A Quick Read On Rates, Jobs And Housing
A better-than-expected November Jobs Report took some shine off the recent rally in bonds, which had been surging over the past few weeks. The report was positive, but not great, although it did surprise Wall Street as both new hires and unemployment beat economists’ estimates. Something that is of particular concern and a focus of the Federal Reserve is the slight acceleration in wage growth, adding to some uncertainty about when the Fed might change its stance. The direction of interest rates from here is anyone’s guess, but the stronger-than-expected jobs data likely keeps the Fed in the “higher for longer” camp, at least in our opinion.
Anecdotal evidence suggests that the economy might be slowing, based on reports from local business owners. However, this has yet to translate into jobs data or consumer spending. Inflation, while still at elevated levels, seems to be moderating. Nonetheless, high credit card balances, rising delinquencies, and the overall high cost of debt are indications that consumers are feeling some pressure. Despite these concerns, GDP and other economic indicators still point to the economy being in reasonably good shape. Overall, the prediction suggests that the path ahead is challenging.
Turning to the housing market, activity in the existing home market, particularly in Southern California, appears to be picking up. Interest rates have fallen to under 7%, and some well-qualified borrowers are securing rates as low as 5.875%. This has prompted buyers to reenter the market, taking advantage of small price reductions and more reasonable interest rates. Large-scale home builders are employing various strategies to attract buyers, including helping first-time home buyers qualify for mortgages. Although construction loans from banks remain subdued, the private lending market is bustling, offering more expensive financing with greater leverage, something most developers need to initiate projects.
While there has been a downward trend in interest rates, it’s important to note that we may have reached a bottom, at least for now. A few additional thoughts on this matter; first, the Bank of Japan is likely to move away from its negative interest rate policy, which could exert pressure on bonds worldwide. Second, assuming a 3% inflation rate and real economic growth of 1.5%, the 10-year Treasury rate could stabilize around 4.5%, give or take 0.5%. Finally, it’s worth mentioning that historical interest rates have averaged significantly higher than current rates. While the recent rate increases have caused discomfort, part of the pain is due to the steepness of the rate hikes and the extended period during which rates were held at arguably too low levels. Looking ahead, if the spread over treasuries narrows, it’s conceivable that mortgage rates could range from the high 4s to the mid-5s in 2024, potentially providing significant support to the real estate market.