Why the Next Few Days Could Determine the Strength of the Real Estate Market in 2023

In congressional testimony given by FED chairman Jerome Powell this week, he stated that the FED funds rate is likely to end up higher than previously expected and they are leaving themselves open to a faster pace of rate hikes in the coming months. The most recent rate hike was 25 basis points and the implication of this is that they could increase by 50 points at the next meeting as well as reach a terminal rate well in the 5%’s. He has been talking the hawkish talk to prepare the markets for some pain, but added that their decisions are data dependent. February data is about to hit the fan in the form of the non-farm payrolls (employment) report on Friday, the CPI release on Tuesday, and the producer price index number on Wednesday. There is no question that these reports will either help or hurt the residential real estate market in terms of its impact on interest rates, which plays a crucial role in supply and demand.

For January, we got bad news (higher numbers than expected) in all three reports and bond yields rose dramatically in February leading to large mortgage rate increases. This changed the trajectory of the real estate market, which seemed poised for a recovery with lower interest rates spurring increased demand in January, but lagged in February as mortgage applications hit a 28-year low. It very much feels like we are now at an inflection point with a very interest rate-sensitive real estate market and a spring selling season about to begin. Are sideline sellers going to feel less locked in as rates go down and is affordability going to improve for buyers?

Starting tomorrow with the employment report, the expectation of the experts surveyed is that the U.S. economy will have added 225,000 jobs in February an the unemployment rate is expected to stay at 3.4%. If we see a surprise to the up-side in jobs similar to the one we saw in January or a reduction in the unemployment rate, this is going to add fuel to the fire for the FED to continue to increase rates longer, higher, and faster and bond yields and interest rates will rise.

As discussed in previous blog posts, the FED does not determine mortgage rates. They do determine shorter term bond yields and market expectations for inflation determine longer term yields and mortgage rates typically follow those. However, if the FED leaves the funds rate higher for longer, as a result of inflation or jobs numbers that are too hot, this will increase longer term bond yields to some extent as well. It also provides high interest alternatives to investing in the stock market or real estate.

Even more important is the CPI release that we will wake up to on Tuesday (or possibly just stay up all night worrying about). Expectations are for an increase .5 percent month to month for February and the annual percent increase to fall to 6.2%. If expectations are exceeded for the second month in a row, the stock market will tank and bond yields will increase across the board. Interest rates will continue to rise with really no hope of coming down until several months worth of data shows inflation is finally receding. By then, the damage will be done and the spring real estate market will broken. If the number is considerably lower than expectations, and I am hopeful for this, especially due to some lagging housing data that should start catching up to the overall CPI number, we should see lower rates and the hope for a soft landing for housing and increased transactions in 2023 are alive.

I assure you I will be anxious about these reports going to bed tonight and on Monday, especially on Monday night as we will need to live with this number as part of the CPI average for the next year. It is truly imperative that inflation comes down faster and, with the seasonal timing of this report and being on the heels of a month of negative data, is sure to push the housing market in one direction or another.