Weekly Economic Update

Economic News:

The Mortgage Rate Questions

Why are rates so high, how long will they stay high, and when will they turn?

We will ask three mortgage questions this week. First, why are mortgage rates so high? We know why interest rates are high—the Federal Reserve has increased short-term rates to deal with stubborn inflation. But mortgage rates have risen far more than the rates on Treasuries. One reason? In addition to the Fed raising rates, they have also stopped purchasing mortgage instruments. This has created less demand for mortgages, increasing the spread between mortgages and Treasuries. Plus, the risk of a recession has increased with the Fed activity. Recessions can cause default rates on mortgages to rise – though we have seen no evidence of a recession thus far.

Second, how long will rates stay high? Because the economy has been so resilient, the Fed has coined the phrase “higher for longer.” Many had expected rates to fall at the end of this year and certainly by early 2024. Thus far it has not happened because the economy keeps expanding despite the Fed’s effort to cool things down. Thus, the Fed feels it must keep rates higher for a longer period of time. Plus, the federal budget deficits will continue to put upward pressure on rates as the Fed is flooding the markets with bond offerings to pay for this debt. Even if the economy slows, the Fed funding requirements will remain in the long-term.

Third, when will mortgage rates turn? Here is the good news. The Fed does not have to start lowering short-term rates for mortgage rates to fall. Just by softening their “higher for longer” rhetoric, the markets could move mortgage rates lower before any action by the Fed. Because of the wider spreads, the spreads between Treasuries and mortgage could narrow. No, we can’t predict when this will happen, but listening to statements by members of the Fed and looking for evidence of slower economic growth will give us all the clues we will need. We recently saw a drop in rates in reaction to the Fed keeping rates steady at their last meeting together with more moderate job growth in October. Could this be the turn? We shall see.

Pending Sales Continue to Lag

Pending home sales rose 1.1% in September, but remain at historically low levels.

The National Association of Realtors® indicated that pending sales transactions rose 1.1% over August with the Northeast, Midwest, and South growing, but numbers fell in the West. "Despite the slight gain, pending contracts remain at historically low levels due to the highest mortgage rates in 20 years," said Lawrence Yun, NAR’s Chief Economist. "Furthermore, inventory remains tight, which hinders sales but keeps home prices elevated." The current index stands at 72.6, which is an 11% decline in transactions from this time last year. The NAR forecasts that the 30-year fixed mortgage rate will average 6.9% for 2023 and decrease to an average of 6.3% in 2024, while the unemployment rate will lower to 3.7% in 2023 before increasing to 4.1% in 2024. NAR predicts existing-home sales will decrease 17.5% in 2023, settling at 4.15 million, before rising 13.5%, to 4.71 million in 2024. Compared to last year, national median existing-home prices are projected to remain stable in 2023—edging higher by 0.1% to $386,700, before increasing by 0.7% next year, to $389,500. Housing starts will drop 10.4% from 2022 to 2023, to 1.39 million, before rising to 1.48 million, or 6.5%, in 2024. "Because of homebuilders' ability to create more inventory, new-home sales could be higher this year despite increasing mortgage rates. This underscores the importance of increased inventory in helping to get the overall housing market moving," said Yun. NAR expects newly constructed home sales will grow from last year by 4.5% in 2023, to 670,000—because of additional inventory in this market segment—and increase by another 19.4% in 2024, to 800,000. The national median new home price will drop by 5.9% this year, to $430,800, and improve by 3.5% next year, to $445,800. Realtor.com Senior Economic Research Analyst Hannah Jones also commented on the report – “Pending home sales grew 1.1% in September but remained 11% below year-ago levels as mortgage rates continued to ascend towards 8%. The Pending Home Sales Index increased month-over-month in the Midwest (+4.1%), the Northeast (+0.8%) and the South (+0.7%), but fell in the West (-1.8%),” Jones said. “All four regions saw year-over-year declines. New home sales, which are also based on contract signings, increased in September as buyers hurried to lock in a mortgage before rates could climb any higher. (Source: NAR)

Real Estate News:

Mature Roomies

Microunits and co-living: trendy housing alternatives to single-family houses and apartments.

For singles and couples in their 50s and 60s, affordable housing is increasingly difficult to find in many areas. Yes, they are in their prime earning years — but few have enough saved for retirement, and those grappling with layoffs, health problems or simply low earnings may find themselves facing high rents, high interest rates and more. Living alone in a single-family house is challenging — financially and logistically — and apartments are increasingly pricey as well. From 2000 to 2022, median home prices increased 156% nationwide, while median rent prices increased 90%, according to Real Estate Witch. Are there other options? Two alternatives to single-family houses and apartments are becoming better known: microunits and co-living. Both address housing affordability problems with major trade-offs; in return for lower costs, you give up space or privacy.

But there are benefits, too. Residents of these trendy experiments — largely a young crowd but increasingly a mix of generations — are finding wider social outlets and opportunities for expression beyond their own walls. And did we mention lower expenses? To balance the lack of personal space, buildings with both microunits and co-living arrangements generally have a common room with TV, a fitness room, a rooftop deck, and/or a “makerspace” for hobbies. These types of housing units are most often built in center cities and active suburbs, so shopping, services and transit should be close. “For older tenants who have downsized, the benefits are affordability and adjacency,” says Keith Schwebel, founder and CEO of KSNY, a developer and builder. “In these units, there’s no maintenance, no yardwork,” he adds. “The gym is in the building and no car is needed to get to shopping and attractions right in the neighborhood.” (Source: MarketWatch)