Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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What’s up with the home ownership rate?  More precisely, why isn’t it up?  After sinking in the aftermath of the “Great Recession,” the rate has  rebounded from the  low point of  62.9 percent four years ago, to 65.1 percent in the fourth quarter of last year, according to a Census Department report. 

But it’s been stuck at pretty much that level since the fourth quarter of 2018, despite favorable interest rates and solid employment growth.

Part of the answer may be found in a  recent survey by ING International, which found that more than 80 percent of Americans who are currently renting a residence don’t view saving money for a down payment as a priority.  Raising a family, repaying student debt and travel are either more important than homeownership or seem more  achievable to them, at least in the near term.  Twenty-five percent of the respondents said they don’t think they will ever be able to buy a home.

Minority Gains

Affordability is an obvious concern for many and with good reason.  Although wages have been increasing, home prices have been increasing faster.  The median sales price has more than doubled since 2000 while median wages have remained flat for most of the past two decades.  Recent wage gains, averaging around 3 percent, continue to lag annual appreciation rates, hovering around 4 percent this year.

The Census Report does contain some good news.  The ownership rate reached a seven-year high for Blacks (44 percent) and a two-year high for Hispanics (48 .1 percent) in the fourth quarter of last year.  But minority ownership continues to lag far behind the 73.7 percent rate for white Americans.

Recent housing reports reflect some areas of strength but reflect a blurry outlook overall, clouded by the persistent lack of inventory that limits options for would-be buyers and keeps upward pressure on prices, creating affordability challenges, especially at the entry level, where the dearth of listings is acute.

 A ‘Neutral” Year

Existing home sales in December topped the November pace by 3.6 percent, but year-over-year sales were essentially flat, reflecting “a neutral year for housing,” according to Lawrence Yun, chief economist  for the National Association of Realtors (NAR).  “Home sellers are positioned well,” he said in a recent report, “but prospective buyers aren’t as fortunate.’  First-time buyer have been most affected by the inventory shortage, which Yun described as “the worst on record.”  The 1.45 million homes available for sale in November was the lowest reported for that month since the NAR began tabulating this data in 1982.

Pending sales don’t indicate any  near-term improvement.  That NAR index fell by almost 5 percent in December – the largest one-month decline in a decade, leaving the index at year-end about where it stood 12 months before. 

New home sales, which had been showing signs of strength all year, reversed course in December, falling 0.4 percent below the November level,  which was revised downward.  Although the annualized December rate of 694,000 units was 23 percent higher year-over-year, the year-end stumble was cause for concern, industry analysts say.

“A Wakeup Call”

Sales of new homes have now declined month-over-month for three consecutive months, noted Zillow economist Matthew Speakman, who thinks those numbers “could serve as a bit of a wakeup call for builders, who have grown increasingly confident in the demand for the homes they have been putting up with growing vigor since the summer.”

Employment- a primary driver of homebuyer demand, remains solid, however.  Employers added 225,000 jobs in January, beating analysts’ more modest projections for the month, and average hourly earnings increased by 3 percent.  Home price gains also accelerated, rising at an annual rate of   4 percent in December compared with 3 percent in January. CoreLogic is predicting that the appreciation rate will exceed  5 percent this year. 

Demand for homes  is increasing – especially for millennials, Frank Nothaft, CoreLogic’s chief economist, observed.  But more than 74 percent of recent buyers in that age group reported that they had to make “significant sacrifices” to purchase their homes.  “This could become an even bigger factor as home prices reach new heights[this year],” he warned.

Builders are feeling optimistic about the outlook, nonetheless.  Steady employment gains spurred them to begin construction on new homes at an annualized pace of 1.61 million units in December – an increase of 17 percent compared with November and more than 40 percent above the year-ago level.  Building permits declined slightly month over month, but were 6 percent higher year-over year, bringing some hope that lagging inventories will be boosted by new construction.

But increasing the supply of homes won’t help much, Robert Frick chief economist for Navy Federal Credit Union cautioned, unless buyers can afford the homes builders construct.  “With housing starts surging, we should see plenty more new homes on the market this year,” he told Housing Wire.  “But if they’re not more affordable, sales will be stunted and many more newly-formed families will be shut out of homeownership.”