Economic Update

by Mark Sprague, Independence Title’s Director of Information Capital

DATELINE: May 3, 2024

The Federal Reserve will likely maintain higher interest rates for an extended period due to firmer-than-expected inflation in early 2024, despite market expectations of rate cuts this year. Fed Chair Jerome Powell is widely expected to emphasize the necessity of this approach to curb economic overheating, signaling the potential of no rate cuts in the near future.

As long as unemployment remains low, reducing rates would feed inflation. So, more of the same. Historically, when rates stabilize as they have, buyers realize that they should buy rather than wait, which historically is about a 20+% increase in sales from the previous year. With not enough residential inventory, values will continue to see mid-single to high-single-digit appreciation through the year in all Texas markets.

Ahead of today’s Federal Open Market Committee decision, which could alter rate cut expectations for the remainder of 2024, bond prices once again sank yesterday, pushing yields up. Between the statement and Fed Chair Powell’s press conference, analysts anticipate a hawkish message and the Fed signaling to the markets that it is comfortable keeping rates higher for longer while stopping short of introducing the possibility of raising rates further. Pricing in fed funds futures markets now suggests only one .25% market cut for the year as the most likely scenario to play out, a large departure from the six+ cuts the market priced in at the start of the year. The Fed is close to tapering its balance sheet reduction by reducing the runoff of its Treasury securities, which shouldn’t impact mortgage-backed securities.

If you have been following our narrative, our estimate of rate movement has not changed for 9 months. Initially it slowed the residential markets, but the steady increase of job creation in most of our Texas metros will continue to drive buyers to buy now.

The only real estate concern is the COVID effect on commercial properties with their larger vacancies. We have not seen much movement on values, but sales are off dramatically in Texas and nationally (60+%). Value reduction should follow in office, retail, and land in 2025. Over the next 5 years expect a 20+/- value reduction in these channels. (the good news is most of Texas commercial is in a better place than other states.)

Hopefully, these talking points will help as the market readjusts after the last 4 years.

As always, if you have any specific questions or concerns, please contact your business development representative.