Maybe it’s just the rapid pace of new economic and real estate news, but it feels like the summer has flown by. In this month’s update we will discuss a stunning jobs report, the first good news about inflation in months, the current status of a changing Utah real estate market, and the impacts of the Inflation Reduction Act on housing. But first, the headlines.
July Jobs Report - In what can only be described as a total shocker, the July Jobs Report showed gains of 528,000 jobs and a reduction in unemployment to 3.5%. Why was this so surprising? To put things in proper perspective, the report showed double the job gains expected by analysts. For months now, signs of a slowing economy have been popping up everywhere and the Fed has maintained aggressive rate hikes (see below) to fight inflation so the expectation was that a slowdown would begin to manifest itself in the labor market as well. Ultimately, however, the labor market remains unexpectedly strong despite everpresent signs of weakness elsewhere in the economy.
Weekly Jobless Claims - Weekly jobless claims rose for the second consecutive week, adding a slight chill to the July Jobs Report. There were 262,000 first time filers, which essentially matched expectations, and another 1.42 million Americans have been receiving benefits for 2 or more weeks. Locally, Utah saw a modest 2.9% uptick in filings (1,263 in total) from the previous week. For perspective, economists consider 270,000 - 300,000 new filings as a benchmark for a material slowdown in the labor market.
Fed Hikes Rates Again - On July 27th, the Fed again boosted interest rates another 0.75% in an ongoing effort to combat runaway inflation. This increase, our fourth this year, demonstrates the most aggressive attempt in decades to cool an overheated economy by increasing borrowing costs. For those keeping score at home, we’ve now seen rates climb 225 basis points since March and more hikes are expected before year end, although the likelihood of a smaller increase in September appears possible in the wake of the July’s CPI report.
July CPI Report - Finally, after months of runaway fears, we saw some good news about U.S. inflation. On Wednesday, the Consumer Price Index for July showed signs that inflation may have finally (and mercifully) peaked. Year over year, prices climbed 8.5% in July compared with a 9.1% year over year increase increase we saw in June. Additionally, month over month inflation came in flat compared with 1.3% in June. Make no mistake, an annual inflation figure of 8.5% when the Fed usually targets 2% is still abhorrently high but the optimism we saw in the markets following the release offer hope that inflation is finally trending in the right direction.
The Crisis of Rising Rents
Inflation is a major problem. It’s not difficult to find headlines reinforcing the fact that what a dollar bought you yesterday is no longer valid today. Nowhere is this trend more evident than in rental housing. Just last month, a new report from Realtor.com showed rents hit an all time record high for the 16th consecutive month. As of June, the national median rent is now $1,876 per month, or 14% higher than just a year ago. Unfortunately for U.S. renters, the Fed’s decisive and unprecedented actions to curb inflation in the form of rapid interest rate increases have only exacerbated the problem, because in most markets, renting remains a more cost effective option.
We know how we got here. Decades of underbuilding despite soaring demand for housing has caused a housing shortage, recessions and pandemics encouraged the Fed to keep interest rates low making home ownership easier and sending prices higher, COVID-19 induced supply chain issues sent building material costs soaring, institutional investors have poured billions of dollars into rental housing further reducing the supply, and overall cost increases have forced landlords to charge more in order to maintain margins. It’s been a perfect storm and we are starting to see the effects in the form of a growing cohort of cost burdened renters.
According to a recent study of 2,300 renters conducted by the Hustle, 40% of renters surveyed are “cost burdened” or spending more than 30% of their income on rent. Another 34% of renters fall within just ten percentage points (of income spent on rent) of this range and could cross that threshold if cost increases continue. Add in the fact that Millennials now collectively carry $1T in debt and nearly half of Gen Z and Millenials live paycheck to paycheck, one has to wonder how long will it truly be before we see default rates start to climb.
The real problem here is no “magic bullet” exists to alleviate the imbalance quickly. The pressure to do something is mounting, but at it’s core, it’s a supply side issue and that means we must wait for new housing to come online. Short of that, the only ammunition available to legislators seeking to address this challenge is zoning reform to allow for greater density (75% of residential land is zoned for single family use) and improving to the dreadfully inadequate Section 8 housing voucher program (the approval process can take years). For what it’s worth, economists are predicting that the rental market will cool, but nothing will happen overnight.
Utah Real Estate Market
As the Bob Dylan song goes, the times they are a changin. Well that’s certainly true in real estate. Gone are the days of record high median sold prices, high sold counts, and low inventory. They have been replaced with the polar opposite as contract cancellations jump, overall transactions dip, listing inventory increases, and prices settle. The Feds aggressive 225 basis point increase in interest rates over the past 5 months was designed to have exactly this kind of chilling effect on housing. Despite what sounds like bad news, these measures were needed to get inflation under control and prevent a larger, more painful crash in the future. All in all, Utah’s future still looks bright as it was just ranked as the #1 most stable housing market in the country by CNBC.
Median Sold Price*
Monthly Change: Down 3.3%
Monthly Change: Down 18.9%
Year Over Year: Down 26.8%
Average # of Active Listings*
Monthly Change: Up 12.5%
Year Over Year: Up 119%
* all graphs/data are for single-family homes in Salt Lake, Utah, and Davis Counties.
Inflation Reduction Bill Eliminates Changes to Carried Interest - Included in the Inflation Reduction Act of 2022 was a provision containing changes to carried interest. Carried interest is an important tax advantage for multi-family investors as it allows certain income to be taxed at capital gains rates instead of as regular income. The changes would have required carried interest stemming from real estate to be held for 3 years before receiving long term capital gains treatment. However, as of August 9th, the carried interest provision was removed in order for the legislation to secure support from Sen. Kyrsten Sinema.
Where are people moving? - A pair of infographics, one showing the results of a decade of population growth across the US and another highlighting the percentage population growth from 2020 to 2021 both show Utah is a popular destination for those looking to relocate. Overall, the trend of people moving South and West is clear, but it is interesting to see the migration patters displayed visually and exciting to see Utah’s optimistic outlook for continued growth if these trends continue.