Weekly Market Update: The market is anxiously waiting to see what the Fed does at the upcoming FOMC meeting

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Buyers and sellers’ sentiments remained virtually unchanged in August as housing market participants wait for more signals on what the Fed’s next move will be in the upcoming FOMC meeting. With the economy looking stronger than what was anticipated six months ago, interest rates will remain elevated for a little longer. Consumers could be tapped out, however, as costs of borrowing continue to rise, and their financial conditions begin to tighten up. As such, the economy will likely show more signs of slowing later this year and the Central Bank will have no choice but to cut rates starting in the first quarter of 2024. Mortgage rates will decline starting in the fourth quarter of this year and will further improve next year. The decline will likely be gradual though.

Lack of affordability and tight supply keep homebuyer confidence at low level: Housing sentiment stalled by unusual market dynamics in August as rates remained elevated, reported by Fannie Mae in their latest national housing survey. Those who believed that it is a good time to buy remained at 18%, the lowest level the market has seen in at least the last three years. With rates rising throughout most of last month, consumers continued to feel pessimistic about home buying conditions and they did not expect things to turn around soon. In fact, only less than two out of ten (18%) expected mortgage rates to decline in the next 12 months. On the sell side, however, consumers were more upbeat with 66% of them reported that it is a good time to sell. Consumers have become more positive about home selling since earlier this year as home prices continued to stabilize and housing supply remained tight.

Share of homes with negative equity remains low in California: Home equity dropped on a year-over-year basis in the second quarter of 2023 but improved on a quarterly basis from the first quarter of 2023, reported by CoreLogic’s latest Homeowner Equity Insights report. At the national level, homeowners with mortgages in aggregate have seen a drop in equity by a total of $287 billion, or a loss of 1.7% year-over-year, from Q2 2022. On average, U.S. homeowners with mortgages lost $8,300 in equity last quarter compared to a year ago but gained an average of $13,900 from the Q1 2023 when home prices in general bottomed out. Roughly 2% of all mortgaged properties, or 1.1 million homes, were underwater or had negative equity last quarter. While the number of under-watered homes increased 4% from a year ago, the share of residential properties with negative equity was still significantly below the peak of 26% observed in Q4 2009. California was one of the 16 states that posted an annual equity loss in Q2 2023, with the average homeowner losing $48,000 in Q2 2023. The state, however, had a share of homes with negative equity at 0.8%, which was the lowest of all states reported by CoreLogic.

Soft landing odds improve… for now: The resilience of the U.S. economy continues to surprise economists to the upside and the chance of falling into a recession has been lowered again. The probability of the U.S. entering a recession in the next 12 months has been reduced to 15% from an earlier 20%, according to Goldman Sachs’ latest forecast outlook. The investment bank expected the Fed to pause rate hike in September and believed that a “very gradual” cuts of 25 bps per quarter will begin in Q2 2024. Goldman Sachs also predicted that the slowdown in economic activity resulting from monetary policy tightening will slowly diminish and eventually become a non-factor by early 2024. Real disposable income will pick back up next year as solid job growth continues.

Households not as optimistic about their financial conditions as before: Despite a solid job growth and decent economic conditions in the first half of the year, consumers have become less confident about their financial situations as the labor market began to slow while costs of borrowing remained high. The slowdown in wage growth could be a contributing factor to the decrease in optimism, as the expected growth rate in household income dipped 0.3% to 2.9% in August, reaching the lowest level since July 2021. Interest rates rising sharply between mid-July to mid-August might also have resulted in the deterioration of perception of credit access in August from a year ago, as nearly 60% of households reported that it is harder to obtain credit than the same time last year when the peak of the series was recorded. Households were also less positive about their future financial situation in August. Less than a quarter (23.8%) of households believed that they will be better off one year from now, the lowest level recorded since October 2022.

New supply continues to soften rent growth: Long gone is the day when the market had double-digit rent growth, and apartment rents could see year-over-year declines in coming months. Rents at the national level in August only increased 0.28% from 12 months ago, according to real estate tech platform RealPage. Other than a brief drop during the Covid lockdown, rents have not experienced a decline on an annual basis in over a decade. A surge in apartment supply is the primary factor for the recent slowdown in growth. Over a million new units have been built in the past three years and more than 460,000 new units – a 50-year high – are expected to be completed this year alone. With supply remaining high at the national level through next year, rent growth could remain low through 2025, but a bounce-back is likely in the year after as far less supply is expected in 2026.

If you have any real estate questions or would like to discuss if now is a good time for you to buy, sell, or invest in a home or investment property, please feel free to contact me.

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