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Jeremy Owens: Hello, and welcome to On Watch by MarketWatch. I’m Jeremy Owens. The US economy has been on an awkward flight the past couple of years, with economists consistently and loudly predicting doom as everything runs better than the pilots could have possibly hoped.
Those pilots, the Federal Reserve Governors, are now hoping for a soft landing, before the economy hits more turbulence in sectors like housing, where higher interest rates have trapped many Americans in their homes.
Today we’ll talk about that bizarre housing market with Market Watch’s Aarthi Swaminathan. And then welcome our economics editor, Greg Robb, to tell us how the economy might land, or whether the Fed should try to keep flying. Plus we’ll take a quick look at the news stories we’re watching right now, and how they will affect your wallet.
First, let’s talk about the housing trap.
Homeowners nationwide would like to upgrade to a new home but are struggling to justify it, and that group includes me. That’s because mortgage rates remain high. Last week the average was 6.6% according to Freddie Mac. Meanwhile, nearly nine in 10 homeowners have a mortgage rate lower than 6%, which is really hard to give up.
People like me staying in their homes have created an inertia in the housing market that has supported record prices on the rare homes that do switch hands. Last year, home sales hit a 29-year low, with fewer houses sold than any year since 1995. And now many people who were born around then are wondering if they’ll ever be able to stop renting.
One millennial who doesn’t see immediate potential for a purchase is market Watch’s housing reporter, Aarthi Swaminathan. She plans to keep renting for the foreseeable future, and brought some good news on that front: rents are coming down. We talked about that. Plus, how we might find our way out of the housing trap.
This is one of the strangest housing markets I can remember in my lifetime. There was the housing crisis 15 or so years ago that was definitely destructive and disruptive, but I’m struggling with what we’re dealing with now. As volume of sales go down, prices go up, rents are going down. There’s a lot of moving pieces here. Is there a way to kind of think about the housing market right now, that can simplify a lot of that?
Aarthi Swaminathan: The housing market, Jeremy, seems a little bit weird. Bizarre. But one way to think about it is that many of us are actually stuck in some sort of a housing trap. So the sentiment of the housing market is, people are eager. People are very interested to buy to sell. Bankers, brokers, everyone else is waiting for one thing to happen and that’s for rates to fall.
Jeremy Owens: And You mean mortgage rates, right? That’s been a huge thing with the Fed raising interest rates, is that mortgage rates have gone up. Which has made people feel like they can’t really buy right now. And especially for homeowners like myself, they can’t give up the low interest rate and move to a higher mortgage rate
Aarthi Swaminathan: Precisely. So rates would have to fall far enough to make it easier for you, who might have a 2%, 3%, 4% rate. But if it falls to 5%, maybe that might pique your interest.
Jeremy Owens: Yeah, I’m definitely stuck in the exact situation you’re talking about. My house is sub-three interest rate on the mortgage right now, and it’s definitely a starter home. We bought this house before we had our youngest child. We’re now two adults, and two children, and a big fat pit bull in a very tiny house that is not big enough for our large family.
But leaving that mortgage rate behind and trying to buy at the prices they are right now, not just for the mortgage rate but for housing itself, just makes it seem like we’re just stuck in this house.
Aarthi Swaminathan: I have to say though, only a fifth of us homeowners with mortgages have a rate below 3%. So you are in a small but privileged pool. It’s nice to be in that position, but yes, you need a bigger house.
But how would you do that? What was the calculus you were looking at when you bought this home, versus what is the calculus you’re going to look at when you buy your next home? Kind of complicated. And especially where you are, homes are really expensive.
Jeremy Owens: The San Francisco Bay area is famously high housing prices, but it’s not just here. I mean, housing prices are at record highs across the US right now. And that’s a huge factor in many people younger than myself being stuck in rentals as well.
Aarthi Swaminathan: So millennials, including myself, we are keen to buy a home. We want to move up, we want to build equity, but the cost of renting is just so much cheaper than the cost of buying. So the apartment that I live in now, it’s about $384,000 depending on which kind of unit you want. But if you want to buy a house, the building across mine is about $8,500 a month in mortgage payments. So that’s more than double.
So, my wages are not going up. My income is still the same. And where am I going to get that much extra money to pay for that house? So I’m in a trap, I need a bigger house, I’m stuck, but people are not willing to sell. Inventory is still pretty low. So kind of in a weird gridlock pattern here.
Jeremy Owens: So there is demand, normal demand really, but lower supply, basically. Because people like me aren’t leaving their house. That leads to higher prices, which keeps people trapped in their rentals because they can’t afford to buy a house. So all of this kind of works in concert, right?
Aarthi Swaminathan: Yeah. And if you look at the median price of a resale home in 2023, November, which is the latest month we have data for as of now, prices rose 4%.
So if you want to buy a new home, because builders are very excitedly building more homes because there’s so much demand, that’s $434,000 that’s the median price. So is it still pretty expensive. And so for a first time home-buyer, you’re not able to leverage on that existing home to maybe take some sort of financing. You just have to cough up 30% in your down payment, if you can, to buy that house.
Very pricey, very difficult. Some people are still doing it, but most of us are still waiting on the sidelines.
Jeremy Owens: Aarthi, we’ve taken a little bit of a negative tone on the housing trap. But it can work for people. While I’m trapped in this house, the valuation of this home has gained. When we talk about housing prices going up, homeowners feel that. And at the same time rents are coming down in most major metro markets, so people who are stuck renting might be able to at least move rentals. Find either cheaper or larger rentals that they can afford that they couldn’t afford before.
Aarthi Swaminathan: So, rents actually fell this December, as compared to last year. And that’s a 0.8% difference, so the median rent is about 1400. And it is interesting, because we had seen over the last two years, rents had actually jumped 18%, and that’s for new leases. And now we’re seeing them come down.
Jeremy Owens: And they went down before that, during the pandemic. It came down, it jumped back up. Now it’s coming down again. It just seems to be trying to find a place, right?
Aarthi Swaminathan: Yeah, but now I think that downward movement is going to be more sustained. Because during the pandemic, home builders decided, okay, this is the time we need to increase supply. And so they built so many apartment units. And there are so many more under construction, and that’s really helping bring rents down, and that’s really helping renters who sign a new lease.
I don’t know how much that’s going to help renters with an existing lease. When I get my renewal offer, I don’t know if rents are going to go up or down. I think they’re going to go up. But new leases, we’re seeing a decrease. And a lot more concessions are being offered. Free parking, free amenities, and things like that. So we are seeing that pressure, good news for our renters in that case.
Jeremy Owens: So Aarthi, do you have any tips and tricks for those who are kind of stuck in their houses right now, but aren’t able to just sit there? That do need to move, that do need to buy a home?
We see a big split between existing home sales and prices, and new home sales and prices. It seems like if you’re looking to buy a house, you may want to look at these new developments.
Aarthi Swaminathan: Yeah, so it’s interesting you mentioned that. Because generally, resale homes have really formed the majority of home sales, and that has really shifted. And I think recently, new homes formed 30% of all homes for sale. That’s a really big increase.
And so, people are really looking at new homes just because of the sales incentives. They don’t have to make huge modifications to a new home. All the appliances are new and there are no strange quirks that come with a previously-owned home.
So from that perspective, I can sense that people are really warming up to the idea of a new home.
Jeremy Owens: As we move forward, what should we be looking at to see if there are major changes in the current status of the housing market? Are there certain data points you’re especially watching this year to see if there are any changes?
Aarthi Swaminathan: Yeah. So the metrics that I am looking at are, how many homes are being built? Because that’s very important to adding inventory. And I’m also looking at mortgage rates. Because mortgage rates have an outsized influence, not just on buying but also selling. So if rates fall far enough, people might say, okay, maybe now it’s time to sell.
If you’re going through a divorce, or maybe you’re an empty nester who has too much house, and you’re trying to look for maybe an apartment or something that you can manage, maybe now’s the time. But rates have to fall far enough, and we don’t know what that number will look like. There are some people who say maybe it’s five, maybe it’s 5.5, but we don’t know if maybe even 6% will stimulate people to sell their homes.
And so if rates fall, that will really solve our demand and supply issue to some extent, putting aside any extreme instances that happen. That’s what I’m really looking at to see where rates end up. And most forecasts expect rates to go down to the low 6% range by the end of the year, which could be enough to prompt home sales.
Jeremy Owens: Right. So like most market watchers, we’re watching the Fed. To see when the Fed might drop interest rates, and how that ripples through to mortgages. We’ll bring Aarthi back to talk about it more. Thank you so much for joining us, Aarthi.
Aarthi Swaminathan: Thank you so much, Jeremy.
Jeremy Owens: Are you stuck in the housing trap? We want to hear about it. If you listen on Spotify, let us know in this week’s poll. We’re going to take a quick break right now.
Coming up, will the economy have a hard landing, soft landing or just keep flying? Stay with us.
Welcome back to On Watch by MarketWatch. Before the break, we talked with Aarthi Swaminathan about how a decline in interest rates could thaw the housing markets current freeze. Now we turn to the questions at the heart of the decision of whether to cut interest rates.
Economic forecasts and Wall Street traders believe the Federal Reserve will cut rates in the coming months, but that same conventional wisdom expected a recession last year. Instead, we’ve had a strong economy driven by job growth and consumer spending. That has given the Fed little reason to act.
Plus, recent data showed price gains ticked higher than expected in December. So the Fed’s goal of tamping down inflation is still not quite finished. That leaves some tough questions for Federal Reserve Chairman, Jerome Powell, and his answers could determine the path of the market and the economy in coming months.
MarketWatch economics editor Greg Robb is used to asking Powell those questions though, and he recently joined us to talk about where the Fed is headed.
We walked into this year with the thought that the Fed was going to cut rates potentially starting in March, but we’ve seen some economic data that has not exactly pushed them toward it, but could. Let’s walk through the scenarios from here as we head into another Federal Reserve meeting next week. And where we could be headed, and what they’re kind of looking for.
Greg Robb: Sure. Things are looking really good for the economy now. The two words that everyone is talking about is soft landing.
A soft landing is the economy slows, inflation falls, but unemployment stays low. So that we don’t get a spike up in the unemployment rate, and those two things mean the Fed can kind of take interest rates down. The Fed has signaled maybe three cuts this year, and that’s a good thing they’re talking about. The market is hoping and pricing in more, they want six.
So that’s kind of the outlook, and it’s really good. It’s a hundred percent better than we thought. The word recession was really where we thought the economy was going to be right now. And the Fed even thought that that’s where we would be right now.
Jeremy Owens: And a recession still isn’t out of the question. There are still people saying that it could be coming. You mentioned soft landing, but there are other ways this could go, right?
Greg Robb: Sure. I mean it’s just the way things look now. There’s no recession now, but people keep pushing it out. They think that it’s going to come later in the summer. There are signs that consumers might be running out of gas, credit card bills are going up, people are going into debt. There’s been a spike in people not paying their credit cards.
That’s what some economists are focusing on. There’s a sense that … Stepping back a little bit, people got a lot of money from the government during the pandemic. And I think one thing to think about that is, some people look at it like people got a bag of cash and they’ve been spending it. But I don’t think that’s the way to look at it.
I think the better way to look at it is that a lot of people were able, because of the government money, to get on better footing with their bills. Suddenly they could pay their credit card debt, and they had a little bit of money left over at the end of the month, which they hadn’t had in a long time.
And now there’s a sense that things are creeping back into that danger zone. They’re going to have to cut back further. And when everybody cuts back further, that would slow the economy. So there could still be a recession this year.
Jeremy Owens: And if we see any signs of that, that would mean the Federal Reserve would need to go into overdrive at that point. Is that kind of how it would go?
Greg Robb: Well, it depends upon inflation. We’ve really made some really good progress over the last year. We’re going to get some good data in the next couple of weeks on inflation that will be key for them, about whether they can start in March or May or if they hold off.
I think inflation is still the main picture for them. All things being equal, if inflation comes down and the economy slows, the Fed is going to do more to try to keep the economy on a solid footing.
Jeremy Owens: And then there’s the other way, where we could just stay with a really good economy right now. And there is no landing at all to speak of, right?
Greg Robb: Right. I mean there is the sign out there that the economy is, it’s supposed to grow. Looks like the first quarter is going to be solid, so that means the economy’s going to keep rolling. If the economy keeps strong, then there’s a sense that inflation isn’t going to come down, because the economy’s going to have a lot of momentum.
And that would put the Fed, the first interest rate cut, delay it perhaps until September. And then with the election, they might even delay it until after the election.
Jeremy Owens: Inflation is the big thing to keep an eye on in the months ahead to see where the economy’s going. And we do have the Federal Reserve meeting next week. What do you expect to learn from that, and when can we expect more clarity on where this is headed?
Greg Robb: I mean, I think this is one of the meetings that they would rather not have. It’s just kind of like, they just want to punt. Because there’s going to be a lot more data between now and the end of March that will really help them understand where the economy is.
It’s a funny thing about the US economy. A lot of reporters write stories in December about the year ahead. But for some reason, if you’re writing about the economy, the best thing to do is to wait until the end of March and then things kind of straighten out.
Because we go through this holiday period in the US, and that kind of messes things up when you look at the data. So you have to get through the holiday and then look around. So we’re going to get some really big inflation numbers. The ones in January are going to be big.
The government puts out these annual revisions for consumer inflation. So they kind of look at last year, and sometimes that really changes things. So we want to see the annual revisions, and we want to see the January numbers on inflation before anybody feels super confident that inflation is vanquished, as some people would hope.
Jeremy Owens: Yeah, so we’ll cover these things. Keep an eye out for this, stay on watch as it were, and maybe know a little bit more by March. Is that the best way to summarize this?
Greg Robb: Yeah, and I mean everybody’s going to ask Chairman Powell at his press conference next week, “When are you going to cut? What is it going to take for you to cut?” And he’s going to have to kind of dance through that minefield, but I don’t really think he’s going to give us muddy answers on that. I think he’s just going to say, wait and see.
And I think that’s kind of going to be the overview of the Fed meeting. People are going to be looking for clues, so we’ll have to see if the market takes any clues from what he says. But I think he’ll just want to kick the can down the road to see about later in the year. And then in March they’ll let us know kind of, are they going to start cutting soon? Are they going to try to hold off a little bit? Hold for longer?
Jeremy Owens: Well, Greg, we know you’re going to be in the room to ask Chairman Powell those hard questions. So we’ll be looking for you, and waiting to hear more from you in the future. Thanks so much for joining us.
Greg Robb: My pleasure.
Jeremy Owens: Before we go, it’s time for What We Are Watching, a look at the news you need to know for the rest of the week and beyond.
This morning the Commerce Department announced that the US gross domestic product increased 3.3% in the fourth quarter, and that blew away economists expectations for about 2%.
And we talked earlier about a soft landing for the economy, that would mean A GDP reading between zero and 2%. So this reading suggests the economy is still flying, we’re not coming in for a landing, and will again have an effect on what the Fed discusses. Next week, we’ll talk more about that then.
While the US economy is growing strongly, Tesla, a company known for rapid growth, might be hitting a bumpy road. Yesterday the electric car company delivered its latest quarter earnings report and the forecast said the growth would slow.
“The company is between two major growth waves,” Chief Executive Elon Musk explained, but the stock fell as analysts complained about not getting more specific information about price cuts, margins or demand for Tesla cars.
Musk’s Electric Car Company was the first of Wall Street’s seven trillionaires to report earnings this quarter. With the majority of them, Alphabet, Amazon, Apple, Meta, and Microsoft expected to reveal their holiday season results next week.
In another earnings report this week, Netflix revealed that it added 13 million net new subscribers in the fourth quarter, its biggest holiday season yet. The streamer also said that it has landed a multi-billion dollar deal with WWE for its Monday night Raw wrestling show and some other content, the streamer’s most prominent leap into live programming.
This is all part of a new reality for streaming services that is good for the companies, but maybe not so great for subscribers. We’ll talk more about that next week.
And that’s it for this episode. Thanks to Aarthi Swaminathan and Greg Robb. To keep following the latest on housing and the economy, head to marketwatch.com.
You can subscribe to On Watch by MarketWatch wherever you get your podcasts, and please do. If you like what you heard, please leave us a rating or review. It really helps others discover the show. And let us know what you want to hear from us. You can reach us at [email protected] by email. And if you’re a listener on Spotify, be sure to answer this week’s Q&A on the topics you want to hear more about, and answer whether you’re stuck in the housing trap like me.
The show is hosted by me, Jeremy Owens, and produced by Meta Lutsoft and Katie Ferguson, who also mixed this episode. Melissa Haggerty is the executive producer. We’ll be back next week with a new episode. And until then, we’ll be on watch.
