The economic and real estate landscapes are changing just as rapidly as the weather with big news regarding both in just the past couple of weeks. In this update, we will highlight big change in the labor market, discuss the Fed’s outlook on interest rates, and explore the groundbreaking verdict challenging real estate commission structures and its impact on buyers, sellers, and industry professionals. As always, we’ll start with the headlines.
Headlines
October Jobs Report - In October, U.S. nonfarm payrolls increased by 150,000, falling short of the expected rise of 170,000 and marking a significant decline from the previous month's gain of 297,000. The unemployment rate also rose to 3.9%, the highest level since January 2022. The report is the first clear indication of a slowing labor market, and almost immediately, led to lower expectations of further Federal Reserve rate hikes. Despite strong consumer spending, weakness in the labor market combined with concerns about rising credit card balances and reduced savings could finally be the tipping point the Fed has been so anxious to see.
Weekly Jobless Claims - In the week ending November 4, initial jobless claims in the US dropped by 3,000 to 217,000. Consensus expectations were 218,000 claims so the experts were pretty much right on. The data, released by the US Department of Labor, revealed a 1.2% seasonally adjusted insured unemployment rate and a 4-week moving average of 212,250, indicating a fair level of stability in the job market. Additionally, the report highlighted a rise of 22,000 in insured unemployment during the week ending October 28. While these figures only reflect slight fluctuations in the newly unemployed, when taken along with the shocker of a jobs report will be watched closely as we hope to discover valuable insights into the ongoing economic challenges and the nation's recovery efforts.
Consumer Price Index - In the past two months, the released reports in August and September, both revealed concerning trends in inflation. In August, consumer prices rose by 0.6% from the previous month, and year-over-year, they were up by 3.7%, with Core CPI climbing 0.3% monthly and 4.3% higher than the prior year. Similarly, in September, prices increased by 0.4% from the previous month, remaining at 3.7% higher year-over-year, and Core CPI rose by 0.3% monthly and was 4.1% higher than last year. These reports underscore the persistence of high inflation, as both were significantly above the Federal Reserve's 2% target. Unfortunately, the upcoming Consumer Price Index (CPI) Report for October 2023, won’t be released until next week (November 14), leaving markets to guess whether inflation will remain persistent or if we will see similar declines to what we saw in Octobers’s Jobs Report
Fed Meeting - On November 1, the Federal Reserve decided to keep the key federal funds rate unchanged in the range of 5.25%-5.5% for the second consecutive meeting after 11 rate hikes. The decision was made in the context of a growing economy and high inflation. The Fed upgraded its assessment of the economy (even before the release of October’s stunning Jobs Report), and Fed Chair Jerome Powell stressed the need to reduce inflation to 2%. Assuming the worst is truly behind us and we continue to see weakness in the labor market, some experts are even predicting a potential rate cut around June 2024.
Landmark Verdict Shakes Real Estate Industry: National Association of Realtors Found Liable for Conspiring to Keep Commissions High
In a historic ruling, a Missouri court found the National Association of Realtors (NAR) and several major brokerages, including Homeservices of America and Keller Williams Realty, liable for rigging real estate commissions, leading to inflated costs for buyers and sellers. The jury determined that the NAR and brokerages utilized the rules of multiple-listings services (MLS), where agents view homes for sale, to inflate commissions, leading to a verdict that could fundamentally reshape the real estate industry. The $1.8 billion oin damages awarded to the plaintiffs, sellers of over 260,000 homes in Missouri, Illinois, and Kansas between 2015 and 2022, could climb as high as $5.3 billion by the time the case is resolved, challenging the traditional commission structure.
Impact of the Verdict:
The decision could have profound implications for how homes are bought and sold. Currently, sellers indirectly pay for both their agents and the buyer's agents, which some argue leads to inflated costs. The blame has been laid on the NAR, which enforces the "cooperative-compensation rule," requiring sellers to offer commissions to buyer's agents through multiple-listings services. While the NAR maintains that commissions are negotiable, plaintiffs argued that sellers are often compelled to offer the standard 2.5% to 3% to attract buyers' agents.
Consumer advocates see this verdict as a significant win for transparency. If buyers and sellers start paying their agents separately, it could encourage negotiation and lead to more competitive fees. The potential savings for consumers could amount to $20 billion to $30 billion annually if commissions fell to between 3% and 4% instead of the typical 5% to 6%. However, buyers might have to pay agents directly out of pocket, presenting challenges for some.
The real estate industry, including agents and brokerages, might face a significant shift, affecting unproven or buyer-focused agents. If fewer buyers engage agents or negotiate fees down, agent earnings could decline. The potential changes could also lead to a re-evaluation of rules and practices, including allowing buyers to roll agents' commissions into their home loans.
Unintended Consequences and Perspectives:
The verdict has sparked debates about whether this change will truly be transformative or if the status quo will persist. While sellers might not be obliged to offer commissions to buyer's agents, they might continue to do so to ensure deals proceed smoothly. However, some believe that in a competitive market, sellers may choose to forgo these commissions, leading to a shift in industry practices.
The decision could spell financial trouble for the NAR, HomeServices of America, and Keller Williams, the brokerages found guilty. Legal and financial challenges are likely to persist, with the possibility of bankruptcy and additional lawsuits. The Justice Department is also considering an investigation into the NAR's practices.
This verdict comes amid ongoing legal challenges for the NAR. The organization faces the prospect of financial distress as it contends with potential bankruptcies due to the damages awarded. Moreover, the industry is now grappling with an onslaught of copycat lawsuits, including ones against major brokerages like Compass and Redfin, indicating a wave of legal battles ahead. The real estate industry as a whole is facing an existential threat, as indicated by stock price drops for companies like Zillow and Opendoor. The Justice Department is also investigating the NAR's business practices, adding to the industry's challenges.
While the NAR and other defendants have vowed to appeal and seek damage reduction, the aftermath of this verdict remains uncertain, with potential legal battles and rule changes ahead. Regardless, the impact of this trial on buyer and seller awareness of commission negotiability and industry practices is already evident.
Utah Real Estate Market
In October, the Utah real estate market experienced a series of fluctuations. The monthly change in median sold prices revealed a notable decrease, down by 2.68%, indicating short-term volatility. However, on a year-over-year basis, there was a modest increase of 0.87%, showcasing limited long-term growth. Sold counts, on the other hand, saw a substantial uptick, climbing 5.49% from the previous month, although they were down by 0.16% compared to the same period last year. Additionally, the monthly change in listings increased as well, up by 0.88%, yet the year-over-year comparison showed a significant decrease of 14.43%. These statistics depict a market in a state of fluctuation as prices and transactions remain mostly stagnant amid the current high-interest rate environment.
Median Sold Price* | Sold Count* | Average # of Listings* |
October: $570,000 November: $550,000 December: $550,000 January: $536,500 February: $550,000 March: $555,628 April: $567,750 May: $585,000 June: $590,000 July: $590,000 August: $586,000 September: $590,850 October: $575,000 | October: 1,211 November: 1,111 December: 1,163 January: 835 February: 1,113 March: 1,454 April: 1,308 May: 1,518 July: 1,372 August: 1,451 September: 1,130 October: 1,192 | October: 6,037 November: 5,754 December: 5,034 January: 4,143 February: 3,662 March: 3,333 April: 3,350 May: 3,480 July: 5,522 August: 4,801 September: 5,121 October: 5,166 |
Monthly Change: Down 2.68% | Monthly Change: Up 5.49% Year Over Year: Down 0.16% | Monthly Change: Up 0.88% Year Over Year: Down 14.43% |
* all graphs/data are for single-family homes in Salt Lake, Utah, and Davis Counties.
Rent Report
The Utah rental market is still struggling to adapt to limited demand across key cities. The rental market in Orem, UT, remained stable compared to the previous month, with a 0.1% increase, while experiencing a 2.3% decrease year-over-year. Salt Lake City saw a 1.5% decrease in median rent from the previous month and a 5.4% decline year-over-year. In Murray, there was a 1.1% decrease in median rent from the previous month and a 1.6% decline year-over-year. Murray's rents are 3.8% higher than the metro-wide median. All in all, seasonal fluctuations in demand are colliding with overall rent growth weakness, making this a challenging time to fill vacancies.
Utah | Month Over Month | Year Over Year |
Murray North Salt Lake Orem Salt Lake City Sandy South Jordan West Jordan | -1.1% 1.4% 0.1% -1.5% 0.2% -0.3% 0.1% | -1.6% -0.3% -2.3% -5.4% -1.7% -1.0% -2.4% |
*Rental data provided by apartment list.
Industry Updates
White House Announces Executive Order on Artificial Intelligence - On October 30, 2023, President Biden took a significant step by signing an executive order aimed at intensifying the regulation of artificial intelligence (AI) applications across diverse sectors in the United States. Although the order does not result in immediate policy changes, it instructs federal agencies to develop comprehensive guidelines and frameworks. Within the realm of housing, the order has far-reaching implications, focusing on key areas such as ensuring AI advances equity and civil rights, safeguarding Americans' data privacy, addressing potential harms to workers, and fostering innovation and competition in the AI landscape. Specifically, the order mandates the U.S. Department of Housing and Urban Development and the Consumer Financial Protection Bureau (CFPB) to combat discriminatory practices facilitated by AI tools in housing-related decision-making processes. These agencies are directed to issue guidance within 180 days to prevent violations of federal law, particularly concerning resident screening systems and housing advertisements. Additionally, the order encourages the Federal Housing Finance Agency and the CFPB to employ their authorities to ensure regulated entities use AI tools appropriately, evaluating underwriting models for bias, and automating collateral-valuation processes to minimize biases. Notably, the National Apartment Association (NAA) welcomes the initiative, particularly the call for bipartisan data privacy legislation, which could establish a national standard and reduce compliance costs for multi-state housing providers. The NAA emphasizes the importance of industry representation and stands prepared to assist its members in navigating any new compliance responsibilities resulting from the finalized federal guidance.
The Rise of Built-to-Rent Single-Family Homes - Built-to-rent single-family housing has emerged as one of the fastest-growing segments in the U.S. housing market, driven by shifting lifestyle needs and changing demographics. Millennials, Gen Zers, and Baby Boomers are increasingly turning to single-family rentals due to high home prices and mortgage interest rates, making homeownership challenging for many. These renters value the home-like feel and finishes provided by single-family residences, along with the additional storage space, garages, and amenities such as community spaces and dog parks. The demand for single-family rentals is further boosted by rising interest rates, which push prospective buyers into the rental market, allowing families to live in higher-priced neighborhoods with better schools. Regions with lower land costs, particularly Sunbelt states like Phoenix, Dallas, Southeast Florida, and Charlotte, have seen significant growth in built-to-rent housing. The Midwest, too, has experienced a rise in this sector. The trend is expected to continue due to the growing demand for spacious homes, hybrid work-from-home policies, and the shortage of housing supply. Investors are attracted to built-to-rent homes due to higher rent growth, occupancy rates, and retention rates compared to traditional apartments. Additionally, these properties offer the potential to convert into for-sale housing in the future if market demands change. Desired amenities in built-to-rent homes include the look and feel of a traditional home, walkability, extra space, garages, and fenced backyards. Many of these communities are developed in walkable neighborhoods, providing residents with access to nearby shops and restaurants. Despite higher interest rates, new construction in the built-to-rent sector continues, with successful projects capitalizing on the demand and lack of supply in this space.
