Market Moving News This Week

Hey there!

It's Fed Week! Here’s a quick highlight of key events that could impact the real estate market this week:

Tuesday:

• OPEC Monthly Report: This report can influence oil prices, which indirectly affect mortgage rates and construction costs. Even though oil prices are improving, it's not enough to significantly impact inflation reports.
• Small Business Optimism from the NFIB: Small business health is a barometer for economic activity, impacting commercial real estate. It's essential to pay attention to how small business owners plan ahead.

Wednesday:

• May CPI Inflation Data: The Consumer Price Index (CPI) release will be a major indicator of inflation trends. Persistent inflation readings can affect how the markets price in rate cuts. Housing affordability is deteriorating, and although we want better news, the market is expecting Headline and CORE CPI numbers to be unchanged.
• Fed Interest Rate Decision: The Federal Reserve concludes its two-day meeting with a critical interest rate decision. Changes in the federal funds rate can directly influence mortgage rates.
• Fed Press Conference: Following the rate decision, the Fed's press conference will provide insights into future monetary policy, offering clues on the trajectory of interest rates and economic stability. Everything Jerome Powell says here will be important.

Thursday:

• May PPI Inflation Data: The Producer Price Index (PPI) offers insights into wholesale inflation. Rising PPI can signal increased costs for building materials, impacting construction and renovation expenses.
• Jobless Claims: This data can indicate the health of the job market, influencing consumer confidence and housing demand.
• 30-Year Bond Auction: Investor demand for long-term bonds can affect long-term interest rates, including those for mortgages.

Friday:

• MI Consumer Sentiment Data: Consumer sentiment impacts spending and investment in real estate. High consumer confidence can drive housing demand, while low confidence might dampen it. Consumer sentiment is the most underrated factor in the real estate market.

Additionally, investors will be closely watching the 10-year Note auction on Tuesday and the 30-year Bond auction on Thursday for demand levels, as these can influence long-term interest rates.

With the Federal Reserve's upcoming press conference and multiple economic data releases, this week is bringing a lot of volatility. Stay tuned as I will watch closely and deliver urgent updates as needed. If your offer is accepted this week, consider locking in ASAP unless the CPI numbers come in BELOW expectations, which isn't likely.

Home Equity Report Q1 2024

CoreLogic's analysis for Q1 2024 shows significant equity gains for U.S. homeowners with mortgages.

Here’s a breakdown of the key findings:

• Equity Increase: Homeowners saw a total equity increase of $1.5 trillion since Q1 2023, a 9.6% rise.
• Negative Equity: The number of homes with negative equity dropped by 2.1% from Q4 2023, with 1 million homes (1.8% of mortgaged properties) underwater. This is a 16.1% decrease from 1.2 million homes in Q1 2023.

Impact of Home Price Changes:

• A 5% increase in home prices would help 110,000 homes regain equity.
• A 5% decrease in home prices would push 153,000 homes underwater.
• CoreLogic forecasts a 3.7% home price increase from March 2024 to March 2025.

State Highlights:

• California: Led the nation with an average equity gain of $64,000 per homeowner. Los Angeles homeowners saw an even higher increase of $72,000.
• Northeast Gains: New Jersey homeowners gained $59,000, reflecting high annual appreciation rates.

National Aggregate Negative Equity:

• The national value of negative equity was $321 billion at the end of Q1 2024, down from $324 billion in Q4 2023 and $339 billion in Q1 2023.
• Negative equity peaked at 26% in Q4 2009 but has significantly declined since.

Chief Economist Dr. Selma Hepp noted that rising home prices have significantly boosted homeowner equity, now close to $305,000 per owner on average. This increase provides a financial buffer for mortgage holders facing rising costs such as insurance and taxes. In Q1 2024, the average U.S. homeowner gained about $28,000 in equity over the past year, with significant gains in states like California, Massachusetts, and New Jersey. No states experienced annual equity losses.

Rent vs. Own

If you think renting costs less than owning a home, you are absolutely right. Many will not be able to afford homeownership, and it's okay to rent instead. For those who want to buy, let’s examine the numbers.

From a cash-flow standpoint, you will save more money if you rent. The key is to take the money you save and invest it, religiously, over the next 30 years. If you do that, you may just come out ahead. However, most people won’t. The forced savings mechanism, along with many other intangible benefits of ownership, help create wealth over time. Real estate is not a get-rich-quick option; it's a long-term investment that can serve you well.

What Will It Take to Cut Rates?

Federal Reserve Chair Jerome Powell and the Federal Reserve have laid out several key economic indicators and conditions they would need to see before considering a cut in interest rates in 2024.

Here are the primary factors they are focusing on:

Inflation Returning to Target:

• Stable Inflation: The Fed aims for a 2% inflation rate as measured by the Personal Consumption Expenditures (PCE) price index. A sustained decrease in inflation towards this target is crucial.
• Consistent Data: They need to see consistent and reliable data showing that inflation pressures are easing and that price stability is returning.

Strong Labor Market:

• Employment Levels: The Fed monitors the unemployment rate and job creation numbers. They want to see a strong labor market with low unemployment rates.
• Wage Growth: While moderate wage growth is acceptable, excessive wage increases can fuel inflation. They seek balanced wage growth that supports workers without adding inflationary pressure.

Economic Growth:

• GDP Growth: The overall economic growth should be stable or improving. A slowdown in economic activity might prompt the Fed to consider rate cuts, but they prefer a balanced approach where growth is sustainable and not overheating.
• Consumer Spending: As a major component of GDP, strong and consistent consumer spending is vital. The Fed looks for trends indicating healthy consumer confidence and spending patterns.

Global Economic Conditions:

• International Stability: Global economic stability plays a role in the Fed's decision-making. They consider international trade, geopolitical events, and the health of major economies worldwide.
• Trade Relations: Smooth trade relations and reduced uncertainties can positively influence the Fed’s outlook.

Financial Market Stability:

• Market Conditions: The Fed monitors financial markets for signs of stress or instability. Significant disruptions in financial markets might prompt a rate cut to ensure liquidity and confidence.
• Credit Conditions: Access to credit for businesses and consumers should remain healthy. Tightening credit conditions could signal the need for a rate cut to stimulate borrowing and investment.

Other Economic Indicators:

• Housing Market: The health of the housing market, including home prices and construction activity, is a key consideration. A struggling housing market could influence rate decisions.
• Business Investment: Business investment levels in capital and infrastructure are also important. Increased investment typically indicates confidence in the economy.

Jerome Powell and the Fed are looking for a combination of stable inflation near the 2% target, a strong labor market, steady economic growth, global economic stability, and stable financial markets. Only if these conditions are met or if the economy shows signs of significant weakening will the Fed consider cutting interest rates in 2024.

In Q1 2024, mentions of "low-income consumers" during US company earnings calls hit an all-time high of 15%, matching the peak from Q1 2022 (Goldman Sachs).

Elevated interest rates and inflation are putting significant pressure on consumers, particularly low-income households. As a result, total household debt reached a record $17.5 trillion in Q1 2024. Delinquency rates on credit cards and auto loans have also climbed to their highest levels since the 2008 financial crisis. The US unemployment rate stayed below 4% for 27 straight months, the longest streak since 1970, ending recently. The record low streak of 35 months occurred in the 1950s, both periods ending during recessions with sudden unemployment spikes.

Currently, the US economy has added over 100,000 jobs each month for 40 consecutive months. However, a recent rise in part-time jobs creates a misleading impression of economic strength, as many Americans work multiple jobs to cover their bills.

The Bureau of Labor Statistics (BLS) reported 272,000 jobs created in May, surpassing the forecast of 185,000. However, negative revisions for March and April cut 15,000 jobs, and the unemployment rate rose from 3.9% to 4%, the highest since January 2022.

Key Points:

• The headline job number, based on the Business Survey, showed significant gains largely due to the birth/death model, which added 231,000 jobs. Without this model, the gain would have been only 41,000 jobs.
• The Household Survey, which is considered more real-time, showed a loss of 408,000 jobs. It also revealed an increase of 286,000 part-time workers and a decrease of 625,000 full-time workers, indicating potential job market softening despite the strong headline figure.

All eyes on jobs and inflation!