Hi Friends! 

Here's what is going on in the market this week- 

The Federal Reserve just decided to keep its benchmark Federal Funds Rate steady, sticking with a range of 5.25% to 5.5%. This decision comes after eleven rate hikes since March 2022. It’s worth noting that this marks the eighth consecutive meeting where rates have remained unchanged. During a recent news conference, Fed Chair Jerome Powell hinted that a rate cut might be on the horizon, although no formal commitment was made. Powell mentioned that a reduction in the policy rate could be considered as soon as the next meeting in September, especially since at least one official supported lowering rates during their recent two-day meeting.

Some experts, like Jamie Patton from TCW, think a rate cut in September seems likely, unless something unexpected happens. Investors are anticipating an initial reduction of 25 basis points, with two more cuts possibly coming in November and December. The speed of these cuts could depend on how the labor market performs and whether inflation remains a concern. Michael de Pass of Citadel Securities emphasized that both factors are crucial in determining the pace of any rate adjustments.

The Federal Reserve is acknowledging progress in fighting inflation and is getting closer to lowering rates without making any explicit promises. They’ve downgraded their description of inflation from "elevated" to "somewhat elevated," indicating progress. For the first time since they began rapidly raising rates two years ago, policymakers are now in a position to balance their dual mandate of keeping inflation low while supporting a strong labor market. The Fed’s decisions are driven by the need to avoid easing too soon, which could keep inflation above their 2% target, and waiting too long, which could hurt the economy.

Recent economic indicators paint a mixed picture. The economy has been stable, with a 2.1% annual GDP growth rate in the first half of the year. While inflation was high in the first quarter, recent data suggests that price growth is starting to slow down again. Powell pointed out that this year’s broader disinflation is an improvement compared to last year’s concentrated decline in goods, not services. Meanwhile, corporate earnings are showing that companies have less pricing power as consumers become more cautious. The Fed is keeping a close eye on these economic conditions, including the labor market, to determine the right timing for any rate cuts.

The labor market, however, is starting to show signs of weakness, as seen in the latest reports from the Bureau of Labor Statistics and ADP. In July, only 114,000 jobs were created, falling short of the expected 175,000. Revisions to previous months also reduced the job count by 29,000. The unemployment rate has risen to 4.3%, the highest it’s been since October 2021. The Household Survey, which is considered more real-time, reported even fewer job gains, just 67,000. Many people are working part-time for economic reasons, like reduced hours or difficulty finding full-time jobs, with 4.6 million people in this situation, an increase of 346,000. Wages are also under pressure, with average hourly earnings below estimates and weekly earnings declining.

Private sector job creation has been slowing for four consecutive months, with July seeing only 122,000 new jobs compared to the forecasted 150,000. Sectors like trade, transportation, construction, and leisure and hospitality saw some gains, but these were offset by losses in information and professional services. Small businesses, particularly those with fewer than 50 employees, continue to struggle, losing 7,000 jobs. The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings fell to 8.184 million in June, significantly lower than the 12 million high in 2022. Unemployment claims have also risen, with initial claims reaching 249,000. The Federal Reserve is closely monitoring these trends as they consider future monetary policy and potential rate cuts to balance price stability with maximum employment. The job market is a significant factor in their decisions. The market is now pricing in a 99.5% probability of a 50 basis point (0.5%) cut in September, up from 11% just a week ago. 

But what could change the market’s view of an imminent rate cut?

There are a few possibilities:

1. Rising unemployment rates.

2. Data showing inflation picking up again.

It’s important to pay close attention and not react too quickly to headlines. 

Now, let’s talk about the Sahm Rule, an economic indicator developed by economist Claudia Sahm. It’s used to identify the start of a recession by monitoring changes in the unemployment rate. According to the rule, a recession is likely underway when the three-month moving average of the national unemployment rate rises by 0.5 percentage points or more from its lowest point in the previous 12 months. This rule aims to provide a timely signal for the onset of recessions, helping policymakers respond more quickly to economic downturns.

So, how does this impact the housing market?

1. Consumer Confidence: An increase in unemployment, as flagged by the Sahm Rule, typically leads to reduced consumer confidence. When people are worried about job security or losing their jobs, they’re less likely to make significant financial commitments, such as buying a house. This reduction in demand can lead to slower home sales and potentially lower home prices.

2. Interest Rates and Mortgage Rates: During recessions, the Federal Reserve often lowers interest rates to stimulate the economy. Lower interest rates can lead to reduced mortgage rates, making borrowing cheaper for homebuyers. While this might encourage some people to buy homes, the overall effect of higher unemployment can still dampen housing market activity.

3. Housing Supply: Builders may respond to signals from the Sahm Rule by slowing down new housing projects due to anticipated lower demand. This can impact the supply of new homes in the market, leading to potential shortages when the economy recovers. In today’s market, lower rates would most likely boost builder sentiment, as they need more incentive to build.

4. Foreclosures and Distressed Sales: Higher unemployment can increase the number of foreclosures and distressed sales, as more homeowners may struggle to keep up with mortgage payments. This can lead to more homes being available at discounted prices, affecting overall pricing trends in the housing market.

In summary, the Sahm Rule serves as an early warning system for recessions, which can significantly impact the housing market by influencing consumer confidence, interest rates, housing supply, and the incidence of foreclosures. The rule helps policymakers and market participants anticipate changes in the economic environment and make more informed decisions regarding housing and investment strategies.

For many, a recession in today’s economy might actually be a blessing for the real estate market. High prices and high rates are taking their toll on buyers nationwide, and recession talk often means rate cuts.

Goldman Sachs is now expecting rate cuts at each Fed meeting this year, adding a cut to November. "If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September."

But to be clear, Jerome Powell said they are NOT considering a 50 bp cut.

There will be three more unemployment reports before the election. The August report will be released on Sept 6th, then the October report will be released on November 1st, just four days before Election Day. I’ll be watching closely.

Home Prices Hit a New Record High

The Case-Shiller Home Price Index, often regarded as the “gold standard” for tracking home price changes, revealed that home prices across the country rose by 0.3% from April to May after adjusting for seasonal variations. This increase set a new record high for home prices. Additionally, home values in May were 5.9% higher than the same month last year, following a 6.4% increase in April.

Similarly, the Federal Housing Finance Agency’s (FHFA) House Price Index reported that home prices remained steady from April to May, with a 5.7% increase compared to the previous year. However, it’s important to note that the FHFA index does not include cash buyers or jumbo loans, which are larger than the limits set by Fannie Mae and Freddie Mac. These factors explain some differences between the two reports.

National home values continue to reach new all-time highs, reinforcing the idea that real estate remains one of the best investments for building wealth. Brian D. Luke, Head of Commodities at S&P DJI, noted that waiting for potentially better lending rates is costly for prospective buyers as home prices keep climbing. He also mentioned that the Case-Shiller Index has risen by 4.1% since the start of the year, marking the fastest growth in two years.

Pending Home Sales Jump Higher in June

Pending Home Sales increased by 4.8% from May to June, according to the National Association of Realtors (NAR), far exceeding the expected 1% rise. While sales were 2.6% lower than a year ago, this marks an improvement from May’s 6.6% year-over-year decline. This report tracks signed contracts on existing homes, making it a key indicator for future home closings as reported in the Existing Home Sales report.

The Pending Home Sales Index rebounded after falling in April and May. Lawrence Yun, NAR’s Chief Economist, explained, "The rise in housing inventory is starting to lead to more contract signings. Multiple offers are less intense, and buyers are in a more favorable position." This suggests that as more homes become available, buyers have more options and potentially more bargaining power.

Prices have remained stable and strong through all the rate volatility, primarily due to low inventory. Lower rates are unlikely to flood the market, driving home prices down significantly.