down. Do the math, if it works for you, take the leap. 

Article Written and Provided by Patti Goodspeed, SVP at Cross Country Mortgage