Market Updates for October 2022

We seem to be stuck in a predictable pattern, pricing and job report data fail to show the expected declines in inflation, the fed reacts with an aggressive rate hike, and recession fears (which impact rental and housing markets) climb. Rinse and repeat. In this months report, we will discuss both reports, recent action by the Fed, and share a few expert predictions about where home values and interest rates will be next year. But first, the headlines.

Headlines

September Jobs Report - The September Jobs report showed the U.S. economy added 263,000 jobs and the unemployment rate fell back to 3.5%. This data can be interpreted in two ways. The pessimist sees a stubbornly robust labor market in which labor force participation (one of the many factors the Fed is worried could keep inflation high) remained flat and the unemployment rate fell. The optimist sees a potential “soft landing” with moderating wage gains and two straight months of slowly declining job gains. Both assessments are accurate, but the Fed is widely expected to keep the throttle down on interest rate hikes until we see significant sings of dissipating inflation. 

Weekly Jobless Claims - Weekly jobless claim numbers came in at 228,000 for the week ending October 8th. This represents an increase of 9,000 filings, which while positive in the context of what the Fed is trying to accomplish with cooling the labor market, it demonstrates the resilience of the job market. Continuing claims also climbed modestly by 3,000 to 1.368 million. Also, while we saw large jumps in new filings in California, Florida, New York and Texas, Utah saw only a modest 11% jump with only 145 new filings over the previous week.

September CPI Report - September’s CPI report was, well, disappointing. In spite of the Fed’s aggressive action, consumer prices rose 8.2% year over year. Core CPI, or an inflation measure minus food and energy, rose 6.6% year over year (against Bloomberg’s economist survey meidan expectations of 6.5%) and actually climbed from last month’s reading of 6.3%. While headline inflation is coming down from the 9.1% we saw in June, the pace of the declines has been slowing rather than picking up steam. This all but assures the Fed will maintain course.

Another Massive Rate Hike - Following the last round of disappointing job and CPI data, the Fed took the unprecedented step of a third consecutive 75 basis point rate hike in September. The increase, which they are hoping will result in cooling inflation, marks the most aggressive moves on inflation we’ve seen in almost 40 years. Unfortunately, with October’s data not showing much improvement, we appear on track for another, equally massive, rate hike when the Fed meets next in early November.

What will the real estate landscape look like in 2023?

It goes without saying that if we knew for certain what was going to happen, we wouldn’t be managing homes. Such expert powers of prognostication would be better used deciphering powerball numbers or the options markets. With that said, it’s never a bad idea to collect opinions from relevant “experts” (unfortunately, even they don’t always agree) to peek into the future at what the landscape might look like next year. Below are the most relevant questions we’d like answers to:

Will the job market stay hot?

The general consensus appears to be “not likely”, which makes sense considering the Fed’s current mission to slow down the economy. According to Bankrates 3rd Quarter Economic Indicator Poll, employers are predicted to add 97,000 jobs per month over the next year with an unemployment rate at 4.4%. For context, the past year saw an average of 487,000 jobs added per month and the new prediction is roughly 100K jobs per month lower than last quarters estimates. Bank of America sees it differently and predicts the U.S. economy will shed half a million jobs and unemployment will reach 5.5% in 2023.

Where will the federal funds rate be in 2023?

Simply put, probably higher. The federal funds rate currently stands at 3.0% to 3.25% (for more on what the Federal funds rate is and how it impacts consumer lending, see here) following last months rate hike. By the end of 2023, Bankrate’s Q3 poll consensus showed a target range of 4.5% - 4.75%, or levels we haven’t seen since 2007. Of course, this isn’t the only opinion as Fannie Mae suggested the federal funds rate will top out at 3.50% - 3.75% and Morningstar predicts a full reversal back to 1.75% by the end of 2023. As you can see, perspectives vary widely.

Will the U.S. economy enter a recession? 

Maybe, but the odds are definitely increasing with each new rate hike. Bankrate’s survey showed that nearly two thirds of economists polled expected the economy to contract in the next 12-18 months. Fannie Mae believes the United States will enter a recession in early 2023 as inflation continues to be stubbornly persistent. Others like the IMF, see a slowdown, but still expect comparatively robust economic growth. 

What home prices fall next year?

Home prices are certainly market specific and some overvalued areas could see steep declines, but overall, most experts (including CoreLogic, Fannie Mae, Freddie Mac, and Zillow) predict a modest increase for home prices rather than a decline. How is this possible if many economists are predicting a recession? Here are three graphs that perfectly articulate the differences in todays real estate market versus 2008’s. To summarize, the supply of available homes if far below 2007-2010 levels, lending standards are not artificially low, and foreclosure activity is nearly non-existent by comparison. 

Will rent prices climb or fall in 2023?

Despite a slight decline in August, rent prices are expected to continue to rise, albeit at a much more reasonable pace than we enjoyed in 2022. The dramatic rise of mortgage interest rates (currently near 7%) has made home ownership less of an option for many potential borrowers. This is expected to help rental demand remain strong, with Moodys analysis and the Federal Reserve Bank of Dallas predicting rent growth in the 5-8% range.

Utah Real Estate Market

There is a new reality in real estate. Mortgage rates are at 20 year highs and pointing upward, over three quarters of U.S. metros are seeing declining home values, and the summertime bidding wars for homes in Utah are a thing of the past. Surprisingly in September, the median sold price of single family homes in Salt Lake, Utah and Davis Counties increased slightly while sales fell 8% and available inventory climbed 6%. That’s not bad considering whats happening in other markets across the country. However, this trend is expected to continue, especially in the short term, until the Fed believes inflation is trending in the right direction and changes course.

* all graphs/data are for single-family homes in Salt Lake, Utah, and Davis Counties. 

Industry Updates

Rental Managers Must Remain Cautious - Unfortunately, the job of managing rental properties either professionally or as a DIY landlord can be dangerous. A disturbing story out of Arizona, where a property manager, constable and neighboring tenant were all killed during an eviction, highlights just how unsafe the job can be. For those of you who manage some of your rentals yourselves, please remember to exercise extreme caution in difficult situations, work towards deescalation at all times, and don’t hesitate to contact police at the first sign of danger.

UAA Becomes Rental Housing Association of Utah - The rebranding of our beloved Utah trade association is designed to be more representative of the clients they service. With single family rentals becoming increasingly popular, it made sense for them to emphasize that they work on behalf of all landlords not just apartment owners. Along with a new name, the association plans to add new government affairs staff to help continue to advocate for Utah landlords. We have always been impressed with the diligent work they do and encourage all landlords to become members.

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