INFLATION MOVES HIGHER

FED TALK

In recent discussions, Fed Governor Michelle Bowman has voiced concerns regarding elevated inflation, suggesting that the Fed may need to "further increase rates and maintain them at a restrictive level for an extended period."

However, a contrasting view has emerged among other Fed members, who are signaling a readiness to curtail their rate hikes. Fed Governor Christopher Waller has pointed out, "Financial markets are exhibiting signs of tightening, effectively assuming some of the responsibility for us." He also noted, "We are now witnessing more favorable inflation data. If this trend persists, we are essentially returning to our target."

Atlanta Fed President Raphael Bostic has taken a similar stance, remarking, "I am of the opinion that further rate hikes may not be necessary." He emphasized that rates are "undoubtedly" exerting a restrictive influence on the economy. Additionally, San Francisco Fed President Mary Daly has suggested that the imperative for additional rate hikes "diminishes" if financial conditions continue to be stringent. Statements from Dallas Fed President Lorie Logan and Philadelphia Fed President Patrick Harker echo these sentiments.

Why does this matter?

The markets responds to Fed Talk. This week there are 17 members of the Fed speaking publicly. Fed chair Jerome Powell will speak on Thursday and the Fed meeting is 2 weeks away. Public statements made by members of the Fed reveal clues as to whether or not members will agree on another hike or to keep rates where they are now.

Looking ahead, the market is indicating that the Federal Reserve's upcoming decision may not involve a rate hike but rather a rate cut. This anticipated rate reduction is projected for June 2024, though it's important to acknowledge that circumstances may evolve significantly between now and that date. For now, the primary focus remains on mitigating inflation, and the Fed is firm in its commitment to maintaining higher interest rates for a longer period to get inflation back down to 2%.

WHERE ARE HOME PRICES HEADED?

Zillow reported that home values declined by 0.1% in September, the first monthly decrease since February. Prices are still 2.1% higher than in September of last year. Home values are still on pace to increase 6% this year according to Zillow’s index.

The small price decline in September follows significant increases seen throughout the spring and summer months, including a 1.3% rise in April, May and June and a 0.7% rise in July. Fall usually brings less competition in the housing market because families with school-age children like to be settled ahead of a new school year. This season is typically the softest for home price appreciation.

Fannie Mae expects U.S. home prices, as measured by Fannie Mae HPI, to rise +6.7% in 2023.And to jump another +2.3% in 2024

RECESSION

A recession is good for mortgage rates, but doesn’t guarantee a dip in home prices. Contrary to the Feds, Bloomberg predicts a recession is still on the way and complains about how mainstream economists keep getting it wrong.

Bloomberg suggests that several signs indicate a potential recession is on the horizon.

These signs include:

1. Historical Patterns: Throughout history, optimism about a "soft landing" for the economy has often occurred just before severe economic downturns.

2. Challenges in Forecasting: Economists find it challenging to predict recessions because they typically use linear forecasting models, while recessions are non-linear events.

3. Delayed Effects of Rate Hikes: The full impact of recent interest rate hikes by the Federal Reserve may not be felt until later, potentially affecting the economy negatively.

4. Recession Indicators: Certain economic indicators, such as unemployment, are already showing signs of potential economic trouble.

5. External Shocks: Various factors, including an auto strike, resumption of student loan payments, rising oil prices, high Treasury yields, a global economic slowdown, and a government shutdown, are additional threats that could harm the economy.

6. Consumer Spending: Despite strong consumer spending, savings have been depleted, and some signs, like rising credit card delinquencies, suggest challenges ahead.

There are arguments for a different outcome, including potential increases in productivity, government policies, and business investments. Spending more money on new wars could get in the way. Nevertheless, the overall assessment suggests caution, as multiple factors indicate an increased risk of a recession, considering the cumulative impact of various challenges the economy faces. According to the IMF, US debt levels are unsustainable.

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.