The current state of the housing market paints a challenging picture, with housing affordability experiencing a continuous decline in the third quarter of 2023. This trend is attributed to the persistent elevation in the costs of borrowing over recent months. Despite a slight improvement in mortgage rates in the past couple of weeks and even the optimistic report on CPI indicating that inflation staying flat, the conversion of this positive development into actual transactions is expected to take time.
The market’s cautious optimism hinges on the recent dip in mortgage rates, and there is a glimmer of hope that this trend could translate into an uptick in homebuyers’ sentiment. The downbeat sentiment noted in October might see a reversal if the declining trend in rates persists. As various indicators point to an economic slowdown in the fourth quarter, there is optimism that the peak in rates may have already been reached. This raises expectations for a more favorable market in the coming months.
House Affordability is at 16-year Low!
The headline statistic revealing a 16-year low in housing affordability is particularly alarming, and it’s essential to delve into the intricacies of the factors contributing to this decline. The California index, for instance, plummeted to 15%, the lowest level since the third quarter of 2007. Tight supply and elevated mortgage rates, which have reached a two-decade high, have driven borrowing costs to unprecedented levels. The monthly mortgage payment for a median-priced home has surged, increasing by 6.3% from the previous quarter and a staggering 15.4% from the third quarter of 2022.
To put these figures into perspective, potential homebuyers now require a minimum annual income exceeding $221,000 to qualify for the purchase of a median-priced home in California. This underscores the significant financial strain imposed by the current market conditions. Affordability has witnessed a decline in 36 counties, remained unchanged in 10, and marginally increased in five. The prospect of home prices lowering in the fourth quarter raises expectations for a potential improvement in affordability if the current trajectory of declining rates persists.
Buyer Appetites Got Lower for … Most Markets?
Amidst these challenges, home purchase sentiment has hit a record low, reflecting the frustration of consumers grappling with elevated interest rates and soaring home prices. The latest Fannie Mae national housing survey reveals that only 15% of consumers believe it is a good time to buy, a stark contrast to the optimism observed in the past. A substantial portion of consumers anticipates further challenges, with nearly half expecting mortgage rates to rise in the next 12 months and two out of five predicting an increase in home prices within the same timeframe.
However, there is a silver lining in the realm of home selling, where consumers have displayed more optimism. In October, 63% of respondents considered it a good time to sell, marking an improvement from 51% recorded in the same month of the previous year. This shift in sentiment can be attributed to the stabilization of home prices amidst a persistently tight housing supply.
The broader economic landscape further complicates the situation, with consumers entering the holiday season with a cautious spending mindset. The latest Holiday Spending Survey by the Conference Board indicates that U.S. consumers are expected to spend an average of $965 on holiday-related items, representing a dip from the $1,006 reported in 2022. This decline in spending is reflective of the waning consumer confidence observed in recent months.
How Economic Seasonality Enters the Big Picture
A notable divergence in spending plans is evident between older and younger consumers. Those aged 45 and above expect an increase in expenses on gifts, while younger consumers plan to cut back due to the resumption of student loan payments, particularly for younger borrowers who may carry a significant student loan debt burden. This financial obligation could potentially impede their ability to engage in robust holiday spending.
The holiday season’s economic impact extends beyond individual spending patterns, with indications of a potential slowdown in job growth in the coming months. Businesses are planning to hire fewer seasonal workers for holiday jobs compared to the previous year. According to Challenger, Gray & Christmas, the number of publicly advertised seasonal positions has declined to the lowest level in a decade. Additionally, recent job numbers released by the Labor Department reveal a decrease in employment within key seasonal employers such as warehouses and transportation companies.
The retail sector, while still recording an increase in hiring compared to the previous year, has witnessed the smallest annual increase in three years. This suggests a shift in the labor market dynamics after two years of robust hiring. Employers are adopting a more cautious approach, reflecting uncertainty about the business environment in the coming months. This caution is driven by a lack of clarity on economic conditions, prompting businesses to exercise prudence in their hiring strategies.
So Why Should We Care about All of This?
There is a glimmer of relief in the realm of inflation expectations. Consumer expectations on inflation have shown a gradual downward trend, attributed to the decline in gas prices and a leveling off of food prices and rent. Both short-term and long-term inflation expectations dropped slightly from September, with the one-year horizon median falling to 3.6% from 3.7%, and the five-year horizon median inching down to 2.7% from 2.8%.
However, it is crucial to note that certain sectors are expected to experience inflationary pressures. Home prices, for instance, are anticipated to continue growing, with the median home price growth projected at 3%. This level surpasses the 12-month trailing average of 2.1%. Costs of college education and medical care are also expected to rise by 6% and 9.1%, respectively. These projections, coupled with a median expected household income growth of only 3.1%, highlight the persisting concerns consumers have regarding inflation.
I understand that I talk about inflation pretty much every week but believe me when I say, paying close attention to this will help you prepare your transaction 5 steps ahead of everyone but predicting when the best time to purchase or sell is.
My Personal Take
In conclusion, the current economic landscape is characterized by a complex interplay of factors impacting housing affordability, consumer sentiment, holiday spending, job growth, and inflation expectations. Driven by a combination of tight supply and elevated mortgage rates, affordability is unfortunately out of reach for lots of people.
As we navigate these economic challenges, it is imperative to adopt a comprehensive, open-minded, and nuanced perspective. Policymakers, businesses, and individuals alike must carefully analyze the intricate dynamics at play and formulate strategies that address the multifaceted nature of the current economic landscape… or maybe I am more of a realist rather than an optimist.
It is also a reminder for all of us, especially the invest0rs, that economic trends are interconnected, and addressing one aspect requires a holistic approach that considers the broader context. In doing so, we can work towards fostering resilience and adaptability in the face of economic uncertainties, paving the way for a more sustainable and inclusive future.
If you have any question, comment, or concern, feel free to reach out to our team at info@chadvorealestate.com.
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