RATES TOOK A DIP, LETS RECAP!

For months we’ve talked about the Fed’s firm stance on keeping policy tight to reach their target rate of inflation, 2%. With a massive number of new jobs created in September, we needed some big news to show signs of weakness in the labor market to avoid mortgage rates rising further. Well, that news came. Below is a quick recap.

The Bureau of Labor Statistics' latest report has revealed a stark contrast to the optimistic forecast of 180,000 new jobs for October, with a mere 150,000 jobs actually created—the smallest increase since June. Interestingly, the past reports for August and September have been revised down by 101,000 jobs. These revisions are common.

The report divides into two narratives: the Business Survey and the Household Survey. The Business survey, which creates the headline job number through estimations like the birth/death model, added an optimistic 412,000 jobs in October. However, this figure seems inflated given the current economic pressures and high costs of starting a business.

On the flip side, the Household Survey, which more directly measures employment by contacting households, tells a different story, indicating a loss of 348,000 jobs.

An overlooked yet significant detail is the decrease in average weekly hours worked. When considered across the entire workforce, this small cut in hours is equivalent to losing 2 million jobs.

In the private sector, ADP's Employment Report showed that only 113,000 jobs were added in October, missing expectations, and confirming wage growth is at its slowest in two years. The chief economist for ADP, Nela Richardson, suggests the labor market is slowing down but still maintains enough momentum for strong consumer spending. Salary increases have also cooled off. The previous year's high increases for job stayers and switchers are now more moderate, pointing to a potential ease in wage-related inflation pressure. Although its not good news when people are less optimistic about future bonuses and raises, its a sign that spending can slow down. Reminder: as people have access to more money, they spend more, and that drives inflation up.

The Job Openings and Labor Turnover Survey (JOLTS) saw a slight increase in job openings to 9.55 million, but this number may be inflated due to the increase in remote job postings across multiple states. And despite the rise, this year's figures are down by 1.3 million compared to last year.

Finally, initial jobless claims have modestly increased to 217,000, but the more telling number is the rise in continuing claims, now at 1.82 million people—a number we haven't seen since last spring.

In summary, the current job market is complex, with some indicators pointing towards ongoing strength in consumer spending, while others suggest a cooling in job creation and wage growth. We watch the labor market closely, because we know the Feds are watching. Fed Chair Jerome Powell wants “concrete” evidence the rate hikes are slowing down the economy.

WHAT TO EXPECT NEXT

The Federal Reserve has paused its aggressive rate hiking campaign, keeping the benchmark Federal Funds Rate steady at a range of 5.25% to 5.5% during its last meeting.  This rate is pivotal as it sets the cost for banks to borrow money overnight, but it's different from consumer-facing rates such as those for mortgages. The decisions made by the Fed, and even the predictions made by the market, all impact bond prices, which are more directly correlated to mortgage rates.

Nevertheless, hikes in the Fed Funds Rate usually aim to slow things down when the economy is overheating. By increasing borrowing costs and tightening the money supply, inflation should go down, as it has historically.

The Fed decision to pause was unanimous however, Jerome Powell has suggested that future increases are still on the table, depending on economic conditions, particularly those related to the labor market. The Fed is closely monitoring for any indications that the employment situation is beginning to cool off, which would, in turn, alleviate inflationary pressures. This exactly why the market responded well to last week’s news.

Despite the fact that job growth in October didn't meet expectations, it's not clear whether this alone will influence the Fed's approach to future rate increases. They are awaiting more data, including the November job figures from ADP and the Bureau of Labor Statistics due in early December, as well as new inflation metrics. This forthcoming information will be crucial in guiding the Fed's policy decisions, including the possibility of rate changes at the next meeting scheduled for December 13.

This week, the economic calendar is quiet, but we will see more housing appreciation data when CoreLogic’s Home Price Index for September is released on Tuesday. The latest Jobless Claims data will also be reported on Thursday. Jerome Powell is speaking publicly on Wednesday and Thursday this week. Investors will also be closely watching Wednesday’s 10-year Note and Thursday’s 30-year Bond auctions for the level of demand.

RECESSIONS AND REAL ESTATE

The Case-Shiller Home Price Index, often considered the premier benchmark for tracking home values, recorded a 0.9% rise in nationwide home prices from July to August, adjusted for seasonal variation. This increment marks the index's seventh straight month of advances. Complementarily, the Federal Housing Finance Agency's (FHFA) House Price Index observed a 0.6% increase in August. Notably, the FHFA index has reported rising home prices for each month of the current year.

It's important to recognize that the FHFA index specifically tracks price changes in single-family homes with conforming loan amounts, typically reflecting the more modest segment of the housing market. It excludes cash purchases and jumbo loan transactions, which partially explains the variation from the Case-Shiller Index figures.

Home prices, as indicated by industry leaders like Case-Shiller, FHFA, CoreLogic, Black Knight, and Zillow, have soared to unprecedented highs, rebounding robustly from the dip experienced in late 2022. Based on the appreciation rates recorded through August, projections suggest home values could climb by 6-8% this year depending on the specific index referenced. These trends underscore the sustained opportunity for wealth accumulation through property ownership and the continued appreciation of home values.

Buying a house is smart.

Data from the National Bureau of Economic Research indicates that there have been eight recessions since 1960, lasting about a year on average, with the Great Recession enduring for six quarters. During these recessions, housing production and new home sales consistently fell. Specifically, housing starts declined by an average of 20% and new home sales by 15% during these periods. Since 1980, real home prices also saw an average decrease of 5% per year during recessions.

However, there were exceptions. In the 2001 recession, for instance, home sales didn't drop; they increased, and real home prices remained stable, while housing starts only fell by 5%. Housing activity typically begins to decline before a recession. In the two quarters before the last eight recessions, housing starts fell by an average of 16%, and new home sales by 19%, even as GDP continued to grow.

Goldman Sachs says it sees housing starts slumping to their lowest level since the early 1990s next year. Builder confidence is low as borrowing costs remain high. The theory is that a recession would cause panic-selling, or a significant increase to inventory driving home prices down. In today’s housing market, more than 30% of owners with a mortgage have rates below 3% and 90% of owners with a mortgage have rates below 6%. A recession would improve mortgage rates quickly and demand would pick up.

Could home prices drop?

In the last year, the total inventory of homes on the market, counting those under contract, decreased by 3.7%. This drop marks the sixth consecutive month of year-over-year reductions in total listings, although the rate of decline is lessening.

Pending listings, homes under contract yet unsold, are down by 7.6% from last year, indicating a cooling market as sales dropped to an annual rate of 3.96 million in September.

The number of homes newly listed for sale fell by 3.2% from last year, an improvement from the 9.1% decrease seen in September. The month-over-month decline in new listings for October was just 2.6%, smaller than the average decline of 5.8% typically seen since 2017. High mortgage rates are likely discouraging some potential sellers due to the 'lock-in' effect of low rates they currently have.

Looking at the 50 largest metro areas, there's a 6.7% year-over-year decrease in home listings. These metro areas show a substantial 38.4% drop in inventory from before the pandemic. There's a slight increase in listings in the South (3.3%), but declines in the Midwest (4.8%), Northeast (10.4%), and West (24.7%), with active listings across all regions down by 30 to 60% from pre-pandemic figures.

New listings in these metro areas decreased by 5.3% year-over-year in October. The largest decreases in new listings were in the West (-10.2%), with significant declines also in the Midwest (-6.2%), South (-3.6%), and Northeast (-2.3%).

Inventory declined in 33 out of the 50 largest metros compared to last year. Some Southern metros like Memphis, New Orleans, and San Antonio saw increases of over 20%. Nonetheless, despite these rises, inventory levels generally remain lower than pre-pandemic numbers. Only Austin and San Antonio showed inventory levels this October that were higher than the average seen from 2017 to 2019.

Here’s where we are today:

The existing home inventory: 1,130,000

Under contract: 393,000

Active Listings: 737,000

Average days on market: 21

In order for home priced to decline significantly, we need a surplus of inventory. If you don’t see signs of supply outpacing demand, home prices are not likely to decline, even during a recession.

The Fed’s goal of 2% inflation can be reached much sooner than anticipated with a recession call. Although Jerome Powell said the risk of a recession is off the table, we’re hearing otherwise from world leaders. Lark Fink, chief executive of BlackRock said, “Geopolitical risk is a major component in shaping all our lives. We are having rising fear throughout the world, and less hope. Rising fear creates a withdrawal from consumption or spending more. So fear creates recessions in the long run, and if we continue to have rising fear, the probability of a European recession grows and the probability of a US recession grows.”

The region’s oil counts for 1/3 of the market.

Here are current market expectations for the path of the Fed Funds Rate:

• Dec 13, 2023: Pause

• Jan 31, 2024: Pause

• Mar 20, 2024: Pause

• May 1, 2024: 25 bps Cut to 5.00-5.25%

• Additional cuts to 4.06% by Nov 2025

  
  

Mortgage rates will improve. Hang in there, and be ready.

DOES HOMEOWNERSHIP STILL MAKE SENSE?

Is it really better to rent if you’re thinking long term? Sure, if you want a lower monthly payment and you plan to invest some portion of the difference, it is.

Benefits of Homeownership:

1. Building Equity: Over time, homeowners build equity as they pay down their mortgage and as the property appreciates in value.

2. Stability: Homeowners enjoy stability in their monthly payments (with fixed-rate mortgages) and don't face rent increases or eviction by landlords. Even when there’s a hardship, there are programs in place to help you keep your home.

3. Tax Benefits: Many homeowners can deduct mortgage interest and property taxes from their taxable income, leading to potential tax savings. The difference is incredible. When applying the income tax benefits of ownership, you can save $500 - $2000 a month in taxes and increase your take home pay. Ask your CPA for a calculation that applies to you personally with all variables considered.

4. Control Over Space: Homeowners have the freedom to customize and make improvements to their property without needing a landlord's permission. You can add an ADU and create an income producing space, or convert your garage to the studio you’ve always dreamed of having.

5. Price Appreciation: Homes often increase in value over time, potentially offering a return on investment when sold. Observe home prices and how they’ve increased over time. The average cost of a home in the US in 1995 was $128,000. The average today is $412,000.

6. No Landlord: Owning a home means not having to deal with landlords, allowing homeowners full control over their living space. Sure, you wont have someone to call when the dishwasher breaks, but you also don’t need permission to paint a room or hang a TV.

7. Long-term Cost Efficiency: While there are upfront costs, homeownership can become more cost-effective than renting in the long run, especially if rental prices rise. Take a look at the numbers below.

8. Sense of Pride: Homeownership is often viewed as a significant accomplishment, giving many a sense of pride and belonging. It feels good.

9. Community Connection: Homeowners tend to be more invested in their communities, leading to deeper social ties and civic participation. Community garage sales, babysitting, walking to school, sharing resources, and building relationships.

10. Potential for Legacy: Homes can be passed down through generations, offering a tangible asset and potentially building generational wealth. For many of us, homeownership is the first and only means to building generational wealth. I know its not getting easier to buy, which makes it more valuable than it is right now.

Yes, it will be cheaper to rent in the short-term, but you’re giving up a lot. The element of forced savings when you have a mortgage payment is why homeowners have 40 times the net worth of renters.

TAKE A LOOK AT THE NUMBERS

Make an appointment with me to illustrate the true cost of renting instead of owning in your market. Remember, interest rates wont go down to 2-3% anytime soon, if ever again. However, the current interest rates are not permanent. Make a decision that works for you, with a clear plan.