In this week’s Real Estate News in Brief… Fed Chief Jerome Powell identifies risks to the economy and suggests what appears to be a less aggressive rate hike strategy.
We begin with economic news from this past week, and comments from Fed Chief Powell that are easing concerns about continued rate hikes. He said on Wednesday, “Interest rates are still below historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth.”
The two words getting the most attention are “just below.” Economists feel they indicate the Fed may not keep raising rates through 2019, although they still anticipate a rate hike next month. Powell’s opinion on the need for rate hikes was much more aggressive in early October. In that discussion, he said, “We may go past neutral, but we’re a long way from neutral at this point, probably.”
Fed’s Financial Stability Report
This more dovish approach to rate hikes is part of the Fed’s Financial Stability Report. In that report, Powell also offered some warnings, saying that trade tensions and geopolitical volatility could lead to a steep drop in the stock market. That would put pressure on companies with weak balance sheets and high debt.
Meanwhile, ahead of that report, Reuters reported that bankers, executives, and investors have been urging Federal Reserve official, behind closed doors, to pay more attention to high corporate debt. Some of those individuals told Reuters they were frustrated the Fed hasn’t placed enough importance on this risk factor. (1)
Economists say, in a worst-case scenario, those businesses could default and destabilize their lenders. They don’t believe it would cause a financial crisis, but could make a downturn more painful.
Home Price Slowdown
The S&P Case Shiller home price report provided another sign of a struggling housing market. It shows the slowest rate of price appreciation in the last two years. The 20-city index was flat in September as compared to August, and was up 5.1% on a seasonally adjusted annual basis. That’s the lowest number since late 2016, according to MarketWatch. (2)
Annual price gains are the strongest in the West, with Las Vegas in the lead. Prices there took a nosedive during the housing crisis so they’ve had a long recovery but are now on fire. Case Schiller says, they’ve gained 13.5% this year. They are still about 20% below market value. Annual price gains were also strong for San Francisco and Seattle, but they have now stalled in San Francisco, and dropped 1.3% in Seattle for the latest monthly report.
The housing market slowdown is also represented by the latest report on new home sales from the Commerce Department. It shows a steep 8.9% drop in October to a two-and-a-half year low. The median new home price also fell 3.1% to $309,700.
The National Association of Realtors reported a big drop in new home sales last month. The association says, they were down 2.6% in October. That’s the lowest since June of 2014, according to MarketWatch.
Economy Races Along
Despite all the less than stellar news about the housing market, economic growth continued at a rapid pace in the third quarter. The government confirmed an earlier report on the GDP, showing a 3.5% pace of growth. Economists are predicting a slower rate of growth in the fourth quarter, of about 2.7%.
Consumers are launching into the holiday season with cash in hand. The government says that consumer spending rose .6% last month. That’s slightly higher than a .5% increases in wages. Inflation remained in check at 2%.
Consumers were feeling a little less confident about the economy, though. The consumer confidence index fell for the first time in five months. It dropped from an 18-year-high of 137.9 to 135.7. (3)
Long-Term Mortgage Rates
Long-term mortgage rates didn’t budge this last week. The average 30-year fixed-rate mortgage was 4.81%.
In other news making headlines…
Mortgage Loan Limits Rising
The Federal Housing Finance Agency raised the limits on conforming loans for 2019 due to higher home prices. Fannie Mae and Freddie Mac announced that the limit will rise to $484,350 in most parts of the country. That’s a 6.9% increase over the current $453,100. The limit for most high-cost areas is also rising. Fannie and Freddie are raising that amount from $679,650 to $726,525 next year.
The National Association of Realtors was pleased with the decision. NAR President, John Smaby, commented, “The move helps keep the American dream within reach for countless families working with Fannie Mae and Freddie Mac.”
Keep in mind that home prices on a national average are still up 5% since last year. I predicted last January that interest rates would rise to 5% by year end, in an effort to slow down the housing boom. That’s exactly what happened. The Fed raised rates in an effort to eliminate bubbles from forming, so a slow down in home price gains is a good thing. It keeps housing affordable.
A Federal Reserve analysis on spending, income, debt, net worth, and demographics claims to show that millennials are not much different than their parents when it comes to material possessions. Generation Y has been described as minimalists who prefer experiences over possessions. But the Fed says their spending habits are similar to previous generations, they just haven’t had as much money to spend.
The report authors say, “We find little evidence that millennial households have tastes and preferences for earlier generations.” The report says that millennials spend less on housing and food, but more on education.
(1) Reuters Article
(2) Slowing Appreciation: MarketWatch
(3) Economic Growth: MarketWatch