MARKET MOVING NEWS THIS WEEK

Let’s start with a quick recap. Last Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) for October indicated a significant drop in job openings to 8.7 million from September's 9.4 million, missing expectations. The hiring rate remained stable at 3.7%, the lowest since pandemic shutdowns, while the quit rate stayed at 2.3% for the fourth month in a row, reflecting a reduced tendency of employers to attract workers with new offers. Interestingly, the decline in job openings might be exaggerated due to the increase in remote working, which leads to job listings being posted in multiple states. The numbers here don’t tell the full story.

On Friday, the U.S. Bureau of Labor Statistics reported the creation of 199,000 jobs, slightly above the forecasted 180,000. However, revisions in September and October led to a combined reduction of 35,000 jobs reported. The unemployment rate decreased from 3.9% to 3.7%. Although that’s good news, its not the news we needed for mortgage rates. This rate is derived from the Household Survey, which is considered more immediate as it involves directly contacting households to check employment status. This survey also indicated a significant increase of 747,000 jobs. Many of these are part-time.

The report also highlighted a 0.4% rise in average hourly earnings for November, exceeding expectations. Despite this, the annual increase in earnings has slowed to 4%, hinting at reduced inflation pressure from wages. When people earn less, or even think they’ll be earning less, spending habits change.

Key takeaway: Friday’s news changes expectations of rate cuts in 2024 from March, back to May. Pay close attention to how the news from the labor sector and inflation will impact the Feds decisions on rates. Fed chair Jerome Powell has repeatedly stated, its premature to plan to for rate cuts. Understand the headlines before you share them.

There are signs of weakness in the labor market, and overall, demand for labor is trending downward. However, the current unemployment rate is 3.7%, that’s pretty low and contradicts notions of a recession and affirms the market’s resilience despite rate hikes. There are still 1.342 jobs available for every person looking for work. We’re almost back to the growth rate we saw before Covid. The labor market is normalizing. This is a key factor in the Fed’s decision making process.

Key Events This Week:

1. November CPI Inflation data - Tuesday

2. OPEC Monthly Report - Wednesday

3. November PPI Inflation data - Wednesday

4. Fed Rate Decision and Statement - Wednesday

5. Retail Sales data - Thursday

6. Initial Jobless Claims - Thursday

All eyes will be on the Fed’s two-day meeting which begins Tuesday, with their Monetary Policy Statement and press conference coming on Wednesday. The Fed will certainly be reviewing this week’s inflation data when November’s Consumer and Producer Price Indexes are reported on Tuesday and Wednesday, respectively.

PROJECTIONS:

• The headline CPI reading is expected to come in between 3-3.1%, down from 3.2% on a year over year basis.

• Core inflation is expected to rise 0.3% from 4%. Many expect to see 4.1% tomorrow. The Core reading is different because it removed food and energy prices.

• The Fed will not be hiking or cutting this week.

For the second month in a row, the average price of regular gasoline across the nation dropped significantly. According to data from AAA, there was a 7.8% decrease in November, which came after a 5.6% fall in October. If the prices of gasoline stay around the same level as they are now, it's likely that we will see another big drop in prices in December.

The Consumer Price Index (CPI) reading significantly influences the Federal Reserve's decision on the federal funds rate. If the CPI indicates a rise in inflation, the Fed could still increase the rate to curb spending and cool the economy, thus reducing inflationary pressure. Conversely, if the CPI shows low inflation or deflation, the Fed might lower the rate to stimulate borrowing and spending, aiming to boost economic activity. In my opinion, its too early to boost economic activity. People are still experiences higher prices at the grocery store, in the housing market, and with other goods and services. Rate cuts would create more demand, and higher prices, quickly.

Essentially, the Fed uses the CPI as a key indicator to adjust monetary policy for maintaining economic stability and controlling inflation.

Based on last week’s jobs news and what we expect to see this week, mortgage rates are not expected to improve significantly this week. Forecasts for Fed rate cuts next year can also change quickly, especially after Wednesday’s press conference. We will be watching closely.

NEWS ON RATE CUTS

Last week there was a 65% chance that the Fed will cut rates for the first time in March 2024. The market is currently pricing in Fed rate cuts to start in May 2024, which would be 10 months after the last rate hike.

In December 2018, the Fed hiked rates to 2.5%. By July 2019, they cut rates by .25%, 7 months later. In June 2006, the Fed hiked rates to 5.25%, and then cut rates to 4.75%, 15 months later. In 2000-01, it took 8 months, and in the cycle before that, in 1995, it took 5 months. This gives you some good perspective, as history repeats itself. These predictions will change with the news, especially as we enter an election year.

A reminder:

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy if it becomes appropriate to do so.”

Fed Chair, Jerome Powell

This week, we will hear more from Jerome Powell. I believe the Fed will continue to pause and watch the market respond to the current rate environment. The job market is doing well, people are spending money and taking out less debt, and inflation is expected to be flat this week, with a slight uptick. We don’t have the data necessary to support rate cuts.

HOUSING MARKET IN ‘24

Affordability has been in the news all year, but 2024 will start with hopes of lower mortgage rates and programs to help buyers get in the game. With better rates, also comes more inventory. Transactions will pick up. Mortgage rates went from 2.65% in in 2020, to 8.03% last October, to 7.03% today and we’ve all experienced the increase in demand as a result of the good news.

Housing has become less affordable because home prices have risen faster than wages. In 2023, the typical monthly payment for a home reached a record $2,715, a 12.6% increase from 2022, while the average household income only grew by 5.2% to about $78,642. This income rise isn't enough to keep up with the escalating housing costs.

Mortgage expenses for homebuyers have surged due to the Federal Reserve's interest rate hikes aimed at reducing inflation. The average rate for a 30-year mortgage reached a 23-year peak of 7.79% in October. Although it has decreased slightly to 7.22%, it's still much higher than the 2.65% low during the pandemic.

High mortgage rates have lessened the demand from homebuyers, yet home prices remain elevated due to a shortage of homes for sale. The median home price in 2023 is the highest ever at $408,806. Many homeowners are choosing not to sell because moving to a new home would mean giving up their current low mortgage rate. These trends could all change in the new year.

WEALTH THROUGH REAL ESTATE

According to the 2022 Survey of Consumer Finances (SCF), the median homeowner has 38 times the household wealth of a renter. Homeowners are wealthier than renters at every income level. For families in the bottom 20 percent of incomes, median net worth was nearly $147,000 for homeowners, and only $3,400 for renters.

Housing emerges as the most substantial component of net worth for the majority of households. The interesting part is that the lower a household's income, the higher the proportion of their wealth is derived from homeownership. For households with middle-range incomes, home equity accounts for about 37% to 68% of their total net worth. In contrast, for those in the top 10% income bracket, home equity comprises only about 23% of their net worth. This data highlights the crucial role of homeownership in wealth accumulation, especially for lower and middle-income families.

The best time to buy, is when you’re buying within your means. Don’t hesitate to reach out and find out how much you can be approved for today.