Fed Rate Cuts on the Horizon?
By: Danny Court with Elliott D. Pollack & Company Mid-2024 Economic Outlook
The recent decreases in inflation have set off a stock market rally that pushed it to a record high in April. Clearly, everyone was hoping for a reduction in the Fed rate. May and June’s inflation results were equally promising. But is the decline enough of a trend to believe the Fed will drop rates like other countries have begun to? We think not. At least not yet.
The Fed is in a difficult position. They want to make sure inflation will not rise again and cause more harm to the economy in the long term. Alternatively, they want to keep everyone employed and not cause unnecessary pain.
To be certain, we are seeing a decline in inflation. In 2023, inflation started at 6.4% and declined to 3.4% by December. It declined further through February, suggesting that the promised Fed rate decreases were soon possible. However, an increase in March dashed those hopes.
As a result, the Fed is taking a wait and see approach, adopting the mantra “higher for longer.” A hike in interest rates is also very unlikely. Optimists are targeting September for the first rate cut. But, with continued strong employment gains, it could be postponed until 2025.
What is causing the fluctuation in inflation? Looking at specific categories, the normally volatile food and energy categories are not causing the problem. For instance, groceries only increased by 1.1% year over year and gasoline prices have dropped 2.5%. The rest of the categories make up 80% of the calculation (called “core inflation), which grew by 3.3% in June. While categories like used cars were down 10%, housing cost, which makes up 36% of the weighting, increased by 5.2%. This is the primary reason we are seeing inflation remain elevated.
Across the nation and here in Arizona, we are seeing a shortage of housing relative to household formations. Unfortunately, the Fed’s stance on interest rates has tightened the supply of housing by making it more expensive to build. This does the opposite of the Fed’s goal of driving down inflation. As long as housing demand outpaces supply, we may continue to see inflation remain above the Fed’s goal of 2.0%.
Looking ahead, employment growth is expected to slightly underperform the historical average in 2025 but recover by 2026. Population inflows are expected to remain steady. We are experiencing a relative boom of new home construction in 2024, which we expect to level out over the next two years.
2024 | MID-YEAR
Real Estate MARKET UPDATE
Monthly Price Per Square Foot
+4.9%
June 2023: $283.69 June 2024: $297.71
Monthly Average Sales Price
+2.0%
June 2023: $581,667 June 2024: $593,013
Monthly Median Sales Price +1.6%
June 2023: $443,000 June 2024: $450,000
Monthly Price Per Square Foot
+4.5%
Dec 2023: $284.89 June 2024: $297.71
Monthly Average Sales Price
+5.6%
Dec 2023: $560,086 June 2024: $593,013
Monthly Median Sales Price +4.7%
Dec 2023: $429,990 June 2024: $450,000
By: Tina Tamboer | Cromford Report
“It is said that the darkest hour of the night comes just before the dawn.” Thomas Fuller, English theologian in 1650.
Annual sales are the lowest they’ve been in 16 years, but there’s reason to believe relief is in store for the second half of 2024. After their June meeting, the Federal Reserve suggested a potential rate drop in September. That could mean a mortgage rate drop this summer, which would give the summer housing market hope for a boost in demand.
Hope is not a strategy, however, for those sellers on the market who must contend with the market as it is today. Mortgage rates have been hovering around 7% for most of the year thus far, severely restricting demand. This resulted in another underwhelming Spring buying season and the lowest number of closings since 2008. On the supply side, new listings were up 16% in the first half, contributing to an overall listing count 62% higher than last year at the end of June. This has led to a balanced market measure in Phoenix, which translates into flat appreciation rates going forward that land near the rate of inflation. To the left are the annual price appreciation measures for June 2024, and 6-month appreciation rates since December 2023.
While the last 6 months have shown appreciation outperforming inflation, market conditions suggest prices will be sluggish through the summer. Sellers are seeing marketing times at a median of 30 days prior to contract. The last time Greater Phoenix saw marketing times this long was 2014, a prolonged balanced market where prices stabilized for nearly a year.
In response to the added competition and more days on market, price reductions are up 88% over last year. Multiple offers are rare and sales over asking price replaced by stronger price negotiations and seller-paid concessions. Sellers under $500K are closing at 98.8% of their list price, with 58% paying a median of $9,900 towards buyers’ closing costs and rate buydowns. High end buyers are negotiating harder on price with sellers over $1M receiving 95.6% of their asking price on average in June.
Meanwhile, single family permits for new homes are up 56% year-to-date compared to last year, just 12% shy of levels seen in 2021 and 2022. This is the opposite of reports citing a decline in builder permit activity nationally. It signals optimism for growth in Greater Phoenix that isn’t as strong in other metropolitan areas. So far this year, new construction sales comprise 27% of all single family sales in Maricopa and Pinal County with sales counts consistent with the past 5 years.
After two years of sales declines and high mortgage rates, Greater Phoenix has shifted from a seller’s market, ideal for the not-so-perfect home, to a balanced market, ideal for the not-so-perfect buyer. Sellers are on board to cooperate with lower-rate FHA and VA assumptions, buyers with low down payments or down payment assistance, mortgage rate buydowns, and other entry-level buying methods previously scoffed at in a seller’s market. As we enter the second half of 2024, all eyes are on mortgage rates for any improvement that would signal a finish line is near for the sales decline that began in 2022
Goodyear
Glendale
Phoenix
Mesa
Peoria
Litchfield Park
Tempe
Gilbert
Chandler
Cave Creek
Fountain Hills
Scottsdale
Carefree
$512,393
$443,523
$522,252
$441,255
$530,892
$541,072
$475,687
$624,300
$529,448 + $17,055
$453,933 + $10,410
$571,186 + $48,934
$462,946 + $21,691
$559,388 + $28,496
$579,196 + $38,124
$491,885 + $16,198
$686,863 + $62,563
$577,681 $605,095 + $27,414
$962,280 $993,745 + $31,465
$813,351
$1,108,959
$1,210,470
$862,734 + $49,383
$1,199,089 + $90,130
$1,217,563 + $7,093 Paradise Valley
$3,775,258
$3,750,108 - $25,150
$30,272
