MARKET UPDATE – MAY 2023

Whether it’s quality television or intriguing movies, I’ve always found myself drawn to and consuming films that focus on the theme of confusion. Lost, Shutter Island, Severance, and the movies of David Lynch all readily come to mind. I love the suspense. I love the mystery. And I love a surprising twist or ending. But that’s art. When it comes to personal finance or the national economy, well, not so much. In this realm, I’d prefer something akin to a staid and boring documentary. You know, sorta like, “Voices from the Past: Unraveling Linguistic History”. Unfortunately, for more than a year, US financial systems have been behaving in a manner that is best described as erratic. Some would say schizophrenic. And, depending on who you ask, the economy is either terrible or it’s vibrant and robust. 

Let’s start with employment numbers. This past Friday, the US Labor Department, anticipating the creation of 188,000 new jobs, instead announced that 253,000 employment opportunities were formed and the unemployment rate dropped to 3.4%- a figure not seen since 1969. Now, depending on your point of view, this is either great news or it’s devastating. The addition of so many new jobs is an indication of a strong and vibrant economy, right? Well, sure, unless your name is Jerome Powell and you’re trying to control inflation- which is dependent upon a less-robust labor market. Thankfully, total employment growth was revised downward by 149,000 over the preceding few months which means that the average gain is actually slowing. If you’re not quite following this, don’t worry- it’s like trying to navigate the labyrinthine hallways of Severance, right? (OK, if you don’t get the reference, you should consider watching the series- especially if you like Waffle Parties). 

Thankfully, the banking crisis, which began two months ago with the dissolution of Silicon Valley Bank, seems to have been contained. Yet, First Republic Bank was absorbed by JP Morgan Chase last weekend after a run on deposits. The First Republic calamity, we were told, was an aberration and US regional banks were solvent and doing just fine. Unless, of course, you were PacWest which, last Tuesday, led the pack of regional bank stocks that collectively swooned on fears of further bank runs and insolvency. More bank closures or takeovers were imminent and, sure enough, by Friday… PacWest’s stock irrationally rebounded an astounding 80%. Confusing and irrational, right? Like employment numbers, the US banking industry is hard to navigate and seems to have no underlying logic dictating direction. 

Meanwhile, the Ten Year Treasury continues to fluctuate as bond traders try to discern the longer-term health of the economy. Given all of this conflicting data, accurately gauging the future trajectory of the economy has also proven to be a challenge. Because the rate of the thirty-year mortgage tracks with the Ten Year Bond, mortgage rates have ricocheted from 6.28% thirty days ago, to 6.75% mid-month, fell to 6.50% last week, and are now 6.65%. 

I’m glad to report that, in the midst of all of this confusion and doom, there is some good news. 

  • In light of more regional bank failures, it’s difficult to envision that the Federal Reserve will continue to raise the Federal Fund Rate. Instead, it seems likely that the Fed will allow previous rate hikes, which are just now reverberating throughout the economy, to continue to bring down the rate of inflation. 
  • One of the salutary benefits of banking industry uncertainty is greater scrutiny of loan applications and tightened lending standards. As a result of fewer loans being approved, the economy should contract even further.
  • The rate of inflation continues to decrease. Last summer it was pegged at 9.1% and according to CPI numbers released this morning, it fell to 4.9% in April. That’s impressive movement!

So, how does all of this impact residential real estate? Because of ‘rate lock’, sellers are still reluctant to exchange an existing mortgage of 3% and commit to a new loan more than double that rate. As a result, there are currently only 419,725 active listings available for sale in the United States. Eight years ago this week, there were 1,081,085. The market remains populated by those who primarily need to sell as a result of death, divorce, or re-location and these sellers are crushing the market. Most homes are still selling considerably over asking, all-cash, with no inspections. Sadly, many buyers continue to struggle to prevail in bidding wars. Deals are not to be found or enjoyed. 

In most years, I would be distraught to learn that, at the end of April, our team sales had fallen by 5%. However, given that the dollar volume of local sales is down approximately 23%, I’ll take our year-to-date production as a win. Hopefully, as the months pass and interest rates fall, we’ll find that the second half of the year is stronger than that of year’s past. Always the optimist, I continue to think that the housing industry will experience more balanced conditions come January 2024. 

As always, thank you. I hope that you enjoy the arrival of Memorial Day and the start of summer!  If you have questions in regard to real estate, feel free to call me at (585) 330-8750.