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What happens after the Fed’s rate hike?
Once they’re done hiking rates, will the Fed need to keep rates high because the consumer balance sheet looks so good?
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The Federal Reserve will hold another meeting this week, where everyone assumes we will get another 75 bps rate hike. The question is: how many more rate hikes are left? And, once they’re done hiking rates, will the Fed need to keep rates high because the consumer balance sheet looks so good?
Over the weekend, The Wall Street Journal brought up this point — that the Fed is mindful that household balance sheets are much better now due to the excess savings built up during the COVID recovery and they might need to raise rates again or keep them high to trigger their job loss recession to fight inflation.
From the WSJ article: “U.S. households still have around $1.7 trillion in savings they accumulated through mid-2021 above and beyond what they would have saved if income and spending had grown in line with the prepandemic economy, according to estimates by Fed economists. Around $350 billion in excess savings as of June were held by the lower half of the income distribution, or around $5,500 per household on average.”
For my economic work, household balance sheets were better during the last expansion than prior to the housing collapse. This was key to the recovery going into the COVID-19 crisis and getting out of that brief recession because we didn’t have a credit bubble that needed deleveraging.
This time is much different than what we saw at the century’s start. This is one of the pillars of the COVID-19 recovery model I wrote on April 7, 2020 and why I created the phrase the “forbearance crash bros” in the summer of 2020, because I knew household balance sheets were good this time around.
Major consumer protection debt laws passed were key
One of the unsung heroes of the most prolonged economic and job expansion ever recorded in history was the passing of the 2005 Bankruptcy Reform Act and the 2010 qualified mortgage rule under Dodd-Frank. Both these laws paved the way for more responsible lending and a more responsible consumer.
In 2000, we saw a lot of credit stress in the system. As we can see below, the bankruptcy levels were extremely high before the bankruptcy law was passed in 2005. That law also facilitated a final big push by consumers to file for bankruptcy before the laws made it harder. Then we saw an uptick in people filing for foreclosures and bankruptcy during an economic expansion from 2005 to 2008. After all that credit stress, then the job loss recession happened.
As we can see above, none of this happened in the expansion from 2010 to 2020, as credit standards were much better. Now, over time, we should get back to pre-COVID-19 trends in foreclosures and bankruptcies, but as you can see, the consumer is in much better shape because the credit system is in much better condition.
All my six recession red flags were raised toward the end of 2006, and the recession didn’t start until later in 2008. This year, I raised my sixth recession red flag on August 5, so I am on recession watch now.
The Federal Reserve is trying to cool inflation by slowing the economy down and raising the unemployment rate. When the Fed says they may need to keep rates higher for longer, I believe that’s them talking tough, as they can fall back on the fact that the labor market is still solid and household balance sheets are good.
This, of course, only works if the employment data stays firm. I believe the Fed can talk tough as long as jobless claims remain below 323,000 on the four-week moving average. Once those levels break, then a lot of things change. So, it will be critical to hear what the Fed thinks of the economy now and going out with rate hikes.
Housing already in a recession, but no credit stress
During the build-up to when the housing bubble burst, housing was getting noticeably weaker on many fronts. What was more damaging was that people were filing for foreclosures before the job loss recession even happened. Currently, the housing market is in a recession: sales, production, jobs and incomes are all falling in the housing sector. This is something I talked about on CNBC a few months ago. But this is a traditional housing recession, this is not a credit bust like we saw during the housing bubble years.
The Federal Reserve wants a housing reset. They know housing is in recession already, but they don’t care because they don’t see a credit bust or a job loss recession yet. Total inventory in America grew from 2000 to 2005 while demand grew. The FOMO demand (fear of missing out) credit boom from 2002 to 2005, as we can see below, has not happened in the last 10 years.
Purchase application data is below 2008 levels today. However, total inventory levels today are below 2019, 2014, 2007, 2005, and 2000 levels because homeowners are in a good place financially. In 2005, we saw a massive spike in inventory during an economic expansion, and then the job loss recession happened in 2008.
While the economy was still in expansion mode, inventory rose from 2.5 million in 2005 to over 4 million in 2007, with foreclosures and bankruptcies rising since then. Today, we are at 1.25 million total inventory, according to NAR, and household balances still look good.
Now, a job-loss recession can change this narrative. However, unlike the credit stress of 2005 to 2008, we are back to traditional late-cycle lending risk with primary homeowners. Those homes with a meager down payment that don’t have excellent FICO scores or a lot of reserves would be the high-level risk for future foreclosures.
This is why I am very mindful of recent 100% loans that some banks are offering. So while the Fed might be monitoring the housing recession to see how bad it gets, they’re not worried enough to start talking about lower rates or buying mortgage backed securities to help housing grow again.
Consumer balance sheets and debt payment levels are healthy.
Then there is the consumer balance sheet, which still has between $1.5 to $1.7 trillion in excess savings post-COVID-19 and $350 billion in the hands of lower-income households, which makes the Fed feel better about their rate hikes. From the Fed: 
,
The Fed feels good about household debt payments as a percentage of disposable incomes — this is close to all-time lows. After the housing bubble crashed, a lot of household debt got deleveraged through foreclosures, short sales and bankruptcies. What was left was fixed long-term debt cost that benefitted from three refinancing waves, driving down the total cost of debt as a percentage of disposable incomes.
Homeowners look great with their nested equity positions; with price gains over the last several years homeowners now have a lot of equity built in. Also, homeowners have been living in their homes longer and longer, so their nested equity position has improved over time. And, more than 40% of homes in America don’t even have a mortgage.
On top of all this good news for homeowners, their mortgage payment as a percentage of disposable income look excellent. We have had three refinance waves since 2010, which created better cash flow for homeowners, meaning the bulk of the households with the highest levels of nominal debt load look excellent. So you can see why the Fed feels a bit more confident that the economy can take these rate hikes to break down inflation and why inflation might have more legs because we don’t see credit stress in the system.
This is a big reason why the credit scores of homeowners have looked solid post-2010 and should always look solid as long as we don’t ease lending standards.
Another good data line from Len Kiefer, deputy chief economist at Freddie Mac, is the distribution of mortgage households and their rates. As you can see below, nearly 65% of households have rates between 2%-4%, and 85.9% have rates of 5% and below.
With the Fed meeting this week to raise rates again, the speculation is what happens after. Are we getting closer to the end of the Fed rate hike cycle? At that point it will be all about the economic data.
I don’t see the Fed changing their tune on rate cuts until the labor market breaks. I believe they will use the strength of household balance sheets to justify hikes because they think rates need to stay higher for longer. However, with all the rate hikes in the system now, once Americans start losing their jobs, the Fed’s tone will change.
It will be hard for them to justify high rates when Americans lose their jobs, no matter how good the consumer looks on paper. Now that all six of my recession red flags are up, the only data line I am focusing on is the labor market. Once that turns, the job-loss recession is in.
That should help the Fed fight against inflation since they believe a higher unemployment rate will mean less wage growth and less inflation. We are getting into a fascinating period with the Fed, their talking points and the economic cycle. Last week I made a case for lower mortgage rates in 2023, but that was based on the bond market. For the Fed to start rate cuts, they need to see a job loss recession.
recession unemployment bankruptcy bankruptcies covid-19 economic expansion fed federal reserve mortgage rates housing market recession recovery unemployment
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Homes listed for sale in early June sell for $7,700 more
New Zillow research suggests the spring home shopping season may see a second wave this summer if mortgage rates fall
The post Homes listed for sale in…
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- A Zillow analysis of 2023 home sales finds homes listed in the first two weeks of June sold for 2.3% more.
- The best time to list a home for sale is a month later than it was in 2019, likely driven by mortgage rates.
- The best time to list can be as early as the second half of February in San Francisco, and as late as the first half of July in New York and Philadelphia.
Spring home sellers looking to maximize their sale price may want to wait it out and list their home for sale in the first half of June. A new Zillow® analysis of 2023 sales found that homes listed in the first two weeks of June sold for 2.3% more, a $7,700 boost on a typical U.S. home.
The best time to list consistently had been early May in the years leading up to the pandemic. The shift to June suggests mortgage rates are strongly influencing demand on top of the usual seasonality that brings buyers to the market in the spring. This home-shopping season is poised to follow a similar pattern as that in 2023, with the potential for a second wave if the Federal Reserve lowers interest rates midyear or later.
The 2.3% sale price premium registered last June followed the first spring in more than 15 years with mortgage rates over 6% on a 30-year fixed-rate loan. The high rates put home buyers on the back foot, and as rates continued upward through May, they were still reassessing and less likely to bid boldly. In June, however, rates pulled back a little from 6.79% to 6.67%, which likely presented an opportunity for determined buyers heading into summer. More buyers understood their market position and could afford to transact, boosting competition and sale prices.
The old logic was that sellers could earn a premium by listing in late spring, when search activity hit its peak. Now, with persistently low inventory, mortgage rate fluctuations make their own seasonality. First-time home buyers who are on the edge of qualifying for a home loan may dip in and out of the market, depending on what’s happening with rates. It is almost certain the Federal Reserve will push back any interest-rate cuts to mid-2024 at the earliest. If mortgage rates follow, that could bring another surge of buyers later this year.
Mortgage rates have been impacting affordability and sale prices since they began rising rapidly two years ago. In 2022, sellers nationwide saw the highest sale premium when they listed their home in late March, right before rates barreled past 5% and continued climbing.
Zillow’s research finds the best time to list can vary widely by metropolitan area. In 2023, it was as early as the second half of February in San Francisco, and as late as the first half of July in New York. Thirty of the top 35 largest metro areas saw for-sale listings command the highest sale prices between May and early July last year.
Zillow also found a wide range in the sale price premiums associated with homes listed during those peak periods. At the hottest time of the year in San Jose, homes sold for 5.5% more, a $88,000 boost on a typical home. Meanwhile, homes in San Antonio sold for 1.9% more during that same time period.
| Metropolitan Area | Best Time to List | Price Premium | Dollar Boost |
| United States | First half of June | 2.3% | $7,700 |
| New York, NY | First half of July | 2.4% | $15,500 |
| Los Angeles, CA | First half of May | 4.1% | $39,300 |
| Chicago, IL | First half of June | 2.8% | $8,800 |
| Dallas, TX | First half of June | 2.5% | $9,200 |
| Houston, TX | Second half of April | 2.0% | $6,200 |
| Washington, DC | Second half of June | 2.2% | $12,700 |
| Philadelphia, PA | First half of July | 2.4% | $8,200 |
| Miami, FL | First half of June | 2.3% | $12,900 |
| Atlanta, GA | Second half of June | 2.3% | $8,700 |
| Boston, MA | Second half of May | 3.5% | $23,600 |
| Phoenix, AZ | First half of June | 3.2% | $14,700 |
| San Francisco, CA | Second half of February | 4.2% | $50,300 |
| Riverside, CA | First half of May | 2.7% | $15,600 |
| Detroit, MI | First half of July | 3.3% | $7,900 |
| Seattle, WA | First half of June | 4.3% | $31,500 |
| Minneapolis, MN | Second half of May | 3.7% | $13,400 |
| San Diego, CA | Second half of April | 3.1% | $29,600 |
| Tampa, FL | Second half of June | 2.1% | $8,000 |
| Denver, CO | Second half of May | 2.9% | $16,900 |
| Baltimore, MD | First half of July | 2.2% | $8,200 |
| St. Louis, MO | First half of June | 2.9% | $7,000 |
| Orlando, FL | First half of June | 2.2% | $8,700 |
| Charlotte, NC | Second half of May | 3.0% | $11,000 |
| San Antonio, TX | First half of June | 1.9% | $5,400 |
| Portland, OR | Second half of April | 2.6% | $14,300 |
| Sacramento, CA | First half of June | 3.2% | $17,900 |
| Pittsburgh, PA | Second half of June | 2.3% | $4,700 |
| Cincinnati, OH | Second half of April | 2.7% | $7,500 |
| Austin, TX | Second half of May | 2.8% | $12,600 |
| Las Vegas, NV | First half of June | 3.4% | $14,600 |
| Kansas City, MO | Second half of May | 2.5% | $7,300 |
| Columbus, OH | Second half of June | 3.3% | $10,400 |
| Indianapolis, IN | First half of July | 3.0% | $8,100 |
| Cleveland, OH | First half of July | 3.4% | $7,400 |
| San Jose, CA | First half of June | 5.5% | $88,400 |
The post Homes listed for sale in early June sell for $7,700 more appeared first on Zillow Research.
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February Employment Situation
By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…
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By Paul Gomme and Peter Rupert
The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.
Temporary help services employment continues a steep decline after a sharp post-pandemic rise.
Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.
The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.
The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.
Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.
As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.
Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.
The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.
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Mortgage rates fall as labor market normalizes
Jobless claims show an expanding economy. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.
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Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.
The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.
From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250
Below is an explanation of how we got here with the labor market, which all started during COVID-19.
1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.
2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.
Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.
3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too
Total employment data
4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels.
From BLS: Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.
Here are the jobs that were created and lost in the previous month:
In this jobs report, the unemployment rate for education levels looks like this:
- Less than a high school diploma: 6.1%
- High school graduate and no college: 4.2%
- Some college or associate degree: 3.1%
- Bachelor’s degree or higher: 2.2%
Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.
recession unemployment covid-19 fed federal reserve mortgage rates recession recovery unemployment
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