Welcome to the latest installment of The Full Measure with Kevin Hecht. Uncover current economic trends and insights—written from an appraiser’s standpoint—in this mid-year analysis for 2023.
As we hit the mid-year mark of 2023, it’s time to assess the real estate industry’s performance so far. It has been an eventful year, with various economic factors to evaluate as we head into the latter half. The forthcoming Federal Open Market Committee (FOMC) meeting, prospective interest rate hikes, robust employment figures, and slowing inflation all hint towards economic stability. However, high mortgage rates and limited affordable inventory keep exerting pressure on potential homebuyers. Unless there are improvements in affordability and inventory, the market dynamics will likely stay consistent.
Key economic updates: Midyear 2023
Inflation and its impact on the real estate sector
The inflation rate has been trending downward recently, with June 2023 witnessing the smallest annual increase since March 2021. The Consumer Price Index (CPI) rose by 0.2% in June, representing the fourth instance in seven months when the monthly growth in CPI fell below the Federal Reserve’s annualized 2.2% target. This marked its slowest annual growth rate of 4.8% since October 2021. If this trend persists, we may see the annual rate of change dip to a low of 1.9%, a level last seen in February 2021.
Despite the broader deceleration, housing inflation remains a primary contributor to overall inflation, responsible for over 70% of the headline inflation increase. However, the Federal Reserve’s ability to tackle rising housing costs is constrained by the scarcity of affordable supply and escalating development costs.
Home sales overview
June witnessed a decline in existing home sales to the lowest level since January, as reported by the National Association of Realtors (NAR). Limited inventory coupled with fluctuating mortgage rates drove a 3.3% decrease to a seasonally adjusted annual rate of 4.16 million. Nevertheless, the solid demand and low resale inventory have pushed existing home prices to an annual high, resulting in a surge in new home sales.
First-time buyers represented 27% of June’s sales, down from 28% in May and 30% in June 2022. The housing inventory level remained constant at 1.08 million units, marking a decrease of 1.25 million from the previous year. This limited inventory, equivalent to a 3.1-month supply, underscores the ongoing demand for more home construction.
The median sales price for all existing homes was $410,200 in June, the second-highest ever recorded, albeit a 0.9% decline from a year ago. Sales varied across the four major regions, with the South and West experiencing decreases, the Northeast witnessing an increase, and the Midwest staying flat. All regions reported a double-digit year-on-year decline in sales.
New single-family home construction declined in June due to elevated construction costs and rising mortgage rates. Overall housing starts decreased by 8% to a seasonally adjusted annual rate of 1.43 million units. Single-family starts fell 7% to a 935,000 seasonally adjusted annual rate, while multifamily construction decreased by 9.9%.
Despite the decline in single-family starts, there are now 688,000 single-family homes under construction, which is 17.0% lower than a year ago. Meanwhile, there are currently 994,000 apartments under construction, the highest levels since May 1973, and a 15.7% increase compared to a year ago.
The current housing market continues to be molded by limited inventory and high demand. As more inventory becomes available, it could help decrease shelter inflation, a major driver for the Consumer Price Index (CPI).
What’s the best way to survive a slow market as an appraiser? Get tips and insights in this article.
Current employment landscape
June observed a boost in nonfarm payroll employment in 38 states and the District of Columbia, with a nationwide increase of 209,000 jobs. Texas led with an additional 31,100 jobs, followed by New York and Washington. However, 12 states collectively lost 46,900 jobs.
Over the past year, the labor market has recovered 3.8 million jobs, signifying a substantial rebound from the recession induced by the COVID-19 pandemic. Except for Vermont and Rhode Island, all states added jobs compared to a year ago. The construction sector also experienced growth, with 33 states reporting an increase in June compared to May.
The unemployment rate dropped to 3.6% in June, with the number of unemployed persons falling by 140,000. The labor force participation rate remained steady at 62.6%, and the rate for individuals aged between 25 and 54 exceeded pre-pandemic levels at 83.5%.
Employment in government, healthcare, social assistance, and construction continued to trend upward in June. The construction sector added 23,000 jobs, with residential construction contributing 10,800 jobs. The unemployment rate for construction workers decreased to 3.6%.
Even with the positive employment trends, the labor market presents a complex picture for policymakers. Although households are in a favorable economic position, high and increasing mortgage rates present significant affordability challenges for homebuyers. The Federal Reserve will likely implement additional rate hikes in the coming months to curb inflation, which could pose further challenges for the housing market.
Interest rates and their impact on the housing market
Rising mortgage rates and the rebound of home price gains have dampened housing demand. In the second quarter of 2023, there was a noticeable decline in the number of adults planning to buy a home within the year, dropping from 18% to 15%. Specifically, first-time buyers have been affected by these soaring mortgage rates and property prices, reducing their market share from 71% to 61% between the first two quarters.
However, the silver lining is that Freddie Mac’s 30-year fixed-rate mortgage slightly dipped to 6.78% during the week ending July 20, 2023, providing momentary relief to prospective homeowners. But, with inflation still slightly above the 2% target, the Federal Reserve is expected to increase interest rates, which could uphold these high mortgage rates.
Mortgage rates have been floating in the 6-7% range for the last 10 months. Despite a subtle softening of nationwide home prices, the high borrowing costs continue to deter potential homeowners. This situation has triggered a ‘lock-in’ effect, where current homeowners defer selling their properties due to their existing mortgage rates. As a result, housing inventory has lagged behind last year’s levels for the past month, prompting buyers toward newly constructed homes.
According to Freddie Mac, the 30-year fixed-rate mortgage settled at 6.7% in June, largely influenced by the Federal Reserve’s decision to delay the hike in the Fed Funds Rate. This led to a 7.1% increase in purchase applications and a modest 2.8% rise in refinance applications during June. At the same time, the delinquency rate for loans overdue by 30 days or more dipped to 3.1% in May, nearing a historical low. Despite foreclosure starts witnessing a minor rise in May, they remain a significant 41% below the levels seen in 2019.
Commercial real estate overview
The Q2 2023 commercial real estate market saw a slowdown in leasing activity across all sectors due to lingering economic uncertainties, although lending activity showed a positive trend. The multifamily sector witnessed a rise in vacancy rates due to overproduction in construction, but it remains robust due to favorable demographics and a robust job market. The office sector is struggling with a record-high vacancy rate of 13.1% due to the rise of hybrid work arrangements. The industrial sector maintains steady rent growth, albeit slower than its pandemic highs. The retail sector is stronger than pre-pandemic levels with a stable vacancy rate. The hotel sector has seen increased demand, occupancy, and room rates. Despite some challenges, the commercial real estate market remains resilient, with sectors like multifamily and retail demonstrating relative strength.
In conclusion, as we continue to navigate through these uncertain times, the real estate market needs to remain adaptable and resilient. The rest of 2023 will be a critical period, not only for real estate but also for the wider economy. The interplay of economic factors such as inflation, interest rates, employment rates, and government policies will continue to shape the industry’s trajectory. We must keep a keen eye on these developments as we continue our march into the latter half of 2023.
Stay tuned for future installments of The Full Measure with Kevin Hecht. As the economic landscape continues to evolve, we encourage you to stay informed and follow this monthly 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.