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The inflation picture in the U.S. has improved quite significantly, so much so that the Fed has appeared to have pivoted quickly from a pause to being done with rate increases, to what is currently expected rate cuts this year. They see economic weakness, consumers who are stretched and a shift in consumption patterns, and business spending on equipment beginning to wane. The Fed moving the fed funds rate lower will depend on whether things weaken and how quickly, but the market is now expecting 2-3 cuts this year, some saying as early as March.
The jobs number Friday (216k added) was higher than the low expectations set (160k), with unemployment holding steady at 3.7%. The story now seems ot be slower growth and weakening jobs market. As Morningstar put it, “under the surface, the trend still points toward a gradual slowdown, suggesting an economic soft landing remains very much in play,” and indicating 2024 Fed rate cuts remain on the table. Their chief U.S. economist Preston Caldwell: “Markets may be focusing too much on the solid job gains in December and not enough on the downward revisions in October and November.” Caldwell said he expects more downward revisions next month.
JPMorgan’s Michael Cembalest and team look at over 20 leading indicators each week and while coincident indicators are looking good at the moment, they see the leading indicators signaling economic decline, not a large decline, but “a run of the mill decline in U.S. economic activity which is consistent with a recession,” Cembalest said, including a decline in corporate profits this year.
What does this all mean for housing in 2024?
We were saying late last year we see the potential for the tale of two cities this year, particularly in the first 2-3 quarters, where low unemployment, decent wage gains, and lower mortgage rates mean the housing market picks up in the spring for higher earning households who have been waiting to find a new home, while affordability lags for LMI buyers — the softening jobs market, a hangover of higher debt service burdens, and the higher cost of living means they continue struggle until rates fall significantly further or deflation vs disinflation.
While mortgage rates ticked up this week, they are down from near 8% to near 6-and-a-half — likely enough to get many buyers on the sidelines to move soon. That’s good for volume, and it may both improve homebuilder confidence and free up some stock of existing homes. But again, not enough in the short term to fill the real need in many markets around the country — the lack of inventory means affordability remains a problems for first time homebuyers.
The difficulties facing the commercial real estate market continue as we begin 2024, but the Fed’s posture change has turned sentiment, leading experts to believe transactions will pick up sooner rather than later. Lower rates have helped close the financing gaps that prevented deals, but differences in opinion as to the underlying value of these assets will continue to be a hurdle, as the Commercial Observer reported last week.
Also of note: George Sheetz v. County of El Dorado, to be heard by the Supreme Court on Tuesday, challenges the use of permit “impact” fees for single family homes that increase development costs and which significantly affect the provision of affordable housing. A ruling in favor of Mr. Sheetz could have wide implications, including on local jurisdiction low-income housing mandates for multifamily developers.