Welcome to the latest installment of The Full Measure with Kevin Hecht—your destination for the most current economic insights and analyses. Catered to real estate appraisers, agents, and other professionals, this monthly blog series helps you navigate the ever-evolving economic environment. Uncover this month’s economic trends and insights—written from an appraiser’s standpoint—in the following economic recap for August 2023.
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Economic recap August 2023
In an ever-evolving economic environment, key aspects such as inflation, employment, and the housing market are undergoing significant changes in August 2023. This post analyzes the recent data and insights, highlighting potential impacts and the overarching market conditions.
Federal Reserve and market metrics in focus
Last Friday’s Jackson Hole Symposium, an annual meeting attended by global economists, central bankers, and policymakers, gave the financial world much to ponder. At the forefront was Fed Chair Jerome Powell, whose remarks sent waves of speculation throughout the market.
Powell did recognize advancements in the battle against inflation, but his tone was noticeably hawkish. In Powell’s own words, “While inflation has receded from its peak – a positive shift – it still hovers higher than preferred. We stand ready to implement further rate hikes as necessary, intending to maintain a restrictive policy until there’s confidence that inflation is on a sustainable decline toward our 2% objective.”
This sentiment isn’t new. Over the past year, the Fed has steadily increased its benchmark Fed Funds Rate, which determines the overnight borrowing rate for banks. Their goal? To temper the economy and mitigate inflation. Their July rate hike marked the eleventh in a series since March 2022, pushing the Fed Funds Rate to a 22-year high. Powell assured that the Federal Reserve would proceed judiciously, taking into account incoming data and the changing economic landscape.
It’s important to note the Fed’s consistent emphasis on the labor market. Powell implied a desire to see a somewhat softer labor sector and a less robust Jobs report before any shift in their perspective. With the August Jobs Report on the horizon, Fed members will undoubtedly be monitoring it closely.
As the September 20 Fed meeting approaches, there’s palpable anticipation around the Fed’s potential rate hike decision. With the August CPI and PPI readings scheduled for release on September 13 and 14, respectively, and the Personal Consumption Expenditures data (for July) slated for August 31, the Federal Reserve will be analyzing this data closely to determine their next steps in navigating the complex inflationary landscape.
Homes sales overview
Existing home sales experienced a decline in July, dropping 2.2% from June to an annualized rate of 4.07 million units, according to the National Association of REALTORS® (NAR). This decrease is notable compared to July of the previous year, with sales down by 16.6%. Given that existing home sales capture a significant chunk of the housing market, this data offers vital insights into the sector’s health.
The root of the slowdown? Inventory, or rather, the lack thereof. Even though inventory showed a 3.7% increase in July, rising from 1.07 million units in June to 1.11 million units, the available housing supply still lags behind the typical levels. The current inventory equates to only 3.3 months of supply at the present sales rate. A closer look reveals a mere 647,000 “active listings” in July.
Lawrence Yun, NAR’s Chief Economist, spotlighted the inventory scarcity as the primary factor hampering sales during the summer season. However, the appetite for homes hasn’t dissipated. This is clear when observing the speed at which competitively priced homes are being snapped up; the average days on market was just 20 days in July. 74% of the homes sold last month had been listed for under a month.
On the brighter side, new home sales surged by 4.4% from June to July, reaching an annualized rate of 714,000 units. This resurgence, marking a 17-month peak, underscores the increasing demand for new properties amid the scarcity of existing ones. But here, too, supply constraints exist. Out of the 437,000 new homes listed at July’s end, only 75,000 were move-in ready. The rest were either under construction or yet to break ground.
The U.S. labor market witnessed a slowdown in July, marked by a decline in job openings to levels unseen in nearly 2.5 years. According to the recent JOLTS report by the Labor Department, the decline isn’t merely due to layoffs; in fact, layoffs remain historically low. Instead, the dip is attributed to a reduction in available vacancies. This aligns with the Conference Board’s findings that consumers’ optimism about the labor market waned in August. Despite the cautious sentiment, the labor market remains tight, with 1.51 job openings per unemployed individual in July, a slight dip from 1.54 in June.
The data shows that the decrease in job openings, which stood at 8.827 million at July’s end, was notably impacted by the professional and business services sector and healthcare and social assistance. However, sectors like information, transportation, warehousing, and utilities observed a rise in unfilled positions. Regionally, the South experienced a noticeable dip in vacancies, while the Northeast and West reported growth.
These trends hint at possibly slower job growth for August. Furthermore, while the labor market has held up despite multiple interest rate hikes since March 2022, there’s an observable decline in worker confidence. This sentiment and external factors like the gas price spike have impacted consumer confidence despite employers’ reluctance to lay off amid the pandemic.
Mortgage rate trends
Mortgage rates have reached their highest levels in 22 years, exerting pressure on an already strained housing market due to soaring prices. The 30-year fixed-rate mortgage now sits at an average rate of 7.23%, as reported by Freddie Mac on August 24, marking the steepest rate since June 2001. This surge in rates, now surpassing 7%, coupled with escalating homebuying costs, has led to a decrease in mortgage applications, indicating that many prospective buyers might be deferring their purchasing decisions.
In 2023, refinance activities have plummeted to levels unseen in nearly 30 years, primarily due to the higher interest rates. As homeowners previously secured mortgages at more favorable rates, the current landscape offers limited benefits for refinancing. Nonetheless, a significant number of refinances taking place involve cashing out home equity or extending loan terms.
On the brighter side, delinquency rates and foreclosure starts remain relatively low, with the overall delinquency rate dropping to 3.37% in Q2 2023.
Predictions suggest a steady rate within the 6% to 7% range for some time. However, some experts, including Lawrence Yun, Chief Economist at the National Association of Realtors, anticipate a drop to about 6% by next spring, influenced by economic factors and the Federal Reserve’s decisions. For the remainder of the year, mortgage originations are expected to remain stagnant. Still, a revival in purchase originations is anticipated in 2024 as the market adjusts and more homes become available.
Commercial real estate update
The commercial real estate sector is experiencing instability. Rising interest rates and waning demand for office spaces are presenting challenges. Further, the Federal Reserve’s move to augment bank capital requirements could lead to more disruptions. Daniel Walsh, CEO of Citymark Capital, emphasizes that while this isn’t reminiscent of the 2008 crisis, the market does face stress. The impending maturity of loans worth approximately $1.5 trillion over the next 18 months is concerning. However, Walsh assures that the banks are likely to adopt a careful approach, selling loans in smaller portions.
In conclusion, understanding the interplay between inflation, employment, housing, and interest rates becomes paramount as we traverse this intricate economic terrain. While challenges persist, it’s vital to interpret these trends with a balanced view. By staying informed, stakeholders can make more strategic decisions, ensuring stability and growth in the face of uncertainty.
Thank you for reading The Full Measure with Kevin Hecht: Economic Recap August 2023. Subscribe to our newsletter to get valuable economic insights, career tips, and more straight to your inbox.
Written by Kevin Hecht. Kevin has been a real estate appraiser since 1987, and currently holds a Certified Residential appraiser license in Missouri. As a McKissock Learning instructor, Kevin specializes in market analysis, USPAP, and real estate economics. In addition to being an appraiser, Kevin is an Adjunct Professor of Economics at Maryville University.