Could a collapse in the U.S. housing market wreck the nation’s economy in 2023-2024, like it did in 2008? Financial experts are publishing their predictions amid a troubling backdrop of elevated home prices and high mortgage rates. Some of these forecasts are quite alarming, to say the least.
Surely, you’ll recall the Federal Reserve hinting at a “higher for longer” interest rate policy at last month’s Federal Open Market Committee (FOMC) meeting. The upward pressure on mortgage interest rates has been unmistakable. This begs the question of what’s in store for the housing market and how stock investors can prepare for what’s coming.
Housing Market Alert: Expect Home Prices and Mortgage Rates to Rise in 2024
As we embark on the final quarter of 2023, all eyes are turning to 2024. Understandably, people want to know what to expect in the housing market. Suffice it to say home prices and mortgage rates are very likely to increase.
They’re already elevated, to put it mildly. Believe it or not, the median sale price of an existing home in the U.S. reached $406,700 in July. That figure is only $7,000 less than the all-time high.
Furthermore, the average annual interest rate for a 30-year mortgage reached 7.36% in late August. And with few signs that the “higher for longer” interest rate policy will end soon, housing could become even less affordable.
So, what are the experts predicting? National Association of Realtors (NAR) Chief Economist Lawrence Yun expects home prices to increase by around 3% to 4% in 2024. Meanwhile, the supply of houses is “likely to remain below what we would deem a balanced market,” according to Chen Zhao, who leads the economics team at Redfin.
Experts with Zillow see home values increasing by 3.4% in 2024. Moreover, the National Association of Home Builders anticipates that America’s housing shortage will persist through the end of this decade.
On the other hand, Moody’s Analytics and Morgan Stanley both expect that U.S. home prices will decline slightly in 2024. This just goes to show that consensus is, as always, hard to find on Wall Street.
What You Can Do About It
Should you prepare for a housing market collapse in 2024? Not necessarily, though real estate buyers and sellers need to factor in elevated home prices and mortgage rates.
This might involve altering your budget for the next year. At the same time, it’s not a bad idea to cut back on real estate stocks. Two clear-cut examples would be Realty Income (NYSE:O) and Rocket Companies (NYSE:RKT). Finally, always keep an eye on the Federal Reserve for hints about future interest rate policy changes.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.
A new report released this week revealed that the majority of loan originators make $100,000 or more annually.
This was one of the major takeaways from Mortgage Daily’s 2012 Loan Originator Survey, which included 175 originators (120 who completed ALL questions).
Per the survey, nearly 60% of respondents indicated that they made at least $100,000, which is about double the median household income in the United States.
Additionally, many noted that they would have made even more if it weren’t for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
However, a small share said they profited from the new requirements, perhaps because of fewer competitors in the space.
The biggest complaint from originators had to do with appraisal requirements, and the fact that many appraisals are coming in low these days (sign of the times).
Most of those surveyed do not work for banks, and more than a quarter are self-employed, meaning many could be mortgage brokers.
A study back in 2011 found that mortgage brokers generated average revenue of 2.25 mortgage points per loan, before the new compensation rules took effect, and predicted that number wouldn’t change.
On a $200,000 loan, we’re talking $4,500, less expense. So for the broker originating numerous loans monthly, you can see how it all adds up.
This figure probably used to be a lot higher during the boom, back when loan officers and brokers could get paid excessive amounts by both the lender and the borrower, not just one.
Is the Survey Skewed?
While this survey gives us a little insight into how much some originators are making these days, the number of participants is a bit limited.
Additionally, you have to wonder how many of the low-producing originators chose to take part in the questionnaire.
Those who aren’t having a banner year might not be keen on filling out a survey.
And salaries are always going to display an enormous range in the real estate business, mainly because there are those who work part-time, those who just entered the fray, and those who have been in business for decades that are well connected.
Just look at real estate agents, excuse me, Realtors, who made a median $34,100 in 2010.
The median salary for those in business for two years or less was just $8,900, while it was $47,100 for those in business 16 years or more, per NAR.
And 16% earned a six-figure income, revealing the major disparity among agents.
Fifth Third Providing Employment Solutions to Unemployed Mortgage Borrowers
Here’s a little something related, as it has to do with employment. Fifth Third Bank said it partnered with NextJob, a “nationwide reemployment solutions company,” to find jobs for its unemployed mortgage borrowers.
The program, which was piloted in 2012, targets bank customers who are at serious risk of default on their mortgages.
Of those who took part so far, 40% were fully employed after six months, making the program a novel way for both the bank and borrowers to avoid foreclosure.
NextJob helps borrowers create an effective resume and cover letter, carry out a targeted job search, and train and prepare for interviews.
Perhaps banks and lenders should consider hiring these at-risk borrowers in their own lending departments, seeing that they’re all having capacity constraints.
That could solve two problems in one, and by the sound of it, the compensation ain’t too shabby. But in all seriousness, if you’re a Fifth Third mortgage customer in need of assistance, check it out.
Pending home sales failed to add a third month onto the mini rally it staged in June and July. The National Association of Realtors® (NAR) said its Pending Home Sale Index (PHSI) declined 7.1 percent to 71.8 in August and is now down 18.7 percent from its August 2022 level.
The PHSI ended a three-month decline in June, rising 0.3 percent followed by a 0.9 percent increase in July.
The PHSI is based on contracts signed during the month to purchase existing single-family houses, condos, and cooperative apartments. It is a leading indicator of those sales which are expected to close over the following 30 to 60 days. NAR will report September’s existing sales on October 19.
“Mortgage rates have been rising above 7 percent since August, which has diminished the pool of home buyers,” said Lawrence Yun, NAR chief economist. “Some would-be home buyers are taking a pause and readjusting their expectations about the location and type of home to better fit their budgets.”
“It’s clear that increased housing inventory and better interest rates are essential to revive the housing market,” added Yun.
The index in all four of the nation’s major regions declined compared to both July and to the prior August. The Northeast PHSI was down 0.9 percent to 62.6 and was 18.2 percent lower on an annual basis. The index for the Midwest lost 7.0 percent and 19.1 percent compared to the two earlier periods to a reading of 71.3.
Pending sales in the South fell 9.1 percent to 86.5 in August, coming in 17.6 percent lower year-over-year. The West’s PHSI declined 7.7 percent to 56.3 and was 21.4 percent behind its August 2022 reading.
Yun concluded, “The Federal Reserve must consider the sharply decelerating rent growth in its consideration of future monetary policy. There is no need to raise interest rates. Moreover, the government shutdown will disrupt some home sales in the short run due to the lack of flood insurance or delays in government-backed mortgage issuance.”
The PHSI was benchmarked at 100 in 2001, a number equal to the average level of contract activity during that year.
After nearly 10 days of trial proceedings, Zillow is ready for its years-long legal battle with REX Real Estate to be over. On Wednesday, just nine days after the long-awaited trial’s September 18 start date, the real estate behemoth file a motion for judgment as a matter of law in the U.S. District Court in Seattle hearing the trial.
A judgement as a matter of the law is permissible if there is no legally sufficient basis for a reasonable jury to find for the nonmoving party (in this instance, REX) on that issue.
Originally filed by REX in March 2021, against Zillow and the National Association of Realtors, the lawsuit alleges that changes made to Zillow’s website “unfairly hides certain listings, shrinking their exposure and diminishing competition among real estate brokers.”
Two months prior, in January 2021, Zillow began moving homes out of its initial search results for sellers who chose not to use agents adhering to the NAR and local multiple listing service (MLS) practices, creating a two-tab design for agent listings and “other listings.”
In January 2022, NAR filed a countersuit claiming that REX uses false advertising and misleading claims to deceive consumers in violation of the Lanham Act, but the countersuit was dismissed in late April 2022.
In mid-May 2022, REX ceased its brokerage operations.
A little over a year later, in mid-June 2023, the three parties involved in the suit, all filed motions for summary judgment on at least some issues, if not the entire lawsuit.
While Judge Thomas Zilly dismissed REX’s antitrust claims against NAR and Zillow, he allowed the discount brokerage’s false advertising claim under the Lanham Act, and a claim for unfair or deceptive trade practices under Washington’s Consumer Protection Act (WCPA) to stand.
According to Zillow’s latest motion, since the start of the trial, REX has failed to produce sufficient evidence on either claim.
“The evidence REX promised would come at trial has not materialized, and the evidence introduced at trial falls short of what is required for multiple elements of these claims,” the motion reads. “Accordingly, REX’s claims should not be put to a jury, and the Court should enter judgment in Zillow’s favor as a matter of law under Federal Rule of Civil Procedure 50(a).”
In order to prove their Lanham Act claim, REX must identify particular statements made by Zillow and then show that they are false. According to earlier filings, REX highlighted Zillow’s tab labels separating types of listings as the statements it was challenging.
While Zillow acknowledged that the court determined that the tab labels are literally false, as REX employs agents who are realtor association members, “it has never has addressed whether the default status or two-tab display as a whole are false statements of fact,” which would be necessary to prove the Lanham Act claim.
“The non-communicative aspects of Zillow’s display—that merely divide listings and default one tab over the other—do not make any such claim,” the motion reads. “Indeed, design decisions that ‘limit [users’] access’ to materials are distinct from any ‘false statement.’”
In addition, for the Lanham Act to apply, the speech in question must be commercial speech, something Zillow claims the two-tab display is not.
“There is no evidence that Zillow intended to convey any particularized message with the default status or two-tab display or that the consumers who viewed these features took away any particular message,” the filing states. “Zillow is an ‘online database of information’ that provides ‘free, publicly available’ information that is ‘not transactional.’”
The motion also claims that “REX has not developed evidence that any aspect of Zillow’s two-tab display was meant to influence consumers to buy defendant’s goods or services,” and that there is “no evidence that a substantial part of Zillow’s audience was deceived by the default status or two-tab display.”
Finally, Zillow also states that that REX “has not even attempted to show injury flowing directly from the alleged deception caused by the distinct aspects of the two-tab display,” something that is necessary if REX hopes to be awarded damages.
“REX’s own fact witnesses did not offer any testimony supporting the notion that the labels, in particular, caused them harm,” the motion continues. “Moreover, the fact that there was an impact on for-sale-by-owner listings—listings that properly would be labeled as ‘Other listings’—shows it is not the labels that had this impact.”
Regarding the WCPA claim, Zillow states that all of the same reasons from the Lanham Act claim apply.
Zillow did not wish to comment and REX has not returned a request for comment.
When you’re looking to purchase your first home, it’s a good idea to familiarize yourself with the different first-time homebuyer programs available in your area. They can help you afford this major purchase.
First-Time Homebuyer Programs
Programs vary in terms of their eligibility requirements and the types of assistance they offer, but all offer some form of financial aid. But what are these programs, and how do they work? Here’s what you need to know.
What Is a First-Time Homebuyer Program?
A first-time homebuyer program is a government-sponsored program designed to help people purchase their first home. Programs vary from state to state, but generally, they offer financial assistance in the form of low-interest rates, down payment assistance, and other incentives.
A few examples include:
The Federal Housing Administration (FHA)
The Veterans Affairs Homebuyer Assistance Program
The National Association of Realtors® (NAR)® Homebuyer Assistance Program
State-sponsored programs, such as the California New Home Grant Program, can also offer assistance.
Who Is Eligible for a First-Time Homebuyer Program?
Each program has its own eligibility requirements, which vary depending on the program and the state in which it is located.
However, generally speaking, you’re eligible if you purchase your first home and meet the criteria set by the program. These criteria can range from being newly divorced, a military veteran, or widowed to having a low income and getting ready to buy your first home. You may be eligible for other programs if you’ve already owned a home. Still, first-time homebuyer programs will automatically disqualify applicants attempting to purchase second homes or investment properties.
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Related read: What Credit Score Do I Need to Buy a House?
How Do First-Time Homebuyer Programs Work?
Once you’ve determined that you’re eligible for a first-time homebuyer program, the next step is to find a program compatible with your needs. Programs typically offer a variety of incentives, such as low-interest rates or down payment assistance, to help you purchase your home. Once you have found a program you’re eligible for, you’ll need to submit an application and meet eligibility requirements.
Once you have been accepted into the program and met eligibility requirements, you’ll need to begin preparations for your home purchase. This may include searching for a qualifying home and making any necessary financial commitments. Finally, once all of the paperwork has been completed, and your financing has been approved, you can go ahead and purchase your home.
How Can I Use a First-Time Homebuyer Program?
There’s no one definitive answer to this question, as each program has different requirements and guidelines. However, if you’re approved for financial assistance, then the money will be given to help you purchase a home. Typically, these programs aren’t for rehabbing a home or house flipping. If you need help making repairs, consider instead getting a personal loan to finance home improvement. You’ll have a higher likelihood of getting approved for help covering repairs than a homebuyer’s program would offer.
The Bottom Line
A first-time homebuyer program can help you get into the market quickly and easily. They offer many benefits, including reduced interest rates and fees, waived closing costs, etc.
Available inventory of homes for sale is on the rise in late September, which is very unusual for this time of year. In fact, inventory is growing faster than this time a year ago.
This is a demand-driven slowdown, because new listings supply is still running 9% to 10% fewer homes for sale each week than this time last year. We’re seeing fewer new sellers each week, but inventory is building as homebuyers wait to see if mortgage rates will come down to make purchases more affordable.
What’s happening with inventory?
Fewer new sellers also means that inventory can’t grow too much; the real trouble develops when demand drops and supply surges. There’s no supply surge, but there is a notable demand drop. Consumers are very sensitive to changes in mortgage rates, and rates are still rising.
We can see these slowing changes build up each week. It’s a pretty sharp change from what was a surprisingly strong first half of the year. There are now 528,000 single-family homes on the market. That’s an increase of 1.8% from last week.
Normally by this point in September, available inventory is declining slightly each week. It’s late in the summer, so normally new listing volume drops as the last few sales of the peak summer months are concluding.
The fact that inventory grew by nearly 2% this week and last week is telling of how homebuyers are reacting to the highest mortgage rates in over two decades.
In this chart of each year’s inventory curves, you can see that the number of homes on the market is climbing faster now than this time last year. This year is the dark red curve, and last year the light red. Mortgage rates continue to climb, so there is no immediate relief for homebuyers on the horizon either.
At this point, it looks like we may see inventory grow to the end of October like we did last year. Look at the divergence in the curves from this year and the tan line from two years ago when we were still in the middle of the pandemic housing boom and record-low mortgage rates.
Pending-home sales continue to lag
New pending sales each week continue to run 10% to 15% below last year’s pace. If you follow the National Association of Realtors when they publish their existing-home sales report each month, you know that the latest report for August showed a sales pace of only 4 million seasonally adjusted annual home sales.
We can already see in the NAR data that there are no signs of improvement for the sales count through September and October. The home sales that are in contract now will close mostly in October. It’s not hard to imagine that next month’s seasonally adjusted home sales data from NAR will come in under 4 million.
In this chart, each bar is the total number of home sales pending on any given week. The shorter the bar, the fewer sales that are in progress. The light portion of the bar is the count of new pendings each week.
There are now 344,000 single-family homes in contract to close in the next couple months. That’s 14% fewer than last year and almost 30% fewer than in September of 2021.
Home sales are limited by the decreased demand, of course, and they’re also limited by the very low supply of new listings. You can’t buy what’s not for sale.
We’ve been talking all year about the market being supply constrained. Right now, sales are limited by declining demand from still-climbing mortgage rates.
Price reductions climb again
We can see the impact of weaker demand starting to creep into the pricing indicators. In the chart below, we look at the leading indicator of this trend: price reductions. This is the percent of homes on the market that have taken a price cut from their original list price.
For a while earlier this year, demand was exceeding supply in residential real estate, and you could measure that demand with the price-reductions curve improving each week. As mortgage rates lurched over 7% to their new highs, suddenly there are fewer offers.
And home-price reductions are climbing again, with 37% of the market taking a price cut. That’s more than any recent year except last year at this time. Price reductions are accelerating now, which bodes negatively for future sales prices.
A normal, balanced market will have 30% to 35% of the homes for sale that have reduced their asking price in recent months. As this dark red line approaches 40%, that’s a clear indicator that buyers are making fewer offers. Remember, the slope of this line captures how many properties are taking new price cuts each week. And this slope is increasing now.
These are transactions that will happen in the future, so it implies sales price weakness in the fourth quarter, which you’ll hear about in the headlines after the new year. But you can see it in the data now.
The median sales price of single-family homes in the U.S. right now is $440,000. That’s down 1% from last week and it’s just a tiny fraction higher than this time last year.
We can see the pressure on home prices in recent weeks. Home prices step downward in September for the seasonal change every year, and you can detect strength or weakness relative to changes in other years.
What we see now is that year-over-year price gains are just barely positive. And the comparison is getting weaker, not stronger, as our current mortgage markets deteriorate. There are fewer offers, and those that do happen are doing so at slight discounts each week.
Last year at this time, there were big price discounts being applied. So, our October comparisons may get slightly easier, but I sure haven’t seen any signals of price strength now.
Looking ahead to the end of 2023
So the question is will Q4 this year be a little better than Q4 2022? The median price of the new listings is fractionally higher than last year at $398,500. It will be fascinating to watch the light colored line here over the next couple weeks.
The new listings are where you see price weakness first. And last year, they were already headed lower.
The price of the new contracts this week came in at $370,000. These are the pending-home sales that went into contract in the last week. Prices of the homes going into contract are lower than last year by a fraction.
The next few weeks will be interesting to track this stat, too. Last year in mid-September is when mortgage rates jumped from 6% to 6.5% to 7.5%. By early October, any offers that were made for purchases came in at notably lower price points.
By September 2022, new pending-home sales prices fell by 3% per week. Will that happen again? Mortgage rates are even higher now than they were last year.
In this chart, you’ll notice the light-colored line started a big decline during this week in 2022. That’s when buyers reacted to newly increased mortgage rates. So, we’re watching to see where the new contracts come in over the next few weeks.
The macro trends impacting mortgage interest rates and the Fed have not given us any reprieve yet. The signals are that mortgage rates are still headed higher.
Consumer expectations for future mortgage rates have moved higher, too, so potential homebuyers are less optimistic than they were at the start of the year. And that’s what we’re seeing in the data each week now.
However, it’s important to point out that while buyer demand has backed off this fall, there is still no sign of any surge in new supply coming to the market. It can be very easy to focus on the negative momentum.
People on the fence should also know that while their competition is lessening, there’s no sign of an inventory flood. That may be an important factor in their home-buying decisions.
Mike Simonsen is president and founder of Altos Research.
“Home sales have been stable for several months, neither rising nor falling in any meaningful way,” NAR chief economist Lawrence Yun said. “Mortgage rate changes will have a big impact over the short run, while job gains will have a steady, positive impact over the long run. The South had a lighter decline in sales … [Read more…]
According to a report prepared by the Congressional Research Service (CRS) earlier this month, there would be several immediate impacts following the program’s expiration.
“The authority to provide new flood insurance contracts will expire,” the CRS report said. “Flood insurance contracts entered into before the expiration would continue until the end of their policy term of one year.”
The borrowing authority of NFIP from the U.S. Treasury would also be reduced from $30.245 billion to $1 billion. Flood mitigation assistance grants would still be available, but “the expiration of the key authorities listed above would have potentially significant impacts on the remaining NFIP activities,” the CRS explained.
There would also be a chilling effect on the mortgage industry, according to experts and lawmakers.
“By law or regulation, federal agencies, federally regulated lending institutions and government-sponsored enterprises must require certain property owners to purchase flood insurance as a condition of any mortgage that these entities make, guarantee, or purchase,” the CRS report said.
Without NFIP, mortgage activity would be seriously diminished, as Sen. John Kennedy (R-Louisiana) stated.
“If for some reason the flood insurance program expires, existing policies are still in effect until their expiration date, and claims will continue to be paid as long as FEMA has money,” Kennedy said on the Senate floor on September 13. “However, the federal requirement that you have to purchase flood insurance under certain circumstances to get a mortgage would be suspended, which means that many mortgage companies would not loan the money to homeowners.”
In previous instances when NFIP lapsed, mortgage activity was temporarily halted. However, according to the CRS report, Congress eventually moved to reauthorize the program retroactively.
“In past NFIP lapses, borrowers were not able to obtain flood insurance to close, renew, or increase loans secured by property in [a Special Flood Hazard Area (SFHA)] until the NFIP was reauthorized,” the report said. “During the lapse in June 2010, estimates suggest over 1,400 home sale closings were canceled or delayed each day, representing over 40,000 sales per month. These figures applied to residential properties, but commercial properties were also affected by the NFIP lapse.”
The National Association of Realtors (NAR) has prepared an FAQ document to advise members of the potential impacts an NFIP lapse would have on the housing industry. They specify that a currently debated continuing resolution (CR) that would fund the federal government after September 30 includes an NFIP extension. Still, political observers and some in Washington are preparing for government funding to lapse.
The White House on Friday instructed federal agencies to prepare for a shutdown, according to reporting from the Associated Press.
“With the October 1 start of a new fiscal year and no funding in place, the Biden administration’s Office of Management and Budget began to advise federal agencies to review and update their shutdown plans, according to an OMB official,” the AP report said. “The start of this process suggests that federal employees could be informed next week if they’re to be furloughed.”
Existing home sales fell 0.7% in August from the prior month as higher mortgage rates lead to limited supply of homes for sale.
Sales fell to an annualized rate of 4.04 million units, below the pandemic low of 4.09 million.
“Home prices continue to march higher despite lower home sales. Supply needs to essentially double to moderate home price gains,” NAR economist Lawrence Yun said.
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National Association of Realtors, which shows that the post-pandemic rebound of home sales has been completely wiped out amid a period of elevated mortgage rates.
Existing home sales fell 0.7% in August from the prior month to an annualized rate of 4.04 million, below economist forecasts of 4.10 million and below the pandemic-era low of 4.09 million.
The ongoing decline in US existing home sales began in 2022, when the Federal Reserve started to aggressively hike interest rates in its quest to tame inflation.
Since early 2022, total existing home sales in the US fell 36% from 6.34 million to last month’s reading of 4.04 million. The decline accelerated as the average 30-year fixed mortgage rates steadily climbed above 7%, making the prospect of buying a home much less affordable.
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But despite the decline in home sales, home prices are rising because of a limited supply of homes available for sale.
The National Association of Realtors said the median price of existing homes in August jumped 3.9% year over year to $407,100. Meanwhile, the inventory of unsold existing homes fell 0.9% to 1.1 million, which is equivalent to just 3.3 months of supply at the current pace of monthly home sales.
And the home price gains could keep accelerating as long as supply remains limited and buyers don’t balk at too-high mortgage rates.
“Home prices continue to march higher despite lower home sales. Supply needs to essentially double to moderate home price gains,” National Association of Realtors’ chief economist Lawrence Yun said.
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The decline in existing home sales comes as homebuilder sentiment and US housing starts continue to decline. And with no Fed interest rate cuts on the immediate horizon, these trends could continue.
The FOMC also said it would continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities.
During a press conference with reporters on Wednesday, Fed Chair Jerome Powell said that the committee decided to leave their policy interest rate unchanged. However, looking ahead, he did not exclude the possibility of another hike.
In spite of a higher-than-expected CPI reading in August, core inflation readings have been falling every month in 2023. Meanwhile, the pace at which new jobs were added to the economy slowed. Other labor market indicators, such as job openings and the unemployment rate, also point to a cooling economy, Danielle Hale, chief economist at Realtor.com noted.
Today’s decision not to raise rates will likely influence credit markets.
“In the mortgage market, for instance, consumers who have been holding off may begin to be motivated by the announcement to consider making the home purchase they have been waiting on,” Michele Raneri, vice president and head of U.S. research and consulting at TransUnion,said.
In fact, mortgage applications picked up in the week leading up to the Fed meeting, signaling a wave of optimism.
The CME FedWatch Tool showed a 99% chance the Fed would halt its hikes to the 5.25 to 5.5% range on Wednesday morning, according to interest rate traders. However, only 70.9% of these investors bet officials will freeze the rate hike at the November 1st meeting.
On Monday, mortgage rates for 30-year fixed-rate mortgages were at 7.21%, according to HousingWire‘s Mortgage Rates Center. However, at Mortgage News Daily, mortgage rates were higher on Tuesday, at 7.30%.
The effects of tighter policy have already reverberated across the economy. While mortgage rates have steadied just below recent highs, they remain more than 3 percentage points above their pandemic-era lows. In the housing sector, the combined impact of higher rates and higher home prices drove the cost of financing a home up more than $400, or 22.5%, from a year ago.
Overall, the market has been rather optimistic about the rate picture this year. However, a number of experts are concerned that lifting rates too high could send the economy into recession.
Inflation picked up to 3.7% in August, down significantly from where it was a year ago but still higher than the 2% threshold. Core inflation—which excludes food and energy costs—rose 4.3% in August. Raising interest rates is designed to tackle those still-high prices outside of the volatile food and energy sectors.
If shelter was excluded from the CPI calculation, inflation would be about 1% in August, said Bright MLS Chief Economist Lisa Sturtevant last week. In August, the rent index was up 7.2%, rising for the 40th consecutive month. Meanwhile, rent growth slowed considerably and median rents nationally fell year-over-year in August, according to Sturtevant. Additionally, apartment construction is strong, which puts an additional pressure on landlords to avoid vacancy. In the second quarter of 2023, the national vacancy rate was 6.3%, up from 5.6% a year earlier. However, it takes months for those aggregate rent trends to show up in the CPI measures.
What’s next?
Although the Fed decided to hold steady this time, it remains fixated on taming inflation and bringing it back to the 2% target. In light of this goal, Realtor.com’s Hale expects the Fed to keep the option for an additional future rate hike on the table.
During the press conference, Powell remained extremely cautious, insisting on the Fed’s data dependent approach. He reiterated that the decisions that will be made at the two remaining meetings in 2023 will depend on the totality of all the data gathered, including the inflation data, the labor market data, the growth data, the balance of risks, etc. As is custom now, he sidestepped questions from reporters about what would prompt the FOMC to raise rates again before the end of 2023 or hold them steady.
Powell also shared the committee’s economic projections, showing a longer period of elevated rates.
“FOMC participants expect the rebalancing in the labor market to continue, easing upward pressure on inflation,” Powell said. “The median unemployment rate projection in the summary economic projections rises from 3.8% at the end of this year to 4.1% over the next two years.”
Meanwhile, the median projection for total PCE inflation is 3.3% this year, 2.5% next year and to reach 2% in 2026, he added.
Even though inflation remains well above the Fed’s longrunning goal of 2%, he acknowledged that inflation has moderated since the middle of last year.
On the housing market, he noted that activity “picked up somewhat” although it remains well below the levels of a year ago, largely reflecting higher mortgage rates.
Indeed, Sturtevant highlighted the resilience of the housing market in the face of rising interest rates. “Over the past year, buyer interest has remained high, home prices continued to rise in most markets, and homebuilding activity has surged,” she said.
However, she underlined that, even with today’s pause, the aggressive rate hikes have had major and somewhat deferred impacts on the housing market.
As demand might decline in the fall, Sturtevant expects home prices to fall in some markets. However, price declines will remain modest as supply will remain low, she added.
“The biggest downfall of the market cooling is that many individuals and families–particularly first-time homebuyers–have been priced out of the market as a result of the Fed’s aggressive rate increase,” she said.
This afternoon’s projections give valuable insight into the amount of improvement in inflation that the Fed would want to see before pausing or ending the current tightening.
“The Federal Reserve is rightly on pause and is looking for more data before determining its next course on interest rates,” NAR Chief Economist Lawrence Yun said. “With fewer job openings, slowing job gains, and softening core consumer price inflation, the Fed must consider the potential economic damage arising from any future rate hikes.”
