Morning! This is MF Lending - we’re the fool-proof way to serve up mortgage and real estate market knowledge without any of the guesswork. So you’ll look like the smartest agent in the room (and you are!)

Here’s what we’ve got for you today:

1. A Solution to Inventory Issues 🏡

2. JPow Testifies with Congress 👩🏻‍⚖️

3. Jobless Claims & Home Sales Report 🔎

By the way, this article on Fed Coffee Corner is the most clicked link in this newsletter, you should check it out if you are interested.

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Nuwave Rates Today 📈

Jobless claims & Existing Home Sales Reports

Two economic data reports were released this morning - Jobless claims and Existing Home Sales for May.

Jobless Claims

264,000 Americans filed for jobless benefits for the first time last week - the highest number since October 2021. This continues to trend higher as the market feels the impact of higher interest rates.

As tough as it is, this is exactly what the Fed wants to see. If the economy slows down, inflation will more quickly arrive to their two percent goal.

Interestingly the majority of claims came from CA, NJ, and CT. Tennessee has one of the lowest jobless claims and was net negative in jobless claims showing the strength of the economy in the southeast.

Existing Home Sales

Existing-home sales rose 0.2% in May 2023 - with gains coming from the South and West, and declines in the Northeast and Midwest. Sales declined 20.4% year-over-year.

NAR is exactly right here. When buyers are approved, the last thing they want to see are extremely volatile swings. Back in March and April, we were seeing 50-75bps swings DAILY. This made it absolutely impossible to accurately predict monthly mortgage payments for clients, it was like blindly throwing at a dart board.

As we detailed in Tuesday’s edition, we have seen the market flat since before June. We have not seen swings in the rates, and it is resulting in more buyers (even if marginally) into the market.

Inventory Struggles Continue

Total housing inventory is up 3.8% from April but down 6.1% from one year ago. Unsold inventory sits at 3.0-month supply at current sales pace.

With the low inventory numbers - houses are moving fast. 74% of homes sold in May were on the market for less than a month - with the average at 18 days.

One Solution to the Housing Inventory 🏡

In the NAR existing home sales report, the NAR President addressed the limited housing inventory by saying:

This is exactly what I wrote about in May - Solving the Inventory Problem - we need to incentivize people to sell.

Let’s look at the numbers:

In 2021 - in hot investment property markets like Atlanta, Nashville, all over TX, etc. investors made up nearly a third of home sales. Many of them purchased the homes in cash.

Today, if they were to sell their investment property, they would pay between 15-20% on all the equity gains on the home.

As an example:

Purchased in 2020: $400,000

Sold in 2023: $650,000

Gains: $250,000

Capital Gains (15%): $37,500

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The only way to avoid Cap Gains today is to do something called a 1031 Exchange. Basically, you roll your gains on the first property into another property and delay paying capital gains.

Today, investors are not selling their homes because:

1. They do not have another property to buy with 1031 exchange (again, because there is limited inventory).

2. They do not want to pay large sums in cap gains -

Therefore, the easy calculus is to hold tight. Limiting the inventory on the market.

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Now imagine a well-functioning government temporarily suspends cap gains on investment properties for the next twelve months. What happens?

Investors will immediately re-underwrite their positions.

When that happens, some of those investors will decide they need to take their chips off the table by selling their positions. They determine that now is the best time to sell, avoid paying taxes on all my wins, and move on down the road.

That will flood the market with homes for sale.

Why this won’t happen right now

Housing is a huge driver of the economy. When people buy homes, they consume. They buy new furniture, new cars, pay for movers, pay for realtors, etc.

If they rolled out a policy like this, the housing market would rip - driving inflation up.

The Fed cannot afford to spark the economy if they want to keep inflation under control.

While it would be beneficial for both NAR and my own business, it would not be beneficial for the macro economy if we want to get to the other side of the inflation issues.

If this were to happen, it would be when the economy needs a catalyst.

If we have a “hard landing” and see a large pullback in GDP in 2024, I think this idea would be back on the table. But as of today, it’s a great idea that cannot be executed…yet.

Jerome Powell Testifies with Congress 👩🏻‍⚖️

Jerome Powell was questioned yesterday by Congress on liquidity, inflation, and bank failures a week after the Fed’s June meeting.

In his statement, Powell affirmed his statements previously saying -

Based on the Fed Watch Tool - it’s nearly an 80% chance that the Fed raises rates by 25bps in the July meeting.

Excluding the small chance CPI numbers come in well below expectations, we will see interest rates rise again through the summer.

Most likely, we will begin to see interest rates in the high-6s to low 7% range all summer.

Other key takeaways from the questioning:

1. Powell is extremely hawkish on inflation

   He indicated Wednesday it was a “pretty good guess” the Fed will hike rates at least twice this year.

2. New regulation of smaller banks is unlikely

3. Everyone is waiting for the “data”

As I have said before - every time you see “data dependent” or “looking at the data” you can go ahead and tune out because the next thing the Fed says will be blowing smoke. They have no idea what they are looking for and continue to move the goal posts.

It seems (right now) the key piece they are waiting on is PCE and Core PCE - which will be released before the next Fed meeting. These indices will be major market movers.

What does this mean for clients?

If clients are in the market, and comfortable with the monthly payments on their preapproval, there is no benefit in waiting to purchase a home. 

Home prices are rising, interest rates are expected to rise until, at least, early 2024 (making the same home more expensive), and the competition on the sideline is doing exactly the same thing.

You can read our previous articles for more in-depth coverage on all of this: Why to Offer Over Ask | Investors Have Left the Market | Home Prices Continue to Rise

The Cul-de-Sac

Thanks for reading - that is all we have for today 😎

Please forward this to your friends and colleagues if you found it valuable.

— Michael F DiLucchio