By MIAMI Realtors® Chief Economist Gay Cororaton
The 30-year mortgage rate fell for the third consecutive week during the week of December 1 to 6.49%. The rate could further fall to 6% – 6.25% by year-end, given the increasing likelihood that the Fed will slow down and even pause on its rate increases by mid-2023 given recent economic data of the adverse effect of the sharp rate hikes on consumer spending, investment, especially, construction/real estate, and job openings.
While inflation is on the decline, it remains above the Fed’s long-run goal of 2% so the Fed is likely to continue raising the federal funds rate to tame inflation and to send a signal that it is committed to fighting inflation. As of October, the personal consumption expenditure index was up while the consumer price index rose 7.7%, both above the Fed’s long-run target of 2%.
However, the latest GDP 2022 Q3 release and job openings data indicate that the economy runs the risk of going into a recession if the current pace of monetary tightening is sustained. The rate increases have had the greatest effect on real estate. Investment spending on residential and non-residential structures and consumer spending for housing and utilities make up nearly 17% of 2022 Q3 real gross domestic product nationally.
Because the negative real effects are emerging strongly while inflation is on the decline and due to the lagged effect of monetary policy on the economy, it behooves the Fed to soften on its monetary tightening and to reassess the impact on the economy before stepping on the breaks and if new, unforeseen inflationary risks emerge.
Consumer spending is slowing (2.1% y/y in 2022 Q3 from 7.4% y/y in 2021 Q3) especially on goods (three consecutive quarters of decline) as consumers cut back on spending for food, gasoline and energy, housing and utilities, and motor vehicles
Investment for structures (“real estate”) has now declined for six consecutive quarters, with residential construction more heavily hit (-12.9% y/y in 2022 Q3) than non-residential construction (-9.2% y/y in 2022 Q3).
There are now fewer job openings as of the end of October compared to one year ago (-6.9% y/y) although there are still more job openings (10.33 million) than the number of unemployed (6.059 million).
Inflationary pressures which are outside the Federal Reserve Banks’ control are on the decline, creating tailwinds for the Fed’s policy to work. The Energy Information Administration is forecasting global oil prices to decline further in 2023 due to increased oil production, including from the United States, up 5% year-over-year as of November.[1] The US Census Bureau reported that a decline in the unfilled orders to shipment ratio (6.04 as of September) compared to the rate during the height of the pandemic (7.5 in May 2020).
[1] Energy Information Administration, November 2022 Short-term Economic Outlook, https://www.eia.gov/outlooks/steo/
