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Rates drop amidst poor 2024 Q2 jobs data

Rates drop amidst poor 2024 Q2 jobs data
by Brad Cartier, posted in Newsletter

Paul Wiseman of AP News reports on the jobs data released last week showing that the U.S. economy hit a significant snag in July as job growth slowed drastically, adding just 114,000 jobs, while the unemployment rate climbed to 4.3%, the highest since October 2021. This decline, driven by raised interest rates, sent shockwaves through global financial markets, with the Dow dropping 610 points and the S&P 500 falling 1.8%.

Hannah Jones of Realtor.com reports on the figures, highlighting that the 114,000 jobs added were significantly below the 12-month average of 215,000. Employment increased in health care, construction, transportation, and warehousing, suggesting the Fed’s contractionary policy is taking effect. During the last rate meeting, Fed Chair Jerome Powell reaffirmed the goal of 2% inflation, noting recent progress and indicating that future rate decisions will depend on ongoing economic data, with a potential rate cut in September still uncertain.

Scott Horsley of NPR reports that this weak data that sparked the stock sell-off is stoking fears of a broader recession. Specifically, job gains for the past months were lower than expected, and the unemployment rate has risen, signaling a possible recession. Wage gains also cooled last month, with average wages in July up 3.6% from a year ago, compared to 3.9% for the twelve months ending in June.

Dismal jobs report

Source: NPR (August 2024)

Lawrence Yun, chief economist at the National Association of Realtors (NAR), reacts to the data: “The Fed was late moving away from the restrictive monetary policy stance when early signs of a softening economy were visible. Soft manufacturing survey data falls in construction activity and damaging financing costs for small businesses clearly hint at a cooling economy and further cooling in inflation. The Fed may make a deeper cut of 50 basis points in September.”

The Mortgage Banker’s Association (MBA) chief economist Mike Fratantoni also commented on the data: 

“Job growth was weak across the board, with small gains or losses across the economy. Not only did the headline unemployment rate increase, but the broader U-6 measure showed an even bigger increase, highlighting that more people are struggling in this job market. The weakness in this report including the slower rate of wage growth and the higher unemployment rate certainly support such a cut, but the next inflation report needs to confirm that price growth is also slowing.”

Mortgage rates drop

Chen Zhao of Redfin reports that mortgage rates dropped due to weak job data. A much weaker-than-expected job market report decreased mortgage rates to 6.4%, the lowest since April 2023. The report indicated that the Fed may need to expedite plans for reducing rates as the likelihood of a recession has been elevated. According to Zhao, it is probable that the Fed should have reduced rates in their meeting earlier this week and may now need to cut by 50 basis points in their September meeting.

Jiayi Xu of Realtor.com reports similar data showing that the Freddie Mac 30-year mortgage rate dropped to 6.73%, the lowest since February, and 10-year Treasury yields fell below 4.2%. Investors expect at least a quarter-point rate cut by September, and the Fed’s statement emphasized that upcoming inflation and employment data will guide its decision.

Rates dropping

Source: Realtor.com (August 2024)

Xu elaborates on what this means for the housing market:

“The housing market has been cooling in recent weeks, with stable prices, increasing listings, and longer time on market. However, as home prices hover at or near record highs, affordability continues to be the top challenge. While the potential rate cut in September will be a good start to bring the rate down, subsequent drops in mortgage rates  may not be as significant as many anticipated because the market is already pricing in rate cuts and such expectation is reflected by recent rate drops. In fact, according to a recent analysis from Realtor.com, 86% of outstanding mortgage debt has a sub-6% rate and more than three-quarters have a rate of 5% or lower—a threshold not anticipated to be reached this year.”

Catherine Koh of the National Association of Homebuilders (NAHB) reports on the decreased rates, highlighting that the 15-year fixed-rate mortgage decreased to 6.14%, and the 10-year Treasury rate declined to 4.28%. The NAHB forecast predicts 30-year mortgage rates to drop to around 6.66% by the end of 2024 and just under 6% by the end of 2025. The forecast also anticipates a 25 basis point cut in the federal funds rate by the December Federal Reserve meeting and six more rate cuts in 2025 as inflation approaches the Fed’s policy target.

Real estate investors

A New Western survey reported on by Globe St found that 91% of investors expect 2024 to be a growth year for the single-family real estate market. Despite current challenges, 80% plan to flip one to five homes, indicating proactive strategies to seize market opportunities. The report highlights an influx of 68,000 new investors in 2023, likely driving the optimistic outlook for 2024.

In addition, the report found a significant decrease in institutional investment activity over the past few years.

Rise in small time investors

Source: New Western (August 2024)

Home flipping and the BRRRR method, previously sidelined due to high interest rates and cooling home prices, are set for a comeback, according to Dave Meyer, a housing market expert reported on by Bloomberg. Meyer anticipates that expected Fed rate cuts will lower borrowing costs and boost home prices, improving post-rehab appraisals. Additionally, Meyer notes that renovated homes have appreciated more than those needing repairs, further supporting the resurgence of these strategies.

Julie Taylor of Realtor.com reports that all-cash offers from investors are declining, signaling less competition for homebuyers. In Q1 2024, only 64% of investors purchased homes with cash, down from 69.7% in Q4 2021, marking the lowest level since 2008. This shift benefits regular homebuyers who now face less competition from cash-wielding investors. The change is driven by the rise of small, independent investors, who made up 62.6% of investor purchases in early 2024, the highest share since 2001.

The New York Post reports on additional Realtor.com data that despite high interest rates sidelining many average homebuyers, real estate investors have seized 14.8% of home purchases in Q1 2024, the highest since 2001. Small investors with 10 or fewer homes led this surge, making up 62.6% of investor purchases, the highest on record. While medium and large investor activity decreased, small investors increased their acquisitions by 6.4% compared to early 2023. This trend marks a shift from the pandemic period when larger investors dominated the market. The top five cities for increased investor activity were as follows: 

  • Savannah, GA (up 8.3%)
  • Youngstown-Warren-Boardman, OH-PA (up 7.9%)
  • Peoria, IL (up 7.2%)
  • Springfield, MA (up 6.4%)
  • Montgomery, AL (up 6.3%).
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