Much like the Deutsche Bahn (the national railroad of Germany) or Taylor Swift’s remarkable talent for releasing an album that sounds exactly like her previous release, Jerome Powell delivered an interest rate hike this past week- exactly on time, as expected. The Chairman of the Federal Reserve and his buds on the Federal Open Market Committee (FOMC) raised interest rates for the sixth time since the start of the year. It was also the fourth consecutive instance in which the Fed increased rates by three-quarters of a percentage point. Despite the fact that inflation remains stubbornly high, Powell indicated that the Fed may begin to slow its pace of rate hikes starting in December. Well, that was Wednesday. Two days later, the Labor Department showed that, remarkably, the US economy created another 261,000 jobs in October- a glaring indication that inflation remains unbridled. As a result, Powell may very well have to impose another seventy-five basis point rate hike when he convenes the FOMC on December 14th.
The intent of all of these interest rate increases is, as stated, to slow the rate of inflation but much of America seems content in ignoring his castor oil pronouncements. Like Elon Musk, many US consumers remain committed to a high-calorie spending binge that will, ultimately, need to be curtailed through greater discipline. Real estate, however, is the one sector of the economy that is behaving as prescribed by economic theory. Nationally, home contract signings fell for the fourth straight month in September, down 31%, compared with September 2021. Meanwhile, the number of active listings rose by 27% year over year. Here in Rochester, sales dropped by only 12% in September while the number of actual listings dropped by 8%. This is a really important number. Active listings are increasing throughout the country, in large part, because of diminishing sales. Locally, the number of available listings has fallen because there still aren’t enough homes available to satisfy the needs of the buyers who are looking. As a result, we haven’t seen any significant drop in valuations.
Although we’re not absolutely certain when there will be a meaningful recovery in the housing market, there are some historic economic trends that might be helpful in forecasting where we’re headed. Real estate is traditionally thought of as a leading indicator of macro-economic realities. The sector is often described as FIFO- First In, First Out- of larger movements. Although there is no strict, academically-imposed definition of a real estate recession, most economists believe that the industry entered a technical downturn earlier this summer. They go on to speculate that, sometime in the first half of 2023, Powell will have succeeded in taming inflation only to have cast the economy into a recession. Because most recessions last ten to sixteen months and because real estate will emerge from the downturn before other sectors of the economy, we should start to see some normalization of activity in time for the 2024 spring market.
So, What Does This Mean?
In the meantime, if somebody is thinking of selling their local residence, they should be able to do so without experiencing much loss of the considerable equity that was created in the past thirty months of growth. Meanwhile, homebuyers might want to consider capitalizing on current opportunity. Although the market is still controlled by sellers, there aren’t nearly as many buyers looking to purchase. As a result, you probably have a greater chance of prevailing when writing and you probably won’t have to pay $50,000 or more above asking price. Yes, the 30-year mortgage rate is set at 7.23%, however, once inflation has been tamed, mortgage rates will begin to drop. The Mortgage Bankers’ Association is forecasting rates of 5.4% by the end of next year and a further reduction to 4.5% by 2024. In other words, you may want to begin looking in greater earnest, purchase a new home now- before the spring market begins- and re-finance next year, when rates are more favorable. Or, you may want to forego real estate for a while and, instead, buy a turkey. If you purchase today, it will probably be thawed in time for dinner on the 24th!
This is always my favorite time of the year. Be sure to take a moment to enjoy this remarkable weather, celebrate the gift that is Josh Allen’s right arm (let’s pray that it heals quickly), and give thanks for whatever it is that you’re most grateful for. Without much difficulty, you’ll find that there’s a lot to celebrate!