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Will we see a Fed pivot in 2024

Will we see a Fed pivot in 2024
by Brad Cartier, posted in Newsletter

According to Logan Mohtashami of Housing Wire, the inflation picture has charted a course for a potential rate drop as early as 2024. June CPI data shows that 90% of the inflation growth came from shelters, which is moderating due to decelerating housing prices and rents. So, if you look at the data stripped of shelter costs, we see much more normalized inflation trends.

Fed pivot

Source: Housing Wire (August 2023)

“The Fed has whispered about what can happen if the inflation growth rate falls more into 2024 and it’s a positive take. Some have thought the Fed would need to keep the fed funds rate elevated for years until they see 2% core PCE data. However, I believe there could be another path for 2024.”

Howard Schneider of Yahoo! News reports on inflation data, noting that although the data is moderating, we have yet to see an increase in the unemployment rate. This is a key indicator for the Fed to see that the economy is cooling, but the unemployment rate has yet to increase. One Fed official reports that it’s too early to gain signals on the Fed rate decision in September; however, the cooling effect is promising, given the 9.1% inflation peak we saw last year.

That said, job growth is slowing, according to Steve Matthews and Catarina Saraiva from Bloomberg.  Two Fed officials are reported as saying that slower employment gains suggest the labor market is coming into balance, and that the central bank may soon need to pivot from rate increases.

Lauren Solberg of Morningstar comments on the improving inflation picture, noting that “[N]early all investors expect the Fed to hold the federal-funds rate at its current levels. From there, markets are still pricing in a chance of one more rate hike, but with a probability of only about 25%.”

Home values

Lily Katz and Chen Zhao of Redfin report on housing prices, highlighting data that shows that the total value of US homes hit a record $46.8 trillion in June, beating the previous all-time high of $46.6 trillion set in 2022. 

Rising home values

Source: Redfin (August 2023)

Redfin Economics Research Lead Chen Zhao notes:

“The dominance of the 30-year fixed rate mortgage in America is propping up home values…Tons of homeowners scored an incredible deal during the pandemic: a 3% mortgage rate for the remainder of their 30-year loan. Now they’re staying put because moving would mean taking on a rate that’s twice as high. This means buyers who are in the market now are duking it out for a very small pool of homes, preventing home values from plunging.”

Danielle Hale of continues the housing price conversation, presenting more moderated figures that show the total value of owner-occupied real estate at $41.2 trillion, down from $41.8 trillion last year. 

Jeff Tucker of Zillow reports similar data, showing that the average home value increased 0.9% month-over-month in July. The average home value now sits at an all-time high of $349,679, 1.4% higher year-over-year. “After June’s 0.8% year-over-year growth, this marks the first acceleration in annual growth since April 2022, ending a 16-month streak of decelerating annual price gains.”

What’s more, Dana Anderson of Redfin highlights their own data showing that 1 in 10 US homes are valued at over $1 million. This is a direct result of lower supply, which puts upward pressure on home values.

Home prices

Source: Redfin (August 2023)

“The supply shortage is making many listings feel hot…In most of the country, expensive properties that are in good condition and priced fairly are attracting buyers and in some cases bidding wars, mostly because for-sale signs are few and far between right now.” 

China’s housing troubles

Nidhi Pandurangi of Business Insider reports on one of China’s top real estate developers, Country Garden, which recently missed interest payments on bonds. This company is the largest private sector real estate company by sales volume. 

Pandurangi notes that “a debt crisis at Country Garden will have a far-reaching impact on China’s housing market sentiment and could significantly weaken buyer confidence on solvent private developers.”

Alexandra Stevenson of the New York Times reports on Country Garden, highlighting that the company’s value has been halved since the beginning of 2023 and that company bonds were trading at 10 cents on the dollar. 

Chinese real estate

Source: Bloomberg (August 2023)

“Investors are alarmed because Country Garden had largely benefited from measures to bolster the real estate market last year that included more financial support. For some time, the Chinese authorities designated it as a model developer. This made lending to the company more palatable, when many other Chinese developers were in trouble.”

Li Gu and Summer Zhen of Reuters reported on China’s housing problems last week, noting that the sector accounts for a quarter of the economy and has recently been marred by bad debts and the default of major players such as Country Garden and Evergrande. The primary reason for the sector’s woes has been high leverage and a state-backed crackdown on real estate speculation. 

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