Weekend Talking Points - 'Work It'

Authored By:
Scott Bradley Brixen
John Smith
January 1, 2023
5 min read

Mortgage rates have moved back below 7%, but the BLS job data for February (out 3/8) will determine if the positive momentum continues, or reverses.

Just a winter pause for prices? CoreLogic’s latest Home Purchase Insights showed that national prices dropped 0.1% month-over-month in January 2024, the same as in December 2023. On a year-over-year basis, however, prices were still up 5.8%. [CoreLogic]

Or a sign of deceleration? CoreLogic projects that national prices will rise just 2.6% over the next 12 months (January 2024 → January 2025). [CoreLogic] It’s worth noting, however, that the data provider has consistently underestimated price growth during 2022 and 2023.

Inventory continues to recover. National active listings (this excludes listings under contract) rose nearly 15% YoY in February 2024, with new listings up 11% YoY. There was a particularly large (21% YoY) increase in active listings priced between $200-$350K. 56% of the active listings were in the South region, up from 47% pre-pandemic. [realtor.com]

What the Fed Said
The next FOMC (Federal Open Markets Committee) meeting is on March 20. Nobody expects the Fed to do anything dramatic. In fact, the market now only expects the Fed to begin cutting short-term interest rates on June 12.

Fed Chair Jerome Powell gave his semiannual report to Congress and said absolutely nothing new. To paraphrase: We’ve made a lot of progress, but we still need to see more evidence that inflation is heading sustainably towards 2%.

Atlanta Fed President Raphael Bostic added his voice to the “no need to rush” camp, saying that two, non-consecutive rate cuts were likely only in the second half, and suggesting that there was no need to move sooner unless the unemployment rate rose markedly.

How do we make the jobs numbers work?
Lately, there has been such a big difference between the monthly ADP (private company, actual payroll data) and BLS (government agency, many imputed inputs) job figures that the ADP data no longer even gives a directional (up or down) read on the BLS release.

As a reminder, the January BLS report showed the US economy added 353,000 jobs, nearly double consensus expectations of 180,000! (ADP reported 111,000 net job additions for that same month.) The consensus for February is for 200K net job gains.

The JOLTs data was little changed. The Job Openings & Labour Turnover survey for January 2024 had job openings at 8.9 million, basically the same as last month but down 15% from January 2023.

ADP job growth for February was a bit light. The Street was looking for 150,000 job additions in February, a bit higher than the 140,000 that ADP reported. According to ADP, the annual pay increase for job stayers dropped further (to +5.1% in Feb 2024 from +5.2% in Jan 2024), while the pay increase for job changers rose (to +7.6% in Feb 2024 from +7.2% in Jan 2024.) Those numbers a year ago? +7.2% for stayers and +14.3% for changers.

Consumer sentiment improves. Fannie Mae’s Home Purchase Sentiment Index (HPSI) for Feb 2024 rose two points to 72.8, its highest level since Mar 2022. 65% of respondents said it was a “Good Time to Sell” (up from 60% in Jan 2024), but only 19% said it was a “Good Time to Buy” (up from 17%). [Fannie Mae]

So much home equity. Over the course of 2023, total home equity (for owners with a mortgage) rose 8.6% or $1.3 TRILLION. If that 8.6% seems high to you (relative to 5–6% home price growth), remember that principal payments (loan amortization) add to home equity as well. [CoreLogic]

So few homes underwater. With home prices rising, the number of homes in negative equity (value of the home lower than the mortgage principal) decreased by 15%. At the end of 2023, only 1.8% of mortgaged properties (or 1.3% of ALL properties) were in negative equity. [CoreLogic]

A Deeper Look at Inventory

Nationwide active inventory levels have been climbing. Realtor.com’s February 2024 figure of 664,716 was up nearly 15% year-over-year. As the graph below clearly shows, 2024 inventory levels (the brown line) are higher than they were in 2021–2023, but are still down 30–40% relative to pre-pandemic.

I wanted to take a closer look at inventory, however, so I drilled down to the state level. In the table below, I calculated the state-by-state decline in active inventory between December 2019 and February 2024, and grouped the states into 10% increments.

Active inventory levels in Florida (-4%), Arizona (-6%), and Texas (-8%) are not far below where they were pre-pandemic. Tennessee and Utah aren’t far behind. It is no coincidence that these states include some of the cities seeing the most pricing pressure. They’re also some of the states where the most new homes are being built.

Where have the inventory declines been most pronounced? In New England, with 70%+ declines in Connecticut and Vermont, for example.

I then looked at the home price growth over the same time period. If we bring this all together (thanks very much ChatGPT), the scatterplot below tracks the decline in active listings (y-axis) versus the growth in median listing prices (x-axis) between December 2019 (pre-pandemic) and February 2024 (latest data).

Logically, the states with the highest risk of price declines (or slower price growth) would be in the top right: a big increase in prices over the last 4 years, with an only modest decline in active inventory: AZ, UT, TN, ID, NE.

Similarly, the states where home prices would seem to be most supported would be in the bottom left: a more modest increase in prices over the last 4 years, with a very large decrease in active inventory: MD, IL, MI, IN.

While states like VT, NH, and ME have seen huge (68–80%) increases in prices over the last 4 years, their inventory levels have fallen by just as much (-65% to -74%).

Finally, there’s Texas and Florida. While inventory levels are almost back to pre-pandemic levels, their statewide increases in median listing prices in TX & FL have been well below the national average. In these states, you’ve got to go even deeper and look at individual cities. The inventory/price balance in previously highly-flying metros like Austin and El Paso looks very different.

Where do Listings Come From?

Back in December 2019, the Top 5 states for active inventory (as a % of nationwide inventory) were:

  • Florida: 12.70%
  • Texas: 8.88%
  • California: 5.60%
  • New York: 5.27%
  • Illinois: 4.46%
  • Total: 36.9%

Makes sense, right? These are the states with the largest populations. (Pennsylvania actually had the 5th-largest population in 2019, with Illinois just behind it.)

By February 2024, the Top 5 largely remained the same, but their total share had grown massively, and CA & NY lost share to FL, TX and GA. Think about this for a second: nearly 50% of the nation’s active inventory comes from 5 states. More than a third comes from the Top 3.

  • Florida: 19.00%
  • Texas: 12.80%
  • California: 5.48%
  • New York: 4.23%
  • Georgia: 4.11%
  • Total: 45.62%

Note: In terms of 2023 population, California remains #1 (39 million), Texas #2 (30 million), and Florida #3 (23 million).

I also looked at the Top 5 for new listings (as a % of nationwide new listings) in February 2024:

  • Florida: 14.56%
  • Texas: 10.45%
  • California: 7.34%
  • Georgia: 4.13%
  • North Carolina: 3.86%
  • Total: 40.34%

So just keep in mind, whenever you’re talking about trends in nationwide active inventory or nationwide new listings, you’re really talking about the momentum in five states!

Mortgage Market

A combination of factors helped push average 30-year mortgage rates back below 7% this week. First, the jobs data (JOLTs, ADP) held few surprises. Second, Powell’s testimony to Congress was a non-event. Of course, this could all reverse today (3/8/2024) if the February BLS jobs report delivers more than 200K job additions.

On the other hand, if the February BLS report shows fewer than 200K job additions and the improbably strong +353,000 jobs figure for January gets revised down, I think we’d get 10-year treasury yields moving towards 4% and 30-yr mortgage rates approaching 6.8%. Wouldn’t that be nice!?

Current odds of a Fed rate cut:

  • March 20: 3% (unchanged from last week)
  • May 1: 22% (from 24% last week)
  • Jun 12: 69% (from 65% last week)
They Said It

“It would be appropriate to start reducing the Fed funds rate at some point this year, but only when there is greater confidence that inflation is sustainably moving towards the 2% target. Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get back to 2%.” — Fed Chairman Jerome Powell in his semiannual Monetary Policy Report to Congress.

“Despite affordability issues, many younger Americans are finding a path to homeownership, with millennials accounting for more than half of home purchase applications between 2020 and 2023. Meanwhile, baby boomers who already have significant financial reserves can pay for homes entirely in cash, which further increases challenges for other buyers.” — CoreLogic February Home Price Insights report

“Job gains remain solid. Pay gains are trending lower but are still above inflation. In short, the labor market is dynamic, but doesn’t tip the scales in terms of a Fed rate decision this year.” — Nela Richardson, ADP’s Chief Economist

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