Weekly Economic Update
Economic News:
The Real Estate Picture
Plenty of buyers, just not enough homes.
What a strange real estate market. To our knowledge, never in our history have we had a situation in which the real estate market has slowed down only because there are not enough homes for sale. Typically, a slowdown in the real estate market is caused by a lack of demand; however, today we have plenty of buyers, just not enough homes. The higher interest rates we see today would usually suppress demand. Today’s high rates have caused somewhat of a pause in demand, but not enough to account for the dearth of listings.
The result of this unique market? For one, home prices are steady, or increasing slightly despite the slowdown in sales. Secondly, new home sales are flourishing because of the lack of existing homes for sale. All of this leads to the next question – where does the real estate market go from here? The future direction of interest rates will be one barometer of the future. We have gotten some good inflation news recently and another set of inflation reports are being released this week. If mortgage rates come down a bit as inflation abates, more existing homeowners may be inclined to list their homes. Mind you, we are not expecting rates to fall back to their lows of the pandemic. But rates that low will not be necessary to get potential sellers to act.
Life moves on. Baby boomers may be aging in place, but the oldest baby boomers are approaching 80 years old and that means their homes are coming onto the market. Remote work is enabling some who are younger to move into their retirement homes before retirement. Millennials who purchased starter homes are growing their families. Life moves on and so will homeownership. One thing for certain, even with more listings, there is a shortage of homes today and this will cause demand to be strong for the foreseeable future.
Millennials Are Not a Renting Generation
As of 2022, 51% of millennials are homeowners.
Millennials are the largest generation in U.S. history. In 2022, the oldest millennial turned 41 years old and the youngest was 26 years old. A common misnomer regarding the millennial generation once was that they were destined to be a generation of renters—avocado toast, anyone? With student loan debt burdens, the scars of the Great Recession, and tight housing inventory, it’s understandable why many reached this conclusion. Despite this popular opinion, millennials are not only interested in homeownership but, as of 2022, the majority of millennials—51 percent—are homeowners, according to Census Bureau data. Many demographic and lifestyle factors point to a generation that is aging into their prime home-buying years. The bulk of the millennials are over the age of 33, nearly half are married and approximately 40 percent have a bachelor’s degree or higher, making millennials the most educated generation in American history. In prioritizing their education, millennials have delayed marriage and family formation relative to previous generations. The delay of these key lifestyle decisions, which are correlated with the transition to homeownership, has translated into a delay in the homeownership rate for millennials compared with their generational predecessors. At age 30, 42 percent of millennials owned homes, compared with 48 percent of Gen Xers at the same age. Over the past decade, however, millennials have significantly narrowed this gap. At age 41, the millennial homeownership rate is 62 percent, while Gen X stood at 64 percent. Millennials’ investment in education is paying off. Higher educational attainment increases earning potential, which in turn boosts house-buying power and increases the likelihood of purchasing a home. Millennials’ pursuit of higher education may have delayed their transition to homeownership, but it gives them a boost now that many are finally making that transition. In 2022, a third of primary home purchases were by people aged 25 to 34, which includes mostly millennials, along with older Gen Zers. (Source: First American)
Home Prices Increasing Again – Slowly
Home prices rose a seasonally adjusted 1.9% in Q2 2023.
Single-family home prices increased 3.0 percent from Q2 2022 to Q2 2023, down from the previous quarter’s revised annual growth rate of 4.9 percent, according to Fannie Mae’s latest Home Price Index (FNM-HPI) reading, a national, repeat-transaction home price index measuring the average, quarterly price change for all single-family properties in the United States, excluding condos. On a quarterly basis, home prices rose a seasonally adjusted 1.9 percent in Q2 2023, an acceleration from 1.3 percent growth in the first quarter. On a non-seasonally adjusted basis, home prices increased by 3.6 percent in Q2 2023. “Once again, home price growth surprised to the upside,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “Housing demand remains resilient, which continues to butt up against the near-historically limited supply of existing homes for sale. Moreover, the ‘lock-in effect,’ in which homeowners are disincentivized to list their homes for sale because of how high mortgage rates have risen, is seriously inhibiting the supply of existing homes available for sale. At nearly 8 percent on a seasonally adjusted annualized basis, this past quarter's home price growth was well above the historical average. One consequence of the stronger home price environment is that new home construction is well-supported. Unfortunately, any hopes of a better-balanced home supply situation may rest on the ability of homebuilders to meet ongoing demand.” The FNM-HPI is produced by aggregating county-level data to create both seasonally adjusted and non-seasonally adjusted national indices that are representative of the whole country and designed to serve as indicators of general single-family home price trends. The FNM-HPI is publicly available at the national level as a quarterly series with a start date of Q1 1975 and extending to the most recent quarter, Q2 2023. Fannie Mae publishes the FNM-HPI approximately mid-month during the first month of each new quarter. (Source: Fannie Mae)
Real Estate News:
Embrace Reality
Interest rates remain mostly above 5%, averaging 6.72%.
The era of ultra-low mortgage rates is over. Embracing this reality will hasten your owning a house that meets your needs. Low rates flourished for 11 years, as the 30-year mortgage remained below 5% from February 2011 to April 2022. Since then, it has remained mostly above 5%, averaging 6.72% in June in Freddie Mac's weekly survey. Some forecasters predict that rates will decline over the next 12 months. But they don't foresee rates dropping below 5% anytime soon. If you want to buy a home, it's tempting to be in denial that this is happening. But as you start to accept that we're now in a time of higher rates, you can achieve closure (literally, when you close on the purchase of a home). "People are still working through their five stages of grief on this mortgage rate stuff," says Lisa Sturtevant, chief economist for Bright MLS, the real estate listing service for the mid-Atlantic region. "And I think you have to reach the stage of acceptance at some point that certainly rates aren't going to come down to where we were back during 2020 and 2021." (When the median 30-year rate was 2.99%.)
Fannie Mae, the Mortgage Bankers Association and the National Association of Realtors all forecast a gradual, moderate decline in mortgage rates through at least the first three months of 2024. Those three organizations are not alone in their prediction that mortgage rates will go down, but no one expects rates to plunge back to where they were two years ago. "I still think we're going to see rates stabilizing and then moving slowly down this year and we're going to end 2023 at 6%," Sturtevant says. Danielle Hale, chief economist for Realtor.com, said in an email that "our base expectation is that it will take until the end of this year or early next year before mortgage rates get back to 6%." It's not realistic to put a home purchase on hold in the hope that mortgage rates will return to 2020 and 2021, when the 30-year mortgage held its breath under 4% the entire time. The median rate over the past 30 years is 5.77%. That's the reality that we've returned to. If you want to buy your first home, you're probably going to pay well above 5% on a 30-year mortgage, and you'll have to establish a budget with that in mind. If you're a homeowner, you dread giving up your current low-rate mortgage and getting a higher-rate loan on the next house. That's understandable, but as Miranda Lambert once sang, "there's freedom in a broken heart." (Source: MarketWatch)