I tend to watch the Olympics while catching up on my reading. As I was skimming an article on the inability of economists to accurately predict the direction of the post-COVID US economy, I looked up just in time to see Simone Biles twist, turn, and dance her way through the air. Her perfectly executed contortions seemed to mirror the erratic, error-prone reversals of the economic forecasts I was reading about. The good news is that the GOAT nailed her landing, and if we’re fortunate, Jerome Powell will do the same. In the past week and a half, three economic news stories have emerged, leading many to believe that he may execute the economic equivalent of a Produnova Vault, achieve a soft landing, and score Olympic gold. Specifically:
- On July 26th, the Personal Consumption Expenditures showed that the rate of inflation had fallen once again, to 2.5%- just slightly above the Fed’s target rate of 2%.
- The Fed Chair stated that there is a strong possibility of a rate cut as soon as September. Powell emphasized that any future reductions would depend on continued signs of cooling inflation and economic conditions.
- Two days later, JayPo was provided a healthy dose of corroborating data when employment numbers, which were slated to show that the US economy created 185,000 jobs in July, reported only 114,000 new employment opportunities.
Fed’s Next Move
Combined, the news clearly demonstrates that disinflation has set in and, after two years of stops and starts, the Fed will almost certainly kick off an era of interest rate reductions. At its September meeting, the Federal Open Markets Committee will probably lower the Federal Fund Rate one quarter of a point. Some are speculating that the Fed has waited too long to lower rates and, rather than inflation, we might now need to contend with the specter of recession. If the Fed has waited too long, the FOMC can always cut rates by half a point in order to jolt the economy. We’ll have a better sense of where things stand as several economic reports are released in the next few weeks. Regardless, all of this is great news for homebuyers.
Looking Ahead
As everybody knows, the past four years have been really difficult for anybody wanting to purchase a home, in part because the Affordability Index is at an all-time low. The one-two punch of property values (Rochester has seen a 61% increase in the value of single-family homes in the past five years) along with stratospheric mortgage rates have kept many on the sidelines. That could start to change. Last month, the thirty-year mortgage was hovering around 7.15%. Today, you can lock in at 6.40%- a drop of nearly three-quarters of a point. I believe that another quarter-to-half-point reduction before the end of the year is certainly possible!
Lower rates will certainly bring more buyers into the market. Concomitantly, we should begin to see more homeowners listing their houses for sale. Why?
- As the difference between locked-in rates (the mortgage that somebody secured in order to buy their existing residence several years ago) and current rates diminishes, it becomes less expensive and, therefore, more appealing for somebody to move from one residence to another.
- Families change. The three-bedroom house that a couple purchased as newlyweds with no children probably doesn’t make as much sense now that they have several kids in tow. Lower mortgage rates mean that families will now more easily be able to make the move that they’ve long wanted to make but felt financially constrained from doing.
More Listings on the Horizon
These aren’t the only reasons Rochester will see a significant increase in homes available for sale next year. Even before rates began to drop, we were already projected to be one of the cities with a major rise in new listings. This is partly because our community is among those experiencing the most severe reduction in inventory. Last spring, it was reported that Monroe County had 58% fewer homes for sale compared to five years ago. It’s only a matter of time before we regress to the national average.
That being said, there’s still not going to be enough inventory to satisfy the needs of the long lines of buyers dreaming of making homeownership a reality. I still contend that the gains that we’ve enjoyed in property value are locked in and we’re not going to see a correction. In reality, Rochester has been forecast to see a 7.5% increase in home values next year- one of the largest increases in the nation. Yes, it’s a much smaller increase than that which we’ve experienced but positive news, nevertheless.
If you have questions or concerns about real estate, feel free to email me at mark@marksiwiec.com or give me a call at 330-8750.