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July 2023 » thefivestar.com 51 July 2023 T H E P O I N T Q: Earlier in May, Fed Chair Powell reiterated that he is still expecting a soft landing for the economy this year and that appears slightly more likely, given the latest data. Do you predict further rate hikes above the 5% mark at the Federal Open Market Committee's next few meetings? I don't know. The Fed has raised rates at the fastest pace in more than four decades. That is sufficient to wait and see the effects of that in terms of a cooling labor market. Market cool- ing and overall consumer demand are helping with bringing inflation down. There is widespread disagreement in terms of what the outlook is for the Fed. Some people want much more aggressive cuts, and some committee members themselves are predict- ing two or more hikes. So, odds have increased lately that the Fed has more hiking to go, but I would still place my bet that they're going to pause. I predict we'll see the cumulative effects lag, and that's what Jerome Powell said at the last press conference: that once you consider the lag that takes place from how rates are hiked, and when you see that overall impact on the economy and inflation, it takes some time to see how those changes will unravel. [When it comes to] comments about a soft landing still being a possibility this year, I'm in the optimistic camp with them. The latest data seems to be pointing in that direction. All the recession calls [from Fannie Mae and the like] have been pushed out every three months, further and further. It's been a year now that the majority of people have been expecting a recession within the next 6-12 months, and those estimates just keep getting pushed out. I think people underestimated how resilient the American consumer is and how resilient the labor market is. Few anticipated that the unemployment rate would fall further last month, rather than start to creep up, which is quite remarkable. Q: How is the "lock-in effect" impacting the market? Should we be worried about this in the long term? The lock-in effect is certainly playing a big role in terms of people deciding whether or not to sell their home when they feel they need to move, or whether they move at all. How large of a role it's playing Is hard to say. Certainly, new listings are down about 25% right now, year over year, and overall, more than four out of five existing mortgage hold- ers have a rate that's well below 5%. They are locked into that lower rate. But there are other factors at play beyond just the lock-in effect that, even with rates at or above 6%, we could still see some increased supply hit the market. A lot of people moved during the pandemic. A lot of moves were "pulled forward," demand was pulled forward, and people listing their homes for sale were pulled forward. So, right now, a record level of people—I think it's three-in-five, more than half of house- holds—have moved within the last four years. And that number is significantly elevated. That's just because so many people moved dur- ing the pandemic, whether they moved across the street or the country. Many of those moves mean that a lot of people now are not planning to move for several years; they'll probably stay in their homes, so the shorter tenure of existing homeowners is also going to be a drag on sup- ply alongside the lock-in effect. We also have a lot of new construction that is still coming down the pipeline. You need that additional supply to create options for people who would otherwise move. A lot of home- owners might have a low rate, but what they're complaining about is available inventory. More new construction and more people listing their homes for sale could cause them to jump into the game of musical chairs and switch homes. Without those new chairs being added or other people moving, they're also going to be locked into their homes, not just because of rates but because of [the lack of ] inventory. All three of those factors are holding back supply right now. All of them are concerning. But the interest rate factor has been the most salient for people when you do the math on a 3% mortgage versus a 6% mortgage. That has held back supply this year. Q: What are the most important trends you see in the housing market? Well, building off the last two concepts, one has been supply; that's been very concern- ing, that new listings are down 25%. That's a huge drop, and it's holding back sales, even if demand is strong or we see a wave of demand rushing to the market when rates drop even a little bit. Ultimately, a lot of those homebuyers end up hitting a wall when they don't find a home "... because so many people moved during the pandemic, whether they moved across the street or the country. Many of those moves mean that a lot of people now are not planning to move for several years; they'll probably stay in their homes, so the shorter tenure of existing homeowners is also going to be a drag on supply alongside the lock-in effect."