WHATS HAPPENING THIS WEEK
January’s job report played a big role in rising rates over the past two weeks. Mortgage purchase applications in the US fell to their lowest level since 1995. First time homebuyers now face the most unaffordable market in history. The average income for first time buyers is up 29% in 4 years, to $90,000. However, first time buyers now represent just 26% of sales, a record low. Meanwhile, inflation and interest rates are still rising.
The solution is to reduce inflation, which can be painful and take time.
The labor sector data will dominate this week’s headlines, starting Wednesday with ADP’s Employment Report, which will give us an update on private payrolls for February. The Bureau of Labor Statistics will give out the jobs report for February. The report includes non-farm payrolls and the unemployment rate.
Fed Chair Jerome Powell will be presenting the Fed’s Semiannual Monetary Policy Report to Congress next Tuesday and Wednesday. Investors will also be closely watching Wednesday’s 10-year Note and Thursday’s 30-year Bond auctions for the level of demand. Investor confidence dives the bond market which directly impacts mortgage rates.
Fed Chair Powell speaks on Tuesday/Wednesday
JOLTs job data on Wednesday
Fed Beige Book on Wednesday
Fed’s Barr speaks on Thursday
February jobs report on Friday
Initial Jobless Claims declined by 2,000 in the latest week, as 190,000 people filed for unemployment benefits for the first time. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, fell 5,000 to 1.655 million.
Employers are clearly trying to keep the workers they currently have, as evidenced by the relatively low amount of Initial Jobless Claims we have been seeing each week. However, Continuing Claims data suggests it’s also harder for people who have been laid off to find new jobs. While this number can be volatile from week to week, the overall trend has been higher, as Continuing Claims have risen by more than 300,000 since the low reached last September. This aligns with the decline in job postings that have been reported by sites like Indeed and ZipRecruiter.
Why does this matter?
When people are working, and the unemployment rate is low, it also means people are spending money. A strong job market is a sign that the economy is not slowing down. The details are equally important. Many of the jobs contributing to this low unemployment rate are part-time. This weeks news could shift the narrative.
Expectations for February Jobs Report:
200,000 jobs added
3.4% unemployment rate
0.3% wage growth
1 month ago, the January jobs report added 517,000 jobs, 200% above expectations. The ideal report would come in much lower than expectations.
Will the Feds continue to hike rates?
There is a 31% chance of another 50 bp rate hike.
With higher inflation readings and a low unemployment rate, we can expect the Feds to hike again. If the Federal Reserve continues to hike interest rates, it is likely to have several consequences on the economy.
Firstly, higher interest rates make borrowing more expensive, which can lead to a decrease in consumer and business spending. A decrease in spending can then cause a drop in economic growth (job losses).
Secondly, rising interest rates can cause the value of the dollar to increase. This can make exports more expensive, causing a decrease in demand for U.S. goods from foreign countries.
However, there are some benefits to higher interest rates. For example, increasing interest rates can help control inflation by making it more expensive to borrow money. As higher rates destructs demand, it helps to lower the prices of homes, eggs, and other basic needs.
Inflation can be harmful to the economy, as it causes prices to rise and can lead to a loss of purchasing power. The Fed’s target inflation rate is 2%, we have a long road ahead of us.
WHAT CLIENTS NEED TO KNOW
Remember when rates were above 7% and you were able to negotiate a 2-3% seller credit for the buyer? That was just 45 days ago. As soon as rates dropped back down to 6% demand jumped and we saw multiple offers again. Many homes sold well above the list price.
There is a lesson here.
Rates will be volatile through the next 60-90 days, which creates a huge opportunity for negotiations. A 2% discount can be applied to the sales price or used to save on out of pocket expenses. Today, inventory levels are very low. For context, in 2012, there were 2.4M homes on the market. Right now, there are less than 600,000 active listings.
Low inventory + higher rates = less competition
Because of the recent jump in rates, the average payment will increase by $257 a month. Assuming a refinance after 12 months, the difference adds up to $3084. With savings considered, along with the future cost to refinance, a conservative 3% appreciation rate adds a $20,000 benefit to buying now.
When in doubt, do the math. Schedule a call to review the chart below in detail.
I expect rates to improve significantly by summer. This window is just as short as it was between October 2022 - Jan 2023.
