The last 30 days has been an emotional rollercoaster for many investors and homebuyers out there as the fear of an increase in unemployment rate, eviction rate, and what was supposed to be another Fed’s “last rate hike”.
However, with the release of other economic key metrics, it hints the end of rate-hike era is near as the employment rate is being stabilized, construction spending is making a comeback, and real estate market activity is rebounding. With that being said, let’s dive in!
Yes, Another Rate Hike!
On May 8th, 2023, the Federal Reserve announced its 10th rate hike, in an attempt to combat inflation. The central bank’s Federal Open Market Committee (FOMC) approved its 10th interest rate hike of its benchmark borrowing rate by 0.25 percentage point, which takes the fed funds rate to a target range of 5%-5.25%. This is the highest the Fed Funds Rate has been since August 2007. After a little over a year of consecutive rate hikes, the FOMC subtly suggested that the current tightening cycle has perhaps come to an end. However, with lingering concerns over economic growth and recent banking turmoil rattling nerves on Wall Street and Main Street, it is not clear whether the Fed will truly pause here. The Fed acknowledged that while inflation has moderated somewhat, it is still the primary focus and pressures continue to run high. The path ahead will be dependent on incoming data and financial conditions.
The Fed has expressed uncertainty regarding the health of the banking system and the overall economy, despite the labor market remaining solid (labor force participation rate was essentially unchanged in April, and the unemployment rate fell to 3.4) and more jobs than expected being added as the U.S. economy added another solid 253K jobs to its payroll in April, while hiring in February and March was revised downward, taking some steam away from the last couple of reports. However, there has been a decrease in job openings, which suggests that the labor shortage that has lasted for two years is beginning to normalize. With the employment trend is slowly unfolding to the direction that the Fed expects, despite the slow pace, it hints that there will not be a major rate hike in the next meeting.
The Market is Rebounding?
The California Association of REALTORS®’ monthly member survey reveals that market activity is gradually increasing, as is typical at this time of year. The share of members having listing appointments, entering escrow, and closing escrow all increased from the previous month. In fact, new escrows (22.7%) and closed sales (23.3%) were at their highest levels in seven and nine months, respectively. However, while the share of those having listing appointments rose from the previous month, the share of those who actually listed a property was unchanged at 18.3%. This highlights the current headwinds for new listings and exacerbates the incredibly tight inventory in the resale market. Limited options for buyers have created greater competition, and more than one-third of REALTORS® witnessed 5+ offers made on a home – the biggest share in eleven months.
Despite a dip in the average rate and promising growth in the mortgage space, Silicon Valley Bank (SVB) suddenly failed mid-March, which caused not only a major scare in the financial sector but also in the tech industry as well since thousands of start-ups and tech companies hold their funds at SVB. Subsequently, many companies had to implement reduction in headcounts the following weeks or even days after the event due to the loss of funds in SVB. Could this be considered the same beginning of the financial crisis in 2008/2009? Possibly. Therefore, we hope that we will be wrong but we forecast the mortgage application and housing activities will decrease in the Spring season this year as the result of a shaky financial sector.
Construction Spending Increased, Is This a Positive Sign?
Construction spending inched up 0.3% during March, translating to a 3.8% year-over-year gain. However, the increase in overall spending masked diverging trends between residential and nonresidential sectors as the improvement in the latter outweighed yet another decline in the former. Residential spending recorded its 10th consecutive monthly decline, dipping 0.2% during the month and maintaining its pace below last year levels by 9.8%. While multi-family and home improvement spending rose during the month, single-family activity continues to be the biggest drag on residential spending, decreasing 0.8% from February and running 22.9% behind a year ago. Builders cited high interest rates, inflation, and higher development costs as impediments to growth.
My Personal Take
First month of Q2 is over and all things considerate, we are in position to enter a recovery area assuming all key economics data and trend predictions are staying the same. But until then, interest rate remains highest for decades but it is expected to stop rising and eventually drop by end of this year. By how much? We do not know.
Once again, unless your purchasing power comes from straight up cash or you are under some special circumstances that require you to purchase a home as soon as possible or you are capable of finding a major good deal, I would still advise the general buying audience to continue to pause the purchasing journey especially if you are/were able to lock in a good deal for your monthly rent.
For more questions, comments, concerns, feel free to reach out to our team at info@chadvorealestate.com
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