Welcome to the latest installment of The Full Measure with Kevin Hecht—your destination for the most current economic insights and analyses. Catered to real estate appraisers, agents, and other professionals, this monthly blog series helps you navigate the ever-evolving economic environment so you can make well-informed decisions to support your business and career success. Uncover this month’s economic trends and insights—written from an appraiser’s standpoint—in the following economic recap for April 2023.
Economic recap April 2023
While the first quarter of 2023 began with stronger economic signals than anticipated, the pace of economic activity had slowed considerably by the end of the first quarter. Businesses are observing a decline in demand for their goods and services, which should result in a further contraction of the labor market in the coming months. The Fed’s own forecast indicates that the U.S. economy could experience a contraction this year. Mortgage rate volatility is likely to remain elevated until core inflation falls more convincingly toward the Federal Reserve’s inflation target. In this recap we focus on a few main areas of the economy.
According to the National Association of Realtors (NAR), existing home sales decreased in March after reversing a 12-month decline in February. Mortgage rates began to rise again in February.
In March, total existing home sales, including single-family homes, townhomes, condominiums, and co-ops, decreased by 2.4% to 4.44 million at a seasonally adjusted annual rate. On an annual basis, sales were 22.0% lower than the previous year.
Geographically, March sales decreased in three regions, ranging from 1.0% in the South to 5.5% in the Midwest. March sales in the Northeast were unchanged. All four regions continued to experience double-digit sales declines year-over-year, ranging from 17.6% in the Midwest to 30.0% in the West.
The median sales price of existing homes in March was $375,700, a 0.9% decrease from the same month last year. In March, the median existing condominium/co-op price was $337,300, a 2.1% increase from a year ago.
Housing starts declined 0.8% in March. March saw a modest decline in residential construction as developers continued to navigate a challenging housing market. Upon closer inspection, multi-unit construction was the cause of the decline. In the meantime, single-family housing starts increased by 2.7% for the month, rising for a second consecutive month for the first time since 2021.
There is a glimmer of optimism as the NAHB Housing Index, which measures homebuilder sentiment, increased from 44 in March to 45 in April. Following the longest stretch of decreases since records have been kept in 1985, this is the fourth straight rise. Nevertheless, a reading below 50 indicates that more builders consider the current situation to be poor as opposed to good.
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Inflation remains somewhat resilient in the U.S. and abroad, according to new data, dampening expectations that monetary policy will loosen before the end of the year.
Headline CPI declined significantly in March. However, core inflation, which excludes food and energy prices, remains elevated. The annual change in core CPI increased to 5.6% in March from 5.5% in February, which pushed long-term yields and mortgage rates higher. Fed officials’ comments appeared to indicate that the central bank will maintain its hawkish posture to combat inflation.
Many believe that inflation will be subdued in the coming months due to a number of factors, including a deceleration in housing cost growth. Nonetheless, inflationary factors continue to exist. Recent consumer surveys indicate that inflation is expected to remain at its present level, and this expectation alone can contribute to sustained price increases.
After falling for five consecutive weeks, mortgage rates increased for the week ending April 21st. The average rate for a 30-year fixed mortgage increased to 6.39 percent from 6.2 percent the previous week, as reported by Freddie Mac. However, mortgage rates will likely continue fluctuating in the coming months, impacting housing affordability and sales activity.
Some good news: Since the beginning of the year, the ten-year Treasury rate has decreased approximately 50 basis points, providing some relief. But if there is a glimmer of hope in the market’s gloom, it is that this upward interest rate cycle is likely nearing its peak. Given tighter credit markets, the Fed has signaled that it may not be necessary to continue raising the Federal Funds target rate after the anticipated May increase.
The U.S. unemployment rate for March was 3.5% according to the jobs report released by the Bureau of Labor Statistics. So far in April, the number of Americans filing unemployment benefits increased by 5,000 to 245 thousand in the week ending April 15th, above market expectations of 240 thousand and representing the highest level in a month. The outcome was consistent with a recent flurry of data releases that indicated some softening in the U.S. labor market, ending a long run of releases indicating a tight labor market despite a number of aggressive rate hikes by the Federal Reserve.
Commercial real estate
Deal volume is now barely moving, due in part to a reduction in debt financing. After March’s mini-bank crisis, mortgage lenders are even more cautious than they were at the beginning of the year. Early indications are that deal volume decreased in the first quarter, while final statistics are still being recorded, transactions for apartments decreased by over 75%, according to Co-Star.
The primary explanation for the low volume of transactions is that property prices have not yet adjusted to the new interest rate environment. Riskier conditions necessitate larger risk-adjusted returns. However, using historical pricing when the cost of capital has doubled results in even lower returns, making it impossible to execute new transactions. While capitalization rates are on the rise, they remain below debt rates, resulting in negative leverage. And with rental rate growth moderating, investors have no way out of this quagmire. Unfortunately, the only way to restart the market is for property values to decline.
In summary, the Fed has finally acknowledged that a recession is imminent. Despite this announcement, economists continue to vigorously debate whether and when a recession will begin, as well as its duration and severity. The next Fed meeting will tell a lot about the future of the economy and the real estate market. As a real estate appraiser, it is going to be even more critical to study your markets. We know that real estate is local, and as we move through the next several months that fact is going to become even more evident as individual markets react differently to the economic news.
Thank you for reading The Full Measure with Kevin Hecht: Economic Recap April 2023. As the economic landscape continues to evolve, we encourage you to stay informed and follow this blog series to get valuable economic insights for appraisers designed to help you make well-informed decisions in your business and career.
Written by Kevin Hecht. Kevin has been a real estate appraiser since 1987, and currently holds a Certified Residential appraiser license in Missouri. As a McKissock Learning instructor, Kevin specializes in market analysis, USPAP, and real estate economics. In addition to being an appraiser, Kevin is an Adjunct Professor of Economics at Maryville University.