Weekly Economic Update

Economic News:

Wars and Inflation Rates

For months the Fed has been waging a robust war against inflation. But as we know, this is not the only war being fought. There are wars against drug addiction, poverty and even illegal immigration. And of course, the classic definition of wars being fought in Ukraine and now Israel against terrorists within the Gaza strip. Though these wars seem to be completely separate from the war on inflation, in reality they are affecting inflation significantly.

How do these wars affect inflation? Well, when Russia invaded Ukraine, the energy markets were thrown into turmoil as Russia is a major energy producer, especially within Europe. Plus, Ukraine is a major producer of agriculture products and the war contributed to skyrocketing prices of products such as wheat and sunflower oil. This does not even mention the defense goods being produced to feed this war. Russia’s military spending alone has tripled. This spending puts pressure on many other resources and even though we are not fighting in Ukraine or Israel—money and resources are being expended which contribute to inflation.

Going back to the war on inflation, even the Fed raising interest rates to halt inflation is causing inflation. How? Well, it has been said that the vast majority of inflation reported in the September Consumer Price Index was due to rising shelter costs. Higher rates cause mortgage and rent payments to rise. While the Fed was counting on home prices falling in response to higher rates, thus far they have risen this year, albeit much slower than previous years. So, there you have it—wars are contributing to inflation --- even the war against inflation. And the war against inflation must be won globally. 

Fannie Updates Their Forecast

Fannie Mae ESR Group revises economic outlook based on strong third quarter indicators.

The rapid rise in long-term interest rates over the past few months will likely weigh on future economic growth, according to the October 2023 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. Even barring another acute credit event, which the ESR Group warns is more likely now that rates are moving rapidly again, the turning of the credit cycle is ongoing and, over time, is expected to weigh on consumption, business investment, and hiring as low-interest debt is rolled into higher rates. Still, the ESR Group notes that the economy likely faces fewer structural headwinds than previously thought after significant updates to the national accounts showed real consumption and incomes in better balance than had been reported previously. When combined with other incoming data, the ESR Group revised upward its 2023 real GDP projection by three-tenths to 2.5 percent on a Q4/Q4 basis but continues to expect significant slowing in economic growth through the end of the year and into 2024. While incoming purchase mortgage application data have highlighted the downside risk to housing activity amid a mortgage rate environment that is now well over 7 percent, home prices have proven more resilient than expected, causing an upward revision to the ESR Group’s 2023 home price forecast from 3.9 percent to 6.7 percent on a Q4/Q4 basis. The ESR Group continues to expect home price growth to decelerate in 2024 as affordability remains extremely constrained. The ESR Group notes that further declines in home sales from an already low level due to the run-up in mortgage rates will likely be muted relative to the slowdown in 2022, but it still predicts the annualized pace of existing home sales to fall below 4 million units in the fourth quarter. New home sales continue to hold up better than existing due to ongoing inventory constraints, though the ESR Group’s forecast calls for a modest deceleration in both new single-family sales and starts in coming quarters. “Personal consumption has not only remained resilient, but recent official data revisions indicate that the consumer has been in a better position than previously thought, increasingly the likelihood of an economic ‘soft landing,’” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “However, despite consumer resiliency, the recent rise in interest rates has been precipitous, and in past environments – even with less severe interest rate shocks – this has led to economic dislocations. As such, we still expect to see a mild economic downturn in the first half of 2024. While the rate of inflation has slowed and continues to slow, we continue to take the Federal Reserve at its word that rates will be ‘higher for longer’ until annual inflation stabilizes at the two-percent target; though at this time, in part because of the recent run-up in long-term rates, we do not expect additional Fed rate hikes.” (Source: Fannie Mae)

Real Estate News:

Homebuying: The Family Factor

Challenging market conditions are driving many to explore family support and proximity into their purchasing plans.

Many potential homebuyers facing affordability challenges are turning their parents and extended family into co-buyers or roommates in order to find a place they can all call home, according to a recent survey from Realtor.com and Censuswide. In addition, the report showed that recent return-to-office requirements and elevated childcare costs may also be driving home shoppers to factor family proximity and support into their purchasing plans. Of those surveyed who are planning to buy a home within the next 12 months, roughly 51% of respondents are potentially looking to their parents to help them prepare for buying a home, with nearly one third (29%) saying they've already moved in with their parents to help save money in preparation for buying a home and another quarter (22%) saying they would consider doing so.

Similarly, one third (32%) of respondents are even cohabitating with other family members to help save enough money to buy a home, including siblings, aunts and uncles, and cousins, and another 24% would consider doing so. "The challenging market conditions this year are changing buyer behavior in significant ways, driving many more people to explore alternative living situations they may not have considered in the past," said Danielle Hale, Chief Economist at Realtor.com. "Mortgage rates hovering at or near 7% have eroded buyers' purchasing power at a time when the consistently low number of homes for sale has kept housing markets surprisingly competitive." In addition to the short-term savings that living with family provides, many are planning to stay close to family even after they've saved up by purchasing a home near their relatives. Some 28% of respondents who are planning to buy a home in the next year are doing so in part to be closer to their family. (Source: DSNews)