NPLA Meeting Recap: JBREC Mid-Year Housing Market Update
Recap and Insights provided by Zach Wallin, Senior Director of Legal Operations at GoDocs
At the most recent NPLA meeting, Devyn Bachman, Chief Operating Officer of John Burns Research & Consulting (JBREC), provided NPLA members with a content-packed macro housing market update. She concluded that from a macro perspective, the market is seeing a cooling but still has strong job growth numbers. It has a slightly rising unemployment rate, a pullback in the Consumer Price Index (CPI), a housing market that is performing decently, with the resale market hurting more than the new construction market, and a rental market that is returning much quicker than anyone expected it to.
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Devyn started her presentation by looking back at historical market cycles to see where we can expect to be headed next. She shared a quote by Mark Twain which says, “History doesn’t repeat itself, but it does rhyme.” When we look at the Federal Funds rate overlaid with recessionary periods, we can see that we are in a very similar holding pattern as we were in the Greenspan era of the 1990s. Then, they hiked interest rates quite aggressively in a short period. Devyn indicated that she believes the Fed is trying to replicate that period now. This is further evidenced by what we see today when looking at the number of months between the last rate hike and the first rate cut. We are sitting at twelve months, which is the fourth-longest cycle in history. This all goes to say that soft landings aren’t always quick landings. Instead of ripping the band-aid off and causing a recession, the Fed is attempting to avoid that scenario by keeping rates at their current level for this extended period. Even if we do see rate cuts, we should not expect them to be dramatic cuts.
Macro Economy
We are, however, seeing signs of life in the market. One of these signs of life is the job market. The downward revisions to the recent job growth data imply a slowing labor market. Our job growth has been fueled by immigration. Approximately two-thirds of the job growth has been due to the “Legal status pending immigrants” (people who have applied for resident status but have not been granted it yet). JBREC is forecasting that they will see a pullback in immigration and job growth numbers. So, from an inflationary standpoint, this will end up being a net benefit for the economy.
As far as inflation is concerned, we are currently sitting at the lowest CPI year-over-year growth rate since March 2021. CPI, including all items, is at 3.0%, while Core CPI (which excludes goods with high price volatility, such as food and energy) is at 3.3%. The inflationary drivers included in the CPI are housing, core services (excluding housing), core goods, food, and energy. Housing is currently the largest driver of overall inflation, and the owner’s equivalent of rent is what makes up most of the housing inflation. The owner’s equivalent of rent has been falling and will continue to fall. This should help overall inflation to continue to fall for at least the next six months. On July 9, 2024, Jerome Powell, Chair of the Federal Reserve, said, “Over the past two years, the economy has made considerable progress toward the Federal Reserve’s 2 percent inflation goal, and labor market conditions have cooled while remaining strong. Reflecting these developments, the risks to achieving our employment and inflation goals are coming into better balance.” He later said, “The labor market appears to be fully back in balance.” Christopher Waller, on the Board of Governors for the Federal Reserve, said, “While I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted.” To support these statements, the futures market is implying a rate cut this September.
Macro Housing
In the housing market, we are seeing a rise in both existing and new home inventory. Part of that rise in new construction inventory is due to spec building vs. presale building, but certain markets, such as Florida, have had huge jumps in resale supply. At the same time, we are seeing a pullback of demand in the market. Pending sales, which is usually the leading indicator of resale sales, have fallen to the lowest level in recorded history. There is a lack of demand in the resale market today. Usually, all of this would indicate a reduction in housing prices. But this has not been the case. Housing prices nationwide have risen 5% year over year. The housing markets that have seen prices increase the most are Seattle, Washington; Orange County, California; San Diego, California; and San Jose, California. The only two markets with price reductions are San Antonio, Texas, and Austin, Texas. The markets where you are seeing the most robust growth today are driven by immigration or foreign buyers.
As for home flipping statistics, which account for any transaction where a home was bought and sold within a twelve-month period, home transactions have fallen nationally year over year by 19%. There are only a few markets where transaction growth for home flippers has been growing, and those include San Jose, Chicago, Seattle, San Francisco, and Orange County, California. Every other market has seen a decline in flipping transactions, with Jacksonville, Florida, seeing a 41% decline year over year. Nine percent of flipped homes were sold at a loss in the first quarter of 2024. While this is not too concerning, the statistics do undercount the amount of flipped homes with a loss as the statistics do not account for the money put in for repairs or the profit. In Austin, Texas, 27% of flipped homes were sold at a loss, San Francisco at 23%, San Antonio at 20%, Houston at 20%, and Dallas at 19%.
In the new home market, we are seeing new home sales remaining above seasonal averages. The reason new home sales are still high is because of the incentives (typically rate buydowns) provided by the home builder. Builders have seen their pricing power (price minus incentives) erode. New home prices are up 3% year-over-year.
The rental market is performing better than anyone expected. The single-family residence national rent growth does not boom or bust (not as much volatility) as much year over year compared to the apartment rent index and the build-to-rent index. Experts thought there would be more of a correction in this market due to the number of housing completions that were coming. However, due to the population growth, the market is absorbing it far better than expected. Immigrants are far more likely to be renters than they are to be home buyers, and they have absorbed some of the multifamily demand. This should be a benefit to the for-sale market a few years from now as these renters receive residency and turn into buyers. The other piece that has really helped is how much more expensive it is to own a home today vs. renting. In Dallas, on average, it costs $2,000 more per month to purchase an entry-level home than it would if you rented. In Orange County, California, it costs $5,251 more per month to purchase an entry-level home vs. renting. When you look at this severe difference, you will see people choosing to rent instead of buy.
On a positive note, in the United States housing market, when looking at aggregate for-sale for-rent inventory, we are 2.1M units undersupplied. That includes 700K for sale and 1.35M for rent.
Q&A
Q: How much does the Presidential Election environment weigh into your interest rate analysis, and has it shifted within the last ten days?
A: We have found that there is no direct correlation between an election year and the impact it has on housing. But there is an impact on the consumer. And that impact is that they often pause. Because of the contentious nature of this election cycle, we have seen an even greater pause than normal. Resale and pending sales numbers are evidence of this. A lot of people are just waiting to see what happens.
Q: One candidate said he did not want to see any changes or surprises between now and election day. Do you put credence in that kind of statement in your analysis?
A: You can’t because that is so “magic 8 ball.” We would rather trust the futures market, which tends to be more accurate than major black swan events. It would just be a guess one way or another.
Q: How does inventory compare pre-COVID to now? Have we caught up?
A: It is really market specific. It is not pre-COVID, but resale listings have increased 36% year-over-year on average across top markets. Orlando is up 92%, and New York is the only market down at negative 6%.
Devyn Bachman provided a fantastic macro presentation for NPLA members on the US economy and the housing market. It was packed full of information on the job market, CPI, home inventory, house flipping statistics, the new home market, and the rental market. All of the information provided will help members with their business decisions in the upcoming months as they anticipate a potential slight cut in interest rates.
Author Bio:
GoDocs is an innovative leader in automated loan document generation, transforming the commercial lending process. With a fully cloud-based platform, GoDocs provides a flexible digital solution that makes commercial loans more cost-effective to document and faster to close, all while maintaining compliance in all 50 states. GoDocs is a Corporate Member of the NPLA.