The labor market is too strong for a recession, so what’s the Fed to do?

 We did it, gang! We made it through another debt ceiling crisis! The United States paid its bills in full and on time, avoiding default and a global economic catastrophe with two days to spare. This self-inflicted wound would have had far-reaching negative economic consequences in the near and long term, including far higher mortgage rates. Financial markets were mostly unbothered despite the fact that this Congress seems to be the most amenable to default. The 10-year Treasury yield rose a modest 0.4% in May, which translated to a 0.4% increase in the average 30-year mortgage rate. The S&P 500, which tracks the stock of the 500 largest publicly traded U.S. companies, reached a high for the year at the beginning of June, up 12% year to date. To be fair, a debt ceiling resolution that didn’t totally destroy the U.S.’s global standing was the most probable scenario. Now that the debt ceiling has been lifted until 2025, we turn our sights back to the Fed and interest rates.

 

During their last meeting, the Fed forecasted a potential pause in rate hikes after three sizable regional bank failures this year, but recent jobs data may swing them back toward a 0.25% increase. Increasing mortgage rates have primarily driven the housing market slowdown we’ve experienced over the past 12 months. Higher rates affect the housing market so strongly because housing is typically financed. Potential buyers have struggled with mortgage rate volatility over the past 18 months, as the average 30-year mortgage rate went from historic lows in 2021 (~3%) to a 20-year high (~7%) in November 2022. Luckily, rates contracted but have remained around 6.5%. Because home prices nationally haven’t contracted substantially from their all-time highs, small rate changes can make a huge difference in the cost of financing. The average 30-year rate hit a 2023 high at the start of June. However, we still expect rates to stay within the 6-7% band this year. At this point, continued rate hikes tell us more about the length of time rates will stay high, since the Fed tends to move in smaller steps over time. This means that, for every step up, there will need to be a step down, which will prolong the process of returning to lower mortgage rates.

 

The Fed has a tricky decision regarding future rate hikes. The broad labor market has shown its strength and seeming immunity to rate hikes. The monthly increase in employment from the U.S. Bureau and Labor Statistics has beat Wall Street estimates for the 14th month in a row. In May alone, 339,000 jobs were created, crushing the expected 195,000 jobs. At the same time, however, unemployment rose from 3.4% to 3.7% from April to May. Additionally, the first-quarter 2023 GDP data was revised up from 1.1% to 1.3% quarter over quarter. With this mix of data, we’re expecting a rate hike pause at the June meeting, but a hike again in July.

 

The housing market is in an interesting spot, where the economy is too good to lower rates but homes have become too expensive for potential buyers. Fewer sellers and buyers are in the market, so sales are unlikely to grow meaningfully this year.

 

Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. In general, higher-priced regions (the West and Northeast) have been hit harder by mortgage rate hikes than less expensive markets (the South and Midwest) because of the absolute dollar cost of the rate hikes and the limited ability to build new homes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.

 

Info via HAR

 

 

Single-family home prices are rising near peak

 Inventory is once again driving the rapid price appreciation that Greater Houston is experiencing in 2023. Last year, single-family home prices peaked in June as buyers rushed to lock in a lower mortgage rate. The Fed announced rate hikes at the end of 2021 that would swiftly affect rates in 2022. The average 30-year mortgage rate rose 2% in the first four months of 2022, crossing 5% for the first time since 2011. That 2% jump caused the monthly cost of financing to increase 27%, so buyers rightly rushed to the market. As rates rose higher, the market cooled and home prices fell in large part to accommodate the higher cost of a mortgage. However, in 2023, demand started to rise again despite elevated mortgage rates, but it wasn’t met with the typical number of new listings.

 

This year, the number of new listings has been significantly lower than usual. Typically, inventory grows in the first half of the year as new listings greatly outpace sales. At this point, inventory growth can’t make up for the sustained inventory stagnation over the past six months, keeping supply of homes and, in turn, sales historically low for the rest of the year. As demand increases through the summer months, competition among buyers will climb with it, raising home prices. Single-family home prices are near their record highs, and if active listings fail to increase, we could easily see home prices reach new record highs over the summer.

 

Info via HAR

 

Months of Supply Inventory continues to indicate a sellers’ market

Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The long-term average MSI is around four to five months in Texas, which indicates a balanced market. An MSI lower than four indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while an MSI higher than five indicates there are more sellers than buyers (meaning it’s a buyers’ market). MSI declined this year for single-family homes and condos, indicating a shift from a balanced market to one that favors sellers. High-rise condos still favor buyers.

 

Info via HAR

 

 

Key Takeaways: 

•  Home sales fell 3.4% month over month as homebuyers faced volatile mortgage rates and sustained low inventory. Far fewer new listings have come to market this year and, in May, new listings were 24% below the long-term average.
• The United States narrowly avoided a catastrophic and self-inflicted credit default, allowing the Fed to focus on the robust labor market and generally strong economy in an effort to decide whether to continue hiking rates.
• Broadly, home prices have contracted slightly from the peak they reached in June 2022, but the steady rate increases have slowed down the housing market significantly, even compared to the years before the white-hot market of 2020-2022. 

Info via HAR

 That's it for this month! Make sure to check back every end of the month for a new CQ Brief update!