By: Jeff Anderson
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||2.975%|
Source: Wall St. Journal
The Federal Reserve doesn’t hold its monthly meetings during the month of August. It’s vacation time. However, the Kansas City Fed hosts an economic symposium in beautiful Jackson Hole, Wyoming at the end of August (the 25th – 27th). That served up an opportunity for a few Fed officials to comment that rates are going to have to keep rising and investors shouldn’t get too comfortable with the idea that they’ll start cutting rates next year. Those comments were enough to put a damper on equities (and fixed income) Friday, sending the major indices down 1 to 2%. The recent recovery in equity markets has been on the belief that rate hikes wouldn’t be as aggressive as predicted in the earlier part of the year.
The Fed wants investors to know one thing.: Inflation must come down, and rate hikes will continue until that happens, even if it leads to a softening economy.
Where interest rates have had a major effect is in real estate. Mortgage originations have declined precipitously, and refinancings (which is where the bulk of activity has been) has ground to a halt. Sales have plummeted and a recent survey has found that people are favoring renting over buying. That is understandable given that the dramatic rise in mortgage rates is making home even less affordable.
To make matters worse, housing affordability has plummeted. The US composite is around 100, down from nearly 180 at the end of 2020. That’s the composite (see chart). When you break it out by region, the West is below 70. To put things in context, the median priced existing single-family home was $357,000 at the end of 2021. In 2020, it was $300,200. At the end of June this year, it was $423,000. Staggering gains that ran right into a rate rise tsunami that seems to have paralyzed buyers and sellers alike. In our beautiful neck of the woods, the median price is a whopping $642,200! (1)
Yet, there is still relatively low inventory of homes for sale, and household formation is still providing natural demand for housing. We haven’t really built enough homes since the housing crisis in 2008. These factors are vastly different from the 2008 housing crisis. Too many homes, and loose lending created havoc that spilled over to the global economy. Those issues don’t exist today, but house prices may have trouble increasing amidst the backdrop of current mortgage rates. Either prices must come down, or rates must come down.
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