The unemployment rate, wages, interest rates and their effect on home prices.

February 13, 2023

The unemployment rate, wages, interest rates and their effect on home prices.

In Sarasota County, the median sold price for existing single family homes was $451,000 in January, down 5.8% from December, 2.4% less than one-year ago.  Accordingly, as I reported last month, sold prices have plateaued.

New listings increased modestly, 4.5%, year over year. Provided more sellers reenter the housing market after a 3-year hiatus, new listings should grow.  When interest rates break below 5.5%, more buyers, who have been sidelined due to higher rates, are likely to come back to the housing market. Prices should rebound higher. How high will be a function of supply and demand.

My target for a healthy rate of appreciation is a 4-month supply when interest rates break below 5.5%. For the week ending February 9, the average for a 30-year fixed-rate mortgage was 6.12%. In January, the supply of homes based on closed resales rose to 3.7 months … heading in the right direction.

However, pending sales, as distinguished from closed sales, surged, ending January with only a 2-month supply based on pended sales.  If this accelerating  pace of home sales continues over the next several months, then when rates descend to 5.5% levels, prices may begin to materially appreciate.  I will be closely monitoring this matrix.

Mortgage rates dropped in January, amidst an evolving consensus that the disinflationary process  was working and the Fed may stop rate hikes sooner than expected. But February threw some cold water at the idea that inflation is cooling. In the US, total nonfarm payroll employment rose by 517,000 in January.  The unemployment rate went down, from 3.7% in December to 3.4% in January. In  Florida it was only 2.4%.  Fed Chairman Jerome Powell’s response was “there’s a long way to go, we’re at the very early stages of disinflation”. 

Powell’s concern is that a strong labor market will inflame continued high inflation.  But it doesn’t have to be that way.  Notwithstanding over 11 million job openings last weekend, and a 3.4% unemployment rate, the rate of inflation is falling. Reading the data and the trend lines, I am not convinced  we need the devastating loss of jobs to cool inflation.   Although the overall number of jobs rose above pre-lockdown levels in August, it is still below what it likely would have been with normal growth and no lockdowns. We’re still playing catch-up from jobs lost from the lockdowns. In this environment, I expect mortgage rates will move up and down in a 5.75% – 6.5% range.  Watch the unemployment rate vs. wage growth rate. If the wage growth rate slows, which it has been, then notwithstanding continued low unemployment, inflation and mortgage interest rates should fall.