With so many sources for online news about the state of the US economy, it is easy to get confused. How bad is inflation? How can we be close to a recession? Why are home values still on an upward climb if rising interest rates have removed buyers from the market?
The FED has been walking a tightrope to tame inflation, while not creating a recession. They are faced with challenges we’ve not experienced before. Not only are they raising rates, but they began shrinking their massive balance sheet.
During the Covid pandemic, the FED made trillions of dollars worth of bond purchases, which they began selling off in June. While this purchase reduced interest rates to record lows, the sell-off might lead to record highs.
One has to wonder about market interference. How did the purchase excite inflation, and will the sell-off exacerbate a recession?
Inflation vs. Recession
In June inflation hit 9.1%, a 40-year high and the FED raised rates. Until this number returns to the 2 or 3% target rate, we can expect interest rates to remain volatile. In turn, this creates uncertainty in the housing market.
However, the average 30-year fixed mortgage rate made the largest weekly drop since 2020. Rates decreased from 5.74% to 5.43% on a 30-year fixed-rate mortgage. Purchase demand has increased 1.2% this week and as expected, refinance applications rose 2%.
The mortgage industry seems to be betting on the talk of a looming recession. The US economy contracted 0.9% during the second quarter, slightly better than the 1.6% contraction in the first quarter.
Two consecutive quarters of negative growth is traditionally viewed as a recession. Some economists are saying that the recession began in January of 2022. At the same time, others view the smaller number as a positive sign of economic growth.
Home Values Continue to Rise
As if the economy hasn’t already confounded the experts, in June, home prices hit an all-time high. This occurred even while home sales declined for the fifth straight month.
The National Association of REALTORS® reported that the median home price was $416,000 last month, up 13.4% from a year ago. This marks more than a decade of year-over-year monthly price gains.
Yes, homebuyers face affordability challenges because of rising prices and higher interest rates. However, while the market has experienced a slowing matched by rising inventory, there is still a housing deficit in supply vs demand.
In June, interest rates rose above 6%, but have settled back in the 5% range. As new home builders pulled back on releasing new home inventory, rents are forecasted to rise 10% in some areas.
Buyers on the fence waiting to see where interest rates will settle, now have a new incentive to enter the market. It would seem that limited supply is still the primary driver of rising values.
Growing Inventory
We began 2022 with a shortage of inventory, but in June, we saw the first year-over-year turnaround in three years. The number of homes available for sale at the end of June was up 9.6% from May, and up 2.4% from 2021.
We know that supply is still in a deficit compared to demand because the days on the market are less than what it was in June 2021. We can say that sales have slowed to the pre-pandemic pace, but the number of days a property is on the market is only 14 days, compared to 17 days a year ago.
We've forgotten that the normal days on the market are usually between 30 and 45 days. Inventory is growing, but homes are selling faster than ever.
So, yes, the economy is a mixed bag of conflicting reports. Whether fear of rising interest rates or opportunistic buyers ready to pounce as rates shift downward, there are still buyers out there ready to buy.
Lawrence Yun, chief economist for the National Association of REALTORS® recently said: “I don't foresee any oversupply coming, even as sales retreat.” The pace of rising prices is slowing when you compare the 13.4% growth number to 23% in June of 2021. But NAR still predicts values to be up 11% by the year’s end.
Encouraging Indicators
While some economists are raising red flags about an impending recession, others are discussing the ongoing strength of the labor market.
Elyse Ausenbaugh, Global Market Strategist at JP Morgan said: "Looking into components of GDP, the fact that consumers are still spending in real terms and that things like credit card delinquencies remain at all-time lows is an encouraging sign that, although the window is narrowing, we're not yet in that recessionary-type scenario that we're watching for that could potentially play out.”
Inventory at Lake Tahoe is slowly returning to normal levels and market activity may not be as frantic as it was at the beginning of the year. The market will continue to seek an equilibrium as affordability meets supply and demand factors.
We tend to be shortsighted in forecasting economic activity and forget about the stimulus measures that may have contributed to 2021 record sales numbers.
If you are thinking of selling your home, this is an excellent time to do so. Homes that are priced well are selling quickly. If you are thinking of buying your retreat at Lake Tahoe, the downward shift in interest rates can save you hundreds of dollars on your monthly payment.
Will the FED continue to push interest rates up, or will the talk of recession keep interest rates where they are now?
While we sit around discussing the future of the US economy, home values keep rising and homes keep selling.
