IMPORTANT NEWS THIS WEEK
The Fed’s crucial two-day meeting begins Tuesday, with the Monetary Policy Statement and press conference coming on Wednesday. Housing news will also be in the spotlight, with February’s Existing Home Sales and New Home Sales releasing on Tuesday and Thursday, respectively. The latest Jobless Claims will also be reported on Thursday as usual.
Why is the Fed Meeting important?
Interest rates on a 30YR mortgage are down from 7.1% to 6.5% since March 1st. Since SVB failed and rate hike expectations came down, mortgage rates are falling. Meanwhile, home prices in the US are up 45% since 2020. The banking collapse sent a loud signal to the Fed that the system is breaking. The rates hikes are designed to tighten the money supply with less money in circulation. It looks like its working. This puts the Fed in position to discuss either slowing down or halting rate hikes. It also gets us closer to finding out when they might cut rates again. Keep in mind, the focus is and has always been to reduce inflation. If we start cutting too soon and “booming” again, we better hope wages rise as quickly as prices will.
Currently, the Fed & Yellen have maintained the view that the banking system is "strong." Yet US Banks borrowed over $150 billion from the Fed last week. This was more than the previous record during the 2008 financial crisis ($112 billion). The banking sector is not out of danger yet.
The Feds slowed their pace of rate hikes in early February when they raised interest rates by 0.25% to 4.5% - 4.75%. This was the fastest series of rate increases since the early 1980s. They have to decide if these hikes are coming on too strong and too fast, or not strong enough.
“It’s going to be a tough decision with very tricky communications,” said William English, a former senior Fed economist who is a professor at Yale School of Management. I will link the article below.
Hint: “tricky communications” = bond market/mortgage rate volatility as markets move with the rhetoric. The press conference on Wednesday will be critical.
Why does unemployment matter?
Initial Jobless Claims fell by 20,000 in the latest week, with 192,000 people filing for unemployment benefits for the first time. The number of people continuing to receive benefits after their initial claim is filed declined by 29,000 to 1.684 million, which is just below the highest Continuing Claims reading in 14 months.
The data reflects a tight labor market where companies are doing their best to hold on to workers. It’s also harder for people who are let go to find new employment. We need to watch this data closely as rising unemployment rates is something the Fed’s are looking for.
When tightening the money supply to reduce demand, businesses will have less access to money. With less money, there is less growth, less jobs, less raises, etc. The unemployment data is important to the Fed’s decision making process.
How does this impact residential real estate?
The problem we face in the housing market is affordability. With mortgage rates over 6% and home prices rising, mortgage payments are much less affordable. If we don’t get inflation under control, home prices, and the cost of food would rise faster than wages. We need lower mortgage rates or a big dip in home prices. Which is more likely?
Mortgage rates will improve with a recession, lowered inflation numbers, higher unemployment rates, or a decision from the Fed to slow down rate hikes.
Home prices would dip significantly with a large surplus of inventory. People choose to sell for many reasons, divorce, new jobs, larger family size, downsizing, retirement, etc. Key note: 99% of homeowners have rates below 6%.
According to Redfin, 1 in 5 homes sold in 2022 were considered affordable based on median income. If rates don’t come down, and home prices remain stable, demand for purchase loans is reduced at a large rate. Something has to give.
