Market Update 3/15/2023

Investors expecting a smaller hike: Last week's market prices indicated expectations of a 0.25-point increase in interest rates when the Fed's policy group meets on March 22. Cooling wage growth and the collapse of a large California bank were apparently enough evidence of softer inflation to quell half-point predictions from just a week earlier.

The state of the housing market has been impacted by several factors, including job growth and wage growth. With the job market picking up, we're seeing a steady increase in home sales across the country. However, wage growth has been cooling off, which could slow down the market's momentum.

The recent collapse of Silicon Valley Bank (SVB), which had grown to be the 16th largest in the U.S., could lead to a material reduction in mortgage rates going into the spring sales season, according to Armada ETF Advisors' Portfolio Manager Al Otero. The SVB collapse and reports of a major policy shift by the Federal Reserve have put interest rate markets into a tailspin, which could result in a rally in rates across the yield curve and an expectation that the Fed will pause raising the fund's rate at its March 21–22 policy session. Many experts suggest that a reduction in mortgage rates could be a substantial positive for the U.S. housing market.

HOUSING NEWS

Out West: Many Western U.S. cities are hubs for high-tech jobs, vulnerable to layoffs any time interest rates rise. Led by San Francisco, Santa Cruz, Boise, and Austin, most of the 32 markets which dropped more than 5% from 2022 peaks had high-tech employment. It could get worse if tech layoffs accelerate.

Real estate asset values fall: The value of U.S. households' overall real estate assets decreased in the fourth quarter of 2022, the first time it has fallen since Q1 of 2012. Values dropped to $43.5 trillion from $43.57 trillion in the third quarter. However, year-over-year values of owner-occupied properties rose nearly 11% from Q4 of 2021.

Luxury home prices: High-interest rates are hitting the luxury home market hard, with sales down 45% in a recent three-month period. Miami, FL, and the Hamptons region on New York's Long Island saw the largest drops - more than 60%. Competition has eased, but low supply continues to prop up high prices, despite a 7% increase in listings.

The Western U.S. has been hit particularly hard by the recent downturn in the housing market, with many cities that rely on high-tech jobs experiencing significant drops in real estate prices. Meanwhile, the luxury home market has taken a hit due to high-interest rates, with sales down nearly 45% in some areas.

REGULATORY NEWS

In regulatory news, Federal Reserve Chair Jerome Powell warned Congress last week that the peak federal funds rate, which currently stands at 4.57%, may rise above the 5.1% the Fed predicted in December. He did not specify how much higher and said decisions will be made "meeting by meeting." Meanwhile, the Federal Housing Authority (FHA) will begin offering a 40-year, fixed-rate mortgage modification option effective May 8 for homeowners at risk of default on FHA loans. The changes will be incorporated in their upcoming Single-Family handbook.

Lastly, the recent collapse of Silicon Valley Bank (SVB), a key player in tech and venture capital for decades, has sent shockwaves through the industry. Federal regulators shut down the bank, and within hours of the announcement that SVB was planning to raise $2.2 billion to shore up its balance sheet, news and rumors fueled a panic run on the bank by depositors. Insolvency followed two days later. The event highlights the vulnerability of even the most established players in the industry and emphasizes the importance of taking a close look at the risks involved in investing in real estate.

In summary, the current economic and housing market conditions continue to shift, and it's important for buyers and sellers to stay informed. From the potential impact of rising interest rates and slowing wage growth to the changing dynamics of the luxury home market, there are a variety of factors to consider when making real estate decisions. By staying up-to-date on the latest news and trends, homebuyers and sellers can make informed choices that will help them navigate the market and achieve their goals.