Not much to report this week, as interest rates remain relatively unchanged, as did its corollary, the 10-year Treasury bond. The sustained lower rate of 7%, from 8% just 45 days ago, did bring a tick up in mortgage applications, which increased 7.4% on a seasonally adjusted basis from one week earlier.

For their part, the Federal Reserve meets today and is widely expected to keep their Federal Funds Rate unchanged at 5.25%-5.5%. We will see if the bond market reacts to that, and this week’s CPI / Jobs date (keep reading…).

Jobs Report / Inflation:

The Bureau of Labor Statistics released its November numbers and the results were widely viewed as positive, with a few yellow flags.

Nonfarm payrolls rose by a seasonally adjusted 199,000, slightly better than the 190,000 average estimate and 150,000 in October.
Unemployment rate declined to 3.7%, compared with the forecast for 3.9%.
Average hourly earnings, a key inflation indicator, increased by 0.4% for the month and 4% from a year ago, close to expectations.
Health care was the biggest growth industry, adding 77,000. Other big gainers included government (49,000), manufacturing (28,000), and leisure and hospitality (40,000).
Wage growth remained strong, as did labor participation.

My skeptical eye saw a slightly less rosy report. The jobs number included 47,000 workers returning from strikes, a large one time-increase. Further, government jobs expanded again, this month by 49,000. Last month government jobs expanded by 51,000. In September government jobs rose by 73,000. Will this continue? I am dubious. I bet the presidential candidates are going to jump on that.

However, the good news is that we are actually above the government’s pre-pandemic projections for employment, by 2 million jobs.

Unusually, the payroll processing company ADP, which also puts out jobs numbers, varied greatly from the government’s jobs numbers. The largest discrepancy seems to be in manufacturing and hospitality. Specifically, manufacturing jobs rose by 28,000 according to the BLS but fell by 15,000 according to ADP. For hospitality, The BLS reported a massive gain with this comment: “+40,000 almost entirely in food services and drinking places. Leisure and hospitality had added an average of 51,000 jobs per month over the prior 12 months.” However, ADP reported a loss of 7,000 jobs, saying, “Restaurants and hotels were the biggest job creators during the post-pandemic recovery. But that boost is behind us, and the return to trend in leisure and hospitality suggests the economy as a whole will see more moderate hiring and wage growth in 2024.”

What is going on here??? Using ADP’s numbers the job’s numbers would have been abysmal.

Inflation

Let’s move on the inflation, which came in at 3.1% in November, an increase of .1% MoM. High, but a bit below expectations. Excluding volatile food and energy prices, the core CPI increased 0.3% on the month and 4% from a year ago. A 2.3% decrease in energy prices helped keep inflation lower. Gas fell 6%. Food prices increased 0.2%. In other words, so far inflation seems to be moderating-ish.

Could white-hot inflation reignite? Yes. What are the chances that it does? Roughly 25%, according to Jason Furman (former chair Council of Economic Advisors, you can read his analysis in a twitter thread here).

The good news: So far, Inflation is easing without tremendous rising unemployment. Credit where credit is due, the Fed hasn’t tanked us, yet. Time will tell, I am concerned our extreme government debt / Treasury bond issuance and the Fed Funds rate being held high for so long will begin to take a serious (and rapid all at once) toll on the economy sometime in 2024. But for now, can’t do anything but give props to the Fed.

New Housing / Economic 2024 Market Outlook: Goldman

Investment bank Goldman Sachs believes that home sales will remain low in 2024. The culprit? Interest rates will remain higher for longer, affecting housing affordability. However, prices will continue to rise, but not much in 2024.

Goldman economists now expect the Fed to cut interest rates a month earlier, in Q3 2024. Of note, this is still 6 months later than many other investment banks have predicted. Most all, including Goldman, predict a global slowdown to begin in 2024, lasting for a couple years. However, in a tremendously positive note, they do NOT believe the US will dip into recession, with economic growth remaining positive.

This early-er cutting of interest rates; however, will not translate into sharp declines in mortgage interest rates. In fact, Goldman expects the 10-year Treasury (which mortgage rates track) to remain higher for longer, around 4.5%, into 2027. This would translate to a range of between 7.3% - 6.2% mortgage rates for the next couple years.

My take: Something is going to break if the Fed keeps rates that high for that long, necessitating Fed rate cuts. The strain from the high cost of capital for businesses and consumers alike will be too much. IMO, we are at 6% mortgage rates by the end of 2024 and 5.5% somewhere in the beginning of 2025. 5% is where we will likely bottom out after that.

Although, if you are in the market for a new home, Lennar is offering fixed rates at 4.750% for homes in Nashville today, prices are in the mid $400k range. Check out the offer I received today in the mail.

Hot Housing Markets

Speaking of Nashville, my home market, there are several markets that are poised to take off in 2024 and will buck the above trend of slower appreciation/population growth. Let’s take a quick look.

According to the NAR the markets with the most pend up demand, i.e. waiting for interest rates to decrease so they can uncoil like a tensioned spring are:…

Austin-Round Rock-Georgetown, TX
Dallas-Fort Worth-Arlington, TX
Dayton-Kettering, OH
Durham-Chapel Hill, NC
Harrisburg-Carlisle, PA
Houston-The Woodlands-Sugar Land, TX
Nashville-Davidson–Murfreesboro–Franklin, TN
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD
Portland-South Portland, ME
Washington-Arlington-Alexandria, DC-VA-MD-WV

Why? A slew of reasons:

Stronger job growth than the national level
Faster income growth than the national level
More renters who can afford to buy the median-priced home than the national level
More potential sellers than the national level
A larger decrease in remote workers than at the national level
More affordable listings for first-time buyers than at the national level
Lower violent crime rate than the national level

My Take: Follow the growth. Where population is growing (and has been long-term, not just in the last 3 years) so will your investment. That is where you want to be.

Bottom Line

Housing affordability is at record lows. This year the housing market froze for most prospective homebuyers. And that turkey is still hard as a rock. Anticipation is high for a rebound in 2024, but according to many economists (including those above) it may be another 6+ months before we even begin to see lower interest rates and yet another 6-12 months until relative affordability resumes. But prices aren’t moderating - and nobody I know in the industry is actually calling for lower home prices, just lower rates of increases. The truth is it’s never a perfect time to jump in.

IMO: Once you can afford it, do it. If you are trying to time the “right moment,” well, it’s gonna be a long wait.

Most Interesting Tweet of the Week

Hahaha, this made me spit up my coffee.

That’s it for this week. If you are interested in digging deeper into these ideas or talkin’ real estate investing - which I always love doing - don’t hesitate to reach out. You can message me right here! Send me a DM.

Until next time, stay skeptical.

Herzliche Grüße

-Andreas

* The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.