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 so you can make well-informed decisions to support your business and career success. Uncover this month’s economic trends and insights—written from an appraiser’s standpoint—in the following economic recap for June 2023.
Economic recap June 2023
June 2023 was packed with economic updates that real estate appraisers, agents, and other professionals need to digest. The Federal Open Market Committee held its meeting, where projections for real gross domestic product growth, unemployment rate, and inflation were discussed. Additionally, consumer spending forecasts revealed modest growth predictions. Amid all this, the Federal Reserve maintains the federal funds rate, pausing its rate hike cycle for now. Let’s delve deeper into the details and implications of these economic trends.
The Consumer Price Index (CPI) inflation, as of May 2023, declined significantly to 4.0% year over year, marking the lowest since March 2021. This deceleration offers some respite to Americans grappling with a two-year inflation run-up. Despite this slowdown, “core” CPI inflation, excluding volatile sectors like food and energy, remains high at 5.3%, down from 6.0% a year ago.
The Fed has forecasted that the Core Personal Consumption Expenditures measure of inflation will not reach its target of 2% until 2025. This projection raises a critical question— will the Fed reconsider its 2% target? Chairman Powell, however, reiterated the Fed’s strong commitment to this goal in his press conference.
In June 2023, the Federal Reserve held rates steady, marking a pause in its rate hike cycle. The Fed’s benchmark federal funds rate currently rests between 1.5% and 1.75%. However, despite this pause, projections from the Fed suggest two more rate hikes on the horizon, potentially leading to a peak at 5.6% in 2023.
Meanwhile, mortgage rates remain high but show signs of decelerating. The daily average 30-year fixed mortgage rate stood at 6.9% on June 21, down from 7.14% a month earlier. Freddie Mac reports the 30-year fixed-rate mortgage averaged 6.69% for the week ending June 15.
This downward trend in mortgage rates follows the Fed’s decision to pause its benchmark interest rate hikes and the recent drop in inflation. Economic analysts anticipate a further decrease in mortgage rates later in the year and into the next, given the slowing economic growth and the tightening cycle of monetary policy reaching its peak.
Despite a limited housing supply, U.S. mortgage applications have recently experienced a slight rebound. This is demonstrated by a 2% increase in purchase applications during the week ending June 16, marking two consecutive weeks of growth. However, when compared to the same time last year, purchase applications are down by 32%.
According to the Mortgage Bankers Association (MBA), the total mortgage activity for the week ending June 9 increased by 7.2% from the previous week. Furthermore, the average 30-year fixed-rate mortgage (FRM) fell five basis points to 6.77%. Over the past month, the FRM has increased by 20 basis points.
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May 2023 saw a significant surge in U.S. home building. Housing starts, a measure of new home construction, increased by 21.7% from April 2023 and 5.7% from May 2022, reaching 1.63 million (Seasonally Adjusted). This increase was led by multifamily housing (up by 27.1%) and single-family starts (up by 18.5%), reflecting the ongoing low inventory in the existing home market.
The marked improvement in housing starts and permits in May 2023 raises the second quarter’s gross domestic product forecast from a 1.5% increase to 1.8%. Nonetheless, the Federal Reserve’s recent forward guidance for more rate hikes may temper this upward trend in future data.
The improving housing market, buoyed by rising builders’ sentiment, signifies that the market’s lowest point may be behind us, despite the elevated risk of a recession and the end of near-zero interest rates.
Existing home sales
Existing home sales in the U.S. in May 2023 marginally increased by 0.2% to a pace of 4.30 million. Despite this slight rise, sales were down by 14.7% from May 2022. Additionally, the median existing-home price fell by 3.1% year-over-year to $396,100, marking the largest price reduction since December 2011.
While higher mortgage rates remain a challenge, the year-over-year price decrease may help stimulate future sales. However, the “mortgage lock-in” phenomenon—where homeowners are reluctant to sell after buying or refinancing at lower rates before 2022—could limit future sales and inventories. Despite a tightening economy and higher inflation, the Federal Reserve has been slow to cut rates, potentially acting as a further deterrent for home sales later in 2023.
Nonfarm payroll employment across the U.S. experienced growth in May 2023, with 39 states and the District of Columbia witnessing a rise in employment numbers. The Bureau of Labor Statistics data indicates that the nonfarm payroll employment nationwide saw an increase of 339,000 in May, up from April’s gain of 294,000 jobs.
Looking at year-over-year statistics up to May 2023, the U.S. job market added over 4.1 million jobs, demonstrating a significant recovery from the pandemic-induced recession. All states, except Rhode Island, showed job growth compared to the previous year.
The construction sector, encompassing residential and non-residential construction, saw increased employment in 23 states, while 21 states reported job losses. Twenty-five thousand new construction jobs were added in May compared to the previous month, with the highest number of jobs added in California (+6,500 jobs). However, the sector also reported job losses, with Indiana losing 2,500 jobs. On a year-over-year basis, the construction sector saw an overall increase of 192,000 jobs in the U.S., a 2.5% rise from the previous year’s level.
Commercial real estate
In contrast to the positive employment trends, the commercial real estate sector is experiencing signs of distress. Recent reports indicate that the value of troubled assets reached $64 billion, and there is potential for another $155 billion. The volume of distressed assets rose by 10% in the first quarter of the year, as per a report from MSCI Real Assets. This rise in commercial real estate distress signals possible challenges ahead.
Even amidst the increasing distress, investors continue to monitor commercial real estate closely, attempting to anticipate any future crisis that could arise following a decade of low-cost borrowing.
In conclusion, while the U.S. job market has shown impressive resilience and recovery from the pandemic-induced downturn, certain sectors, such as commercial real estate, show signs of potential distress. This highlights the uneven nature of the recovery across different sectors. Monitoring these trends and adapting strategies accordingly will be crucial to mitigating potential impacts and fostering continued economic growth. The future trajectory of these sectors will hinge on a multitude of factors, including ongoing economic policy decisions and market forces.
Thank you for reading The Full Measure with Kevin Hecht: Economic Recap June 2023. As the economic landscape continues to evolve, we encourage you to stay informed and follow this blog series to get valuable economic insights for appraisers designed to help you make well-informed decisions in your business and career.
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.