2022 Mid-Year Economic Forecast
As you’ve likely heard, we are seeing significant changes in our current housing market. The frenzied buying environment of the previous fall and early spring has shifted to a more balanced environment. This has created a lot of concern for many Austinites, but it’s important to keep in mind that we remain in a seller’s market with approximately 2 months of inventory. A balanced market is 6 months of inventory, and anything less is considered a seller’s market while anything over 6 months is considered a buyer’s market.
I had the privilege of attending a market update with Mark Sprague of Independence Title and wanted to share a few highlights.
- Last week the Fed increased rates by another 75 basis points
- Increased interest rates tend to slow the market for ~90 days following the increase
- We continue to have low inventory – less than 2 months
- Home appreciation has slowed
- Inflation reaches 40-year high in June
- There is no better time to buy in Austin, TX!
Please see the full report below:
2022 Mid-Year Economic Forecast
Mark Sprague – Independence Title
Is the long-awaited slowdown in the pace of economic activity nationally here, or is it?
Jobs nationally and locally continue to be created at a robust pace. (Job openings are twice the number of people out of work nationally and locally.) Consumers are spending. Businesses are investing. The housing market has slowed, but mainly because of a lack of supply rather than a drop in demand. It is hard to see any significant slowing in growth or the rate of inflation. Unfortunately, many economists, analysts, and the media again underestimate the strength and resilience of the U.S. and Texas economies. The reason for that appears to be that they focus on the increase in nominal rates and ignore what is happening to real rates. As long as real interest rates remain negative, the economy will not slow by any appreciable amount, and inflation will remain stubbornly high.
Mortgage rates – The U.S. has been experiencing all-time low mortgage rates for almost two years. But, now, all that is changing.
Low mortgage rates are usually a sign of a struggling economy. Rates plummeted in 2020 when COVID began. People lost jobs, businesses closed, many companies were not sure of what the future held, and the Federal Reserve lowered the Federal funds rate to 0% and .25%. to help the economy, they stayed at those mortgage rates throughout 2020 and 2021.
As the economy began to heal, mortgage rates started rising at the beginning of this year, 2022. Yes, the economy is still recovering from the damage caused by the pandemic. However, we’ve successfully added jobs, more people are joining the workforce, and inflation has increased.
These trends can be good for an economy, but potential homebuyers are upset they can no longer get a rate around 3% borrowing rate. (Think about it: most consumers under 40 have not seen a housing market where rates jump 2+ points in 5 months.) Mortgage rates have already gone up this year, and according to the Fed, they will continue to rise in anticipation of slowing inflation. So the possibility of rates ending between 6% and 7% this year is real.
There are plenty of other factors to consider, though. For example, cost of labor and materials continues to go up 4% to 5% monthly, making the house or apartment you look at today more expensive tomorrow!) However, suppose there are more waves of COVID variants globally. In that case, the Russian-Ukraine conflict continues to impact the global economy negatively, China’s economic growth continues to sputter, the U.S. national economy could slow, and the rise in rates might stall. (I wouldn’t hold my breath…..the house, and the mortgage will still be more expensive.)
The Fed plans to raise the fund’s rate from 0% to what it believes is a neutral rate of 2.5% to 3% or so by the end of this year and perhaps even move it slightly above that neutral level into a restrictive mode in 2023, which means that lending rates will be closer to 6% by the end of 2022 and 7% 2023. This has affected the stock market investors and caused economists to ratchet their growth expectations downwards. But the Fed told us what it planned to do in December of last year (2021), and the stock market has been sliding steadily ever since. So wouldn’t it seem reasonable to see clear evidence of slower economic activity by now?
We are coming off a tumultuous two years of strong growth in the U.S. housing market. And now, we are facing a tumultuous year of mortgage market normalization. So it’s true to say that turmoil and mortgage outlooks are strange bedfellows, but it’s true. Interest rates are rising, affordability is challenging, and geopolitical conflicts impact global supply markets.
Lastly, it would be best if you didn’t wait to buy based solely on interest rates. They will continue to increase, but they are still at historically low rates. If you want to buy, waiting will cost you! Every time rates go up, you lose 12% buying power. (On a $100,000 home, you lost $12,000 waiting + appreciation). Although a higher interest rate will increase your monthly payment, the change may not be as dramatic as thought. Higher rates have not stopped sales historically. (Historically, it paused the market for 60 to 90 days and picked up on the other side.)
So, all the above is happening, right? It’s all about perspective.
The Slowing Housing market – Many of you point to the national and local housing market as evidence that slower growth has arrived. But, unfortunately, existing home sales seemed to slow at the exact same time that the Fed began to sound tough and the stock market began its swoon. As a result, most of us (including economists and analysts) conclude that the housing market is slowing down in response to the combo of sharp increases in home prices and rising mortgage rates. It makes perfect sense. Or does it?
Austin Market facts. Here is an update with year over year statics from May 2021 to May 2022:
- Median sales price: up 19%
- Days on market: up 5.4 days
- New Listings: up 24%
- Sold Listings: down 37%
Active listings in Austin is 2761, up 52% (time to worry, right! Not!! Still less than a month’s inventory)
Average List Price is $550,000.
Inventory is now .8 months which is well below a balanced market of 6. months.
The Austin market is shifting ever so slightly. The market has been highly in favor of sellers and continues to be. So some balancing out evens the playing field a little bit. But we still have less than a month’s inventory. After a long, harsh, drought of homes for sale, we are finally seeing a tad more inventory coming on the market. So it appears the crunch is easing a bit. Values are still increasing, however, at a more reasonable pace.
The most important factor is that there is only a .8-month supply of homes available for sale. Analysts, economists, and real estate agents would like to see about a 6.0-month supply, the market to be close to equilibrium needs to be almost five times as much. Austin has not been back to balance for the last 5+ years. There are simply not enough homes from which to choose. Some of the homes that are available will be too expensive, too small, in poor condition, or not close enough to a school. It isn’t easy to find something that suits your needs. Home sales would be far more robust than they are if there were more homes on the market. So have home sales suffered because of reduced demand? Or are there simply not enough homes on the market? We think it is primarily the latter.
What about values? Are Austin and Texas an overvalued market? The media keeps quoting all these studies saying Austin is one of the nation’s most overvalued markets. Presently, most of these studies and news stories are looking at a primary driver of concern, price. Understandable, particularly when the Texas metros have had over 150+% value growth in the last 10+ years, and the coasts and most of the nation have had 40+ to 50+% value growth at the same time. Shades of the last recession, the recession before, and so on.
But a flawed logic in economics where supply and demand are paramount for finding ‘true value.’ The less product and the higher the demand, the values escalate. The values we see in many markets are because of the lack of housing starts nationally over the last 12+ years. There is a shortage of products, so values escalate with greater demand.
What has driven the demand in the past? Speculation? Relaxation of financing underwriting to purchase? Better marketing of product (hype)? All these would drive values up.
But, all these and more are fallible; they are not based on ‘true demand.’ Many of the above parameters promote the ‘economic bubble’ theory. i.e., the bubble can burst/lose its air. The ability to lose value (deflate) quickly has to be there; if the current buyer backs out, fortunately, there seems to be another waiting.
That’s where what is happening in Austin and DFW are different. Our demand is driven by job creation, lack of inventory, GDP, historical housing permits, etc.
Also, ask yourself the question, in these overvalued markets do you see the presence of ‘negative equity’? We are building about a million fewer homes annually in 2004, 2005, and 2006 than we are now. Presently there are more buyers than sellers in these markets. Negative equity is hard to find nationally and locally because of greater demand than product.
The rest of the major metros in the U.S. home starts are off -50+% to -80+%, the last 12 years. DFW and Austin are the only two metros nationally with more home starts, higher real estate values, higher employment, and higher GDP than 12 years ago. We are creating more jobs, than we have shelter; the other metros are not.
What does this mean? The rest of the nation is not creating more jobs than they have historically, slowing the number of housing permits in their metro. What does this mean for DFW and Austin? It is going to take a while to catch up.
Have values dropped? The average sales price is still above list price – 106+% of list. Peak exuberance was last April at 109+%.
Slowing labor market? – Despite concerns about a downturn, this doesn’t look like a labor market about to tip into recession. Job openings are still near record highs, and there are still 1.9 job openings per unemployed worker available in the U.S. Similarly, despite stories of layoffs and hiring freezes in industries like tech, layoffs actually hit a record low in April 2022. Austin is feeling the effect of escalating interest rates, elevated property taxes, the return to the work place, renewed travel, and soaring gas and food prices. The good news is the Austin metro area’s unemployment rate fell to 2.5% in May 2022, the lowest level since the start of the pandemic.
Overall, the labor market fundamentals remain strong with near record-high openings and record-low layoffs, particularly in the Texas region. Apart from housing, there is little evidence of the economy slowing down. On the contrary, retail sales through April have been rising rapidly in nominal terms and at a moderate rate after adjustment for inflation. Consumers say they are worried about what will happen, but thus far, they have not changed their consumption behavior.
Businesses continue to spend. Nonresidential investment has been climbing at a 6.0% pace, which should continue. With the labor market as tight as it is, firms are having a hard time finding enough bodies to hire. And when they can find them, they have to offer a much higher salary than they did a year ago. When labor is in such short supply and so expensive, there is an incentive for firms to spend money on technology to increase output without significantly increasing headcount. For that reason, investment spending seems unlikely to slow any time soon. All the above show that inflation is here to stay for a while.
So, if businesses are hiring and spending money on investment, and consumers are buying houses and spending money on other goods and services, what is slowing? Not much.
Is there a concern about the economy? A healthy national economy has an annual GDP of 3.5% to 5%. We currently expect second quarter GDP growth of 2.0%. That may seem slow, but with the economy at full employment then a 2.0% growth rate, the amount of supply chain issues globally, Europe in recession, and China having strong indications of a recession due to factories and cities shut down. The U.S. had a – 1.6 growth in the first quarter. We are happy with 2% growth nationally and look to GDP improving.
If home sales were being hit by reduced demand, why is it that the average home sells in less than 20 days? Demand continues to outstrip inventory, so the need for housing remains solid. Some potential buyers — of houses priced at or below $350,000 — have had to change their parameters, but they still want to buy. So they have to change with the market.
So, where is the housing market? It continues to be robust with little change in appreciation over the next 3+ to 5+ years locally and regionally. Rates will continue to creep up. Rents will continue to increase from 7% to 28% annually, pushing more renters to buy. And still not enough inventory for rent or sale. Waiting to buy will cost you. These are not the words of an optimist but someone who has watched housing / financial markets for nearly 50 years. If you are interested in owning a house, there is no better time to buy!