Hi Friends!

This week, significant economic events are expected to influence the housing market, particularly regarding monetary policy changes that may impact mortgage rates and buyer demand. Key housing reports and economic indicators are scheduled, providing insight into the current state of the market and broader economy. The market is currently pricing in a 94% probability of a Fed rate cut in September. Once again, you will see headlines predicting 2-3 cuts this year. We’re finally seeing the weakness in the labor market and inflation improving consistently, giving the Fed the signals they need to cut.

Monetary Policy Changes

The possibility of a Fed rate cut is looming large, with the market currently pricing in a 94% probability of such a move in September. Predictions are rife with speculations of 2-3 cuts this year, as economic indicators show weakening in the labor market and consistent improvements in inflation.

Labor Market and Inflation

Weakness in the labor market is becoming evident, and inflation is showing signs of cooling. This twin development is providing the Fed with the necessary signals to consider a rate cut.

The Argument for a Single Rate Cut

In my opinion, we only need one cut this year. As exciting as it would be to cut 2-3 times, it's best to keep inflation tamed for the greater good of the American people. A high rate environment is painful; however, rising prices are equally painful. We need to find balance. Cutting too much, too soon could get us right back to square one.

Current Inflation Indicators

Inflation is cooling, as shown by the latest CPI report for June. Notably, prices for staples like food at home, gasoline, and new lease rents haven't changed much in over a year. Excluding the implicit cost of homeownership, inflation has been in line with the Fed's target for more than a year.

Expert Opinions

A note from Mark Zandi, Chief Economist at Moody’s Analytics, highlights a critical reason why the Fed should begin cutting rates: it would provide immediate financial relief to hard-pressed lower-income Americans. Credit card rates, which soared in the wake of last year’s banking crisis, would come in, as would rates on consumer finance and subprime auto loans. Lower-income households borrowed heavily when inflation was raging to supplement their income and support their purchasing power. Struggling small business owners, many of whom have bank loans tied to the prime rate, would also benefit. High-income Americans are already enjoying record high stock prices as investors anticipate rate cuts. It’s time for the Fed to actually cut rates so that lower-income Americans can benefit too.

Key Events This Week

Fed Chair Powell Speaks - MondayAll eyes will be on Fed Chair Powell's speech, as his remarks could signal future monetary policy adjustments. Any indication of rate changes will be closely scrutinized by market participants. We expect Powell to remain conservative and affirm previous comments made about monitoring data closely between meetings. The speech is at 12:30 PM PST.

June Retail Sales Data - TuesdayJune's retail sales data will be released, providing insight into consumer spending habits. We expect to see more weakness here. More than 33% of US consumers are concerned about making ends meet over the next 6 months. This includes 30% of Americans earning $150,000 or more annually, according to the Fed survey of 5,000 respondents. Over the last 12 months, 43% of all surveyed consumers and 37% of high-income individuals cut their discretionary spending.

June Building Permits and Housing Starts Data - WednesdayJune’s Housing Starts and Building Permits report is critical for understanding the supply side of the housing market. This data will show how many new homes began construction and how many permits were issued, reflecting future construction activity and inventory.

Philadelphia Fed Manufacturing Data - ThursdayAn update on manufacturing for the Philadelphia region will be released, complementing Monday's report on manufacturing in the New York region. These reports will help assess the health of the manufacturing sector. The cost to produce goods impacts the price of goods sold. It's important to watch these numbers.

Latest Jobless Claims - ThursdayThe latest jobless claims data will be released, providing a snapshot of the labor market. Lower claims could indicate a stronger job market, influencing economic outlooks and policy decisions.

Total of 11 Fed Speaker Events This WeekIn addition to Chair Powell's speech, there will be 10 other Fed speaker events. These events are critical as they could provide further indications of the Fed's monetary policy direction. I will be listening closely and sharing any significant comments made. We expect all Fed speakers to make comments in favor of cuts soon.

Impact on Mortgage Rates and Buyer Demand

As these events unfold, their impact on mortgage rates and buyer demand will be my focus. My suggestion is to lock in your rate quickly if your offer is accepted to take advantage of the recent improvement to the rate sheets. After an assassination attempt, and the odds of Trump’s second term pick up, we expect the markets to consider Trump’s policies to be inflationary. During his first term, Headline CPI went from 2.5% to 1.4%, and topped off at 2.9%. CORE CPI went from 2.3% to 1.4%, and never exceeded 2.4%. Import prices went from 3.8% to 1%.

Bond Market Reactions

Bond Prices and Yields When the Fed cuts interest rates by 50 basis points (bp), bond yields generally fall. This is because newly issued bonds will offer lower interest rates, making existing bonds with higher rates more attractive, thereby increasing their prices.

Demand for Bonds Lower interest rates can increase the demand for bonds as investors seek stable returns. This increased demand pushes bond prices higher and yields lower.

Yield Curve A substantial rate cut can impact the yield curve, often steepening it if short-term rates fall faster than long-term rates. This happens because the Fed controls short-term rates more directly, while long-term rates are influenced by market expectations of future economic conditions and inflation.

Mortgage Rate Reactions

Immediate Impact on Rates Mortgage rates are closely tied to long-term bond yields, particularly the 10-year Treasury yield. A 50 bp cut in the Fed funds rate typically leads to a decrease in the 10-year Treasury yield, which in turn lowers mortgage rates.

Borrowing Costs and Housing Affordability Lower mortgage rates reduce the cost of borrowing for homebuyers. This can increase housing affordability and stimulate demand in the housing market.

Refinancing Activity A significant rate cut often triggers a surge in refinancing activity, as homeowners seek to take advantage of the lower rates to reduce their monthly mortgage payments.

Broader Housing Market Effects Lower mortgage rates can boost the housing market by making it cheaper to finance home purchases. This can lead to increased home sales and potentially higher home prices due to the increased demand.

Broader Economic Impacts

Consumer Spending Lower mortgage rates and borrowing costs can lead to increased consumer spending, as people have more disposable income after refinancing or purchasing homes at lower rates.

Business Investments Businesses might also benefit from lower borrowing costs, leading to increased investment in expansion and operations.

Potential Inflation Increase While a rate cut aims to stimulate the economy, it can also lead to higher inflation if the increased demand outpaces supply.

Navigating the Housing Market

Navigating the housing market can be tricky, especially these days. That's why having an experienced guide when buying or selling a home is so important. The market isn't exactly straightforward right now, and working with a real estate expert can offer insights and advice that make all the difference.

Importance of Experienced GuidanceWhile today’s market conditions might seem confusing or overwhelming, you don't have to handle them alone. With a trusted expert leading you through every step, you can navigate the process with the clarity and confidence you deserve.

Real Estate Expert's Role 

Here are just a few of the ways a real estate expert is invaluable:

• Contracts: Agents help with the disclosures and contracts necessary in today’s heavily regulated environment.
• Experience: In today’s market, experience is crucial. Real estate professionals know the entire sales process, including how it’s changing right now.
• Negotiations: Your real estate advisor acts as a buffer in negotiations with all parties and advocates for your best interests throughout the entire transaction.
• Industry Expertise: Knowledge is power in today’s market, and your advisor will simply and effectively explain processes, market conditions, and key terms, translating what they mean for you along the way.
• Pricing: A real estate professional understands current real estate values when setting the price of your home or helping you make an offer to purchase one. Pricing matters more than ever right now, so having expert advice will help ensure you’re set up for success.

Key Factors for Choosing a Real Estate Expert

A real estate agent is a crucial guide through this challenging market, but not all agents are created equal. A true expert can carefully walk you through the whole real estate process, look out for your unique needs, and advise you on the best ways to achieve success.

Trust and ProfessionalismFinding an expert real estate advisor – not just any agent – should be your top priority if you want to buy or sell a home. Like any relationship, it starts with trust. You’ll want to know you can depend on that person to always put you and your best interests first. That means hiring a true professional. As Business Insider explains:

“As long as you've properly vetted the agents you're considering and ensured they have the necessary expertise, it's okay to go with your gut when making your final decision on which real estate agent you want to work with. You're going to be working closely with this person, so it's important to choose an agent you're comfortable with."

Current Market Dynamics

Even if you didn't own a home during the 2008 housing crisis, you likely remember its impact. Many people worry about a similar event happening again, but rest assured, the current market is different. Economists overwhelmingly do not expect a crash in 2024 or beyond because there isn't an oversupply of houses for sale. Unlike the lead-up to 2008, today there's an undersupply, even with recent inventory growth.

Supply and Demand BalanceThe housing supply comes from three main sources: existing homes, new home construction, and distressed properties. Currently, the supply of existing homes is still low overall, despite an increase compared to last year. New home construction is also not a concern; builders are cautious and underbuilding compared to pre-crisis levels, trying to catch up from past underproduction. Additionally, stricter lending standards have led to fewer foreclosures, preventing a flood of distressed properties that could drive prices down.

In summary, inventory levels are not high enough to trigger a significant price drop or market crash. Experts like Mark Fleming and Lawrence Yun emphasize that the fundamental issue is a lack of supply relative to demand. There are no risky subprime mortgages, and builders are not overproducing homes. Therefore, the housing market is not heading towards a crash similar to 2008.

Navigating the housing market can be challenging, but with the right information and expert guidance, you can make informed decisions that benefit your financial future. Keep an eye on economic indicators, understand the implications of potential rate cuts, and always work with a trusted real estate professional to navigate these complexities successfully.