State of the Housing Market, November Recap

San Francisco

Written by Breck Hapner

Those participating in the housing market may receive some new surprises at the end of this week as the Federal Reserve, based on fresh economic data, will deliver their final interest rate decision of the year.  As mortgage rates have slightly evened out recently, another raise could further complicate expenses tied to the home buying process.

Experts say the Fed’s interest rate increases have resulted in a small dent in demand overall, but data in numerous reports this past week provide evidence of a shrinking U.S. economy and diminishing employment opportunities. Business commerce shrunk for a fifth consecutive month in November, and applications for unemployment benefits rose last week to a three-month high.

These facts suggest interest rate elevations by the Fed are beginning to hit on a larger scale, further affecting traditionally strong parts of the economy, such as the housing market. Experts point out that although mortgage rates have stabilized and available inventory has increased, consumer confidence has been weakened, subduing home purchases.

It is important to understand how interest rates and inflation-fighting measures work together to influence the buying and selling of real estate. By examining the underlying economic components, it is easier to comprehend how they affect the home markets. In this November recap, we will present some of the current basic driving forces that are ultimately influencing how (or whether) you invest in property.

It may seem counterintuitive, but the Fed has continually been raising interest rates to slow down the economy, which has been chugging along quite vigorously. Most of the time, we hear about plans to enhance the efficiency of economic systems rather than methodologies to induce disruption. The Fed’s raising of interest rates has introduced a degree of havoc to the home acquisition process. But it is imperative to keep in mind the Fed’s objective: to slow the rate of economic activity to bring down inflation, which currently stands at 7.7 percent.

The idea is to make borrowing money more expensive, and then economic activity will begin to dribble. Supposedly, without the huge demand prices for commodities will drop, lowering the rate of inflation. Of course, this means cheaper mortgage rates and more affordable housing.

So, if price escalations and job creation have nosedived in recent months, will this be enough to stave off another rate injection? The Fed has embarked on the nastiest monetary crunching campaign since the 1980s, with five raises in interest rates this year. Will the home markets see another in December? The before-mentioned economic tepidness has experts leaning toward another rate hike, but a 50-basis-point increase instead of the previous five 75-basis-point hikes. 

As discussed in our October recap, many potential homebuyers are on the sidelines, waiting for lending rates to plummet. Remember, the Fed’s interest rate hikes had originally increased mortgage rates to more than 7 percent, although rates have recently dropped to 6.85 percent. A $2K monthly mortgage last year is a $4K monthly mortgage now. For many potential homebuyers, that is quite a chunk of change.

We tend to associate only large investments, like a car or a house, with economic logistics. But in truth, the entire supply chain, every commodity, and all goods, services, and solutions are affected by the demand that fuels inflation.

The economy is a gigantic machine with many millions of intricate, whirling gears. When even a few of the inner levers fall out of joint, every associated system is adversely affected. If economic gears are out of whack, main well-springs, such as home markets, are impacted. The systems involved determine the level of severity.

The central bank’s preferred inflation gauge, the Personal Consumption Expenditures Price Index (PCE), will release a new report this Wednesday. Economic and housing analysts will study this inflation measuring guide to determine if it aligns with the Consumer Price Index (CPI). In both September and October, the CPI rose 0.4 percent, and over the last year, the all-items CPI increased 7.7 percent. Although this is much less than economists expected, it is a hopeful portent: the Fed’s interest rate hikes are beginning to show results.

As millions of Americans begin their holiday shopping, inflation remains a primary concern. Most are not spending as much due to trepidation over the economy. Investors, brokers, and financial analysts from every industry are looking forward to the publication of The Conference Board’s monthly consumer confidence survey to find out how the current pricing of goods is viewed by the public at large. This report will also influence the Fed’s decision regarding another interest rate hike.

So much is tied together by the effects of inflation and the job market. The dreaded word “recession” is still lingering on the tip of every investor’s tongue. This is scary enough, especially for potential new homebuyers. Let’s face it, for most people, having a good job is important, preferably a job that allows you to maintain your customary standard of living despite the effects of inflation. No one wants to contemplate being without a job when trying to purchase a home. This is nothing more than financial quicksand.

The November jobs data will be released Wednesday, December 14th. This report will affect how the Feds construe interest rates and how investors conduct future buying and selling. So far, the labor market has exhibited historically low unemployment and has stood up against higher interest rates. But last month’s unemployment numbers show the largest amount of those applying for benefits since March. If the job creation trend reverses and job markets begin to flounder, consumer demand will follow. Experts predict no one will borrow due to the rising costs of credit. Will inflation then decrease, or will we fall into a recession? No one will need to ask, “Is now a good time to buy a home?”

It is a balancing act; tiptoeing along a speculative high wire across a bottomless investment black hole is causing all the anxiety and apprehension in markets. Brokers and real estate agents alike tell a similar tale: buyers are fickle, wringing their hands with uncertainty. Currently, paved concrete is covering the quicksand, but an economic sinkhole could swallow vulnerable markets.

S&P Global’s measure of activity has dropped to the second-lowest level since the pandemic-forced shutdowns, and companies across the U.S. are showing signs of decreased momentum. This is also a by-product of the Fed’s interest rate hikes meant to introduce more reasonable pricing for goods and services. But let’s face it, jobs may suffer as higher borrowing costs negatively impact employers, disturbing job growth. 

All this being said, a recent GDP source data report showed the largest upward trajectory since the start of this year for U.S. core capital goods orders and shipments. That, coupled with October retail sales growing by the largest margin in eight months, indicate small yet positive economic growth for the fourth quarter this year.

Experts at large will state the economy is not in recession but unanimously agree the cumulative effects of rising interest rates may become the yoke weighing on future commodities, as well as the housing market. 

Even though home sales rose in October due to expanded inventory and reduced pricing, it remains to be seen how the home market will react to another possible interest rate increase impacting current mortgage rates. However, according to Fannie Mae’s latest index, if the recent decline in mortgage rates remains in effect, confidence in home buyers will rise as property prices stabilize and become a safe, affordable investment.

In our December report, Haven will take a closer look at how inflation and interest rates are directly affecting the current housing market.

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