Weekly Economic Update

Economic News:

Did the Jobs Machine Take a Breather as Well?

June job report shows signs of cooling labor market.

Last month, the Federal Reserve Board took a breather from raising rates. They went into “wait and see mode” in order to determine what they would do next. Well, one data point they were waiting for arrived last Friday – the jobs report. Up until now the jobs machine has not taken a breather at all, and the strong employment situation has been putting upward pressure on inflation. We are sure that the Fed is not rooting for the economy to cut jobs, but a lighter pace of jobs growth would be something we expect they would be hoping to see. Thus, they waited -- what did they see?

The addition of 209,000 jobs was in the range of expectations. Expectations rose because of a strong ADP private payroll report the day before the job report was released. The headline unemployment rate dipped one tick to 3.6%. The previous two months of reports were revised downward by 110,000 jobs and part-time employment grew—both signs of possible weakness. In addition, wage growth came in at 0.4% monthly and 4.4% year-over-year – slightly higher than expected. These numbers were seen as mixed – the number of jobs added was moderate, but wage growth continues to be elevated. Certainly, this gives the Fed some food for thought when they meet in a few weeks.

Speaking of inflation, this week we will see the Consumer and Producer Price Indices. These indices are also watched by the Fed very closely. Last month, the May numbers showed inflation easing a bit more. We sure could use some more good news this month if the Fed would consider extending their pause when they meet in two weeks, something now considered unlikely. If they decide to wait until the next meeting in September, we can officially call it a summer vacation instead of a pause! But first, the inflation data.

Equity Dips in First Quarter

Home equity down year-over-year but still significantly higher than pre-pandemic.

U.S. homeowners with mortgages saw their home equity decrease by 0.7% year-over-year–an average loss of $5,400 per borrower–according to CoreLogic. Homeowners with mortgages account for nearly 63% of all U.S. properties, CoreLogic noted in its Homeowner Equity Report for the first quarter. The collective loss exceeds $108 billion, the report said. “Home equity trends closely follow home price changes,” said CoreLogic Chief Economist Selma Hepp. “As a result, while the average amount of equity declined from a year ago, it increased from the fourth quarter of 2022, as monthly home prices growth accelerated in early 2023.” Hepp said the average U.S. homeowner now has more than $274,000 in equity, up significantly from $182,000 before the pandemic. “Also, while homeowners in some areas of the country who bought a property last spring have no equity as a result of price losses, forecasted home price appreciation over the next year should help many borrowers regain some of that lost equity,” she said. U.S. homeowners with a mortgage lost a small amount of equity in the first quarter for the first time since early 2012, while national combined equity followed suit. “Despite these declines, home equity remains solid, with the number of underwater properties unchanged since the fourth quarter of 2022,” the report said. (Source: CoreLogic)

When Will the Spreads Narrow?

MBA and NAR expect spread to narrow with mortgage loan rates setting around 5.5% in 2024.

The historic spread between the 10-year Treasury yield and 30-year mortgage rates should shrink by the end of the year, the Mortgage Bankers Association’s (MBA) deputy chief economist Joel Kan said recently at the National Association of Real Estate Editors annual convention. Traditionally, the 10-year Treasury rate is 180 basis points (bps) or so, but of late it has been more than 300 bps. Kan also told the National Association of Real Estate Editors during their annual conference that the MBA expects loan rates to average 5.6% by the end of the year, and that overall lending volume will hit $1.8 trillion. For 2024, the current MBA forecast is for rates in the 5.5% range and for originations to rise 25%, mostly in purchase mortgages. “There could be some cash-out refi activity,” the economist told the meeting, but mostly purchase. In another conference session, Jessica Lautz, deputy chief economist for the National Association of Realtors (NAR), predicted that existing home sales will dip 9.3% this year before making up that decline and then some next year by increasing 15.4%. Existing-home prices will leap 28% in 2024, after falling 1.8% this year, she ventured. The NAR expects loan rates to fall back to an average of 5.6% next year. In his presentation, Kan also said the market should see some improvement in credit availability “in the coming months. We’re at a point where everyone’s done tightening,” he said. “There’s still some risk aversion, but it’s starting to open up.” (Source: National Mortgage Professional)

Real Estate News:

Less Competition From Investors

Homebuyers and small investors face less competition as professional investors pull back.

Professional investors might be tapering down their home purchases, which could be a good development for frustrated homebuyers who find it hard to compete with investors’ lofty, quick-close, all-cash offers. Investors who typically rent out their properties to tenants purchased 8.2% of homes in December 2022, according to the Realtor.com® Spring 2023 Investor Report. That was down from the peak in February 2022 when they bought up 8.9% of homes on the market. However, it was a bit higher than in December 2021. The report suggests investors took a bit longer to respond to surging mortgage interest rates than homebuyers did as the majority made all-cash offers. The report focused on investors who purchase property to hold and rent out and excluded home flippers as much as possible.

“We have seen that investor activity has started to come down, which means that the typical homebuyer would be competing with fewer investors,” says Hannah Jones, an economic data analyst at Realtor.com. “We heard this over and over during the pandemic. A family is looking to buy a home, but they got outbid by investors.” From January to June 2022, investors made up 8.5% or more of all home sales. But by June, mortgage rates were pushing higher, rents appeared to have peaked, cutting into potential landlord profits, and “the economic outlook became more uncertain and fears of a possible recession loomed,” the report states. Notably, it’s not just homebuyers who are better able to compete now. Smaller investors, typically those with fewer than 50 properties, are also buying up more homes since the larger ones pulled back last summer. In December, mom-and-pop real estate investors made up 72.8% of all investor purchases, up from a low of 52.6% the previous October. (Source: Realtor.com)