Q2 2024 jobs data signals rate cut

Justin Lahart and Nick Timiraos of the Wall Street Journal report on last week’s jobs data, highlighting that the U.S. added 206,000 jobs in June, slightly surpassing expectations and maintaining a strong growth trend. However, the unemployment rate increased to 4.1%, indicating some weakness in the labor market, showing signs of gradually slowing down. Further, average hourly earnings increased by 3.9% in June compared to a year earlier, marking their smallest gain since 2021.

Source: Wall Street Journal (July 2024)

“For the Federal Reserve, Friday’s report provides further evidence that the labor market appears to have come into better balance. A hot labor market makes it more difficult to lower rates, while the central bank is also mandated to keep the job market as strong as possible without triggering inflation. There likely wasn’t anything alarming enough in Friday’s payroll report to lead Fed officials to push for a July rate cut.”

Mortgage Banker Association (MBA) chief economist Mike Fratantoni reacts to the data and what it means for mortgages and interest rates: 

“Beyond this headline, other aspects of the data indicate a slowing job market. The unemployment rate ticked up to 4.1%. Wage gains slowed again to 3.9% on a 12-month basis, and temporary hires actually decreased by 49,000, a sign that business demand for labor is decreasing. Historically-speaking, this is still a tight job market. However, relative to more recent data, the job market is weakening. Inflation data showing more reductions for the next couple of months will be the most important evidence that the Federal Reserve needs to cut rates in September. The current job market data points in that direction once you read below the headline.”

Logan Mohtashami of HousingWire (subscription required) comments on the data, reporting that he believes the Fed won’t pivot until we see a greater weakening in labor markets. “That has been my position since 2022 and we are starting to see some early signs of them successfully attacking the U.S. labor market in the past few months.”

Jeanna Smialek and Joe Rennison of The New York Times report that the jobs data spurred investors to bet on a September rate cut. Fed officials have indicated that a significant labor market weakening could lead to rate cuts. Although the current slowdown may not meet that standard, economists and investors believe that, combined with cooling inflation, it could prompt a rate cut as early as September. Investors have reacted by slightly increasing stock prices, and the expectation of two quarter-point rate cuts this year is now fully priced in.

Multifamily market

According to a new report from RealPage, demand for apartment rentals is rising. Demand surged in Q2 2024, with 390,000 units absorbed over the past year, making it one of the highest figures on record. That said, record supply continues to moderately outpace demand, with over half a million new market-rate apartment units delivered in the past 12 months, the highest total since 1986.

Source: RealPage (July 2024)

Although demand rose in Q2, according to RealPage, Redfin reports that in Q3, this trend may be moderating. This is due to a record number of apartments coming online following longer-than-expected delivery times. That said, expect new supply to cool as builders pause new construction due to high rates and an uncertain economy.

Source: Redfin (July 2024)

“Apartment builders have pumped the brakes on the number of projects they’re starting—multifamily building starts have fallen below their 10-year historical average—but completions are still near their record high because there were so many construction projects kicked off during the pandemic moving frenzy that are just now being finished. This backlog of new units is putting a lid on how much rent prices can grow. But at the same time, demand from renters who can’t afford to buy their own homes is keeping rents near their record high.”

Sami Sparber of Axios reports on multifamily, highlighting that larger apartments are rising as developers target individuals seeking more living space due to delayed home purchases and remote working. In 2023, the average size of newly built apartments in the U.S. increased to 916 square feet, marking a 27-square-foot growth from the previous year. This followed a period of shrinking apartment sizes in 2022, attributed to strong rental demand prompting developers to maximize building capacity.

Luxury market

Jeff Andrews of HousingWire reports on the luxury real estate market, noting that, according to a new analysis, these units—with monthly rental fees of at least $5,000—make up an increasingly larger portion of the single-family rental segment. Between 2017 and 2022, the number of single-family renter households earning more than $150,000 per year doubled. The higher the income bracket, the more renters in these brackets are turning to single-family rentals. On the other hand, households earning less than $50,000 decreased by 17%, suggesting that they are being priced out. 

Further, Andrews reports on the geographic differences in luxury rental real estate:

“The trend isn’t evenly dispersed geographically. Five of the top six cities with the largest shares of single-family rentals in the luxury tier are in California. Irvine has the most, with 73.6% of its single-family rentals in the luxury space. In Los Angeles, 58.9% of single-family rentals are in the luxury tier, while 29% are in the ultra-luxury tier (monthly rents of at least $10,000). Boston’s luxury share is 42.7%, with San Diego at 40.7% and San Francisco at 37%.”

E.B. Solomont of the Wall Street Journal reports on luxury real estate and the unwillingness of owners to sell, leading to a supply crunch for this market segment. Since 2000, the average monthly number of active existing home listings has dropped by 45%, while the U.S. population has grown by about 20%. This decline can be attributed to several factors, including sellers being locked into low rates, construction costs being 40% higher than pre-COVID, and buildable land becoming more scarce.

That said, not all markets for luxury real estate are flourishing, according to Diana Olick of CNBC. Due to climate change, the nation’s priciest coastal real estate is increasingly precarious. This year’s hurricane season is already underway, and the forecast is for “above-normal” activity, according to the National Oceanic and Atmospheric Administration (NOAA). It predicts up to 13 hurricanes, with four to seven categorized as “major” storms. Various risk models have shown myriad projections for falling real estate values, but the effects of climate change are already hitting the market faster than most expected.

For example:

“Looking at ZIP codes just on the East and Gulf coasts of the United States, 33 have a median home value of at least $1 million. In just these areas a combined 77,005 properties are at significant flood risk…a climate risk data and analytics firm. That is roughly $100 billion in potential losses.”

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