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Fed Chair is Back After Strong Jobs Report
After last week’s surprisingly strong Jobs Report, Fed Chair Jerome Powell spoke about the economy and direction of rates. Let’s walk through what happened and what to watch in the week ahead.
“Cause I’m Back, Yes, I’m Back” – Back in Black by AC/DC.
“The strong Jobs Report shows you why we think this will be a process that takes a significant period of time.” Fed Chair Powell 2/7/23.
Partner, Mortgage Consultant CMPS
O’Dette Mortgage Group
February 14, 2023
The Federal Reserve has a dual mandate, which is to maintain price stability (inflation) and promote maximum employment. On the inflation front, it appears inflation has indeed peaked and is on the decline. The Fed Chair reiterated the “disinflationary process” has begun. This is a positive development for the economy, housing, and long-term rates.
On the labor market front of the Fed’s mandate, the Fed in its desire to slow demand and thus inflation, wants to see some unemployment. The good news/bad news? Last week, the Bureau of Labor Statistics (BLS) reported the unemployment rate at 3.4%, the lowest in 53 years…that is good news. The bad news is it means the Fed will look to raise rates by .25% in March and another .25% in May, thereby lifting the Fed Funds Rate above 5.00%.
This renewed outlook for a higher Fed Funds Rate has elevated uncertainty and volatility in long-term rates, which move up and down based on economic conditions and inflation, both of which are easing and a reason why long-term rates are lower than short-term rates.
“Likely to see some softening in labor market conditions” – Powell
This is a reasonable assumption considering the number of planned layoffs announced this year, while we sit at multi-decade low unemployment, it seems like up is the only direction for unemployment.
Soft Landing Back in Play
Due to the current strength of the labor market, there is a growing chance the Fed can raise rates and lower inflation towards its 2.00% target without triggering a deep recession.
History has shown that recessions do not take place with unemployment at 4% or below without some sort of surprise shock to the economy.
Let’s hope the Fed is not too successful in “creating” unemployment because if it quickly rises, the idea of a soft economic landing could go away quickly too.
3.70%
As we mentioned, long-term rates have responded negatively to last week’s strong jobs report, because good news is bad news for bonds and rates. The 10-yr Note touched 3.33% last Thursday and touched 3.70% just a few days later. However, rates remain beneath where the 10-yr yield opened 2023 at 3.85%.
“We are going to react to the data” – Powell
Here the Fed Chair reminds the markets that last Friday’s Jobs report was strong, but backward looking and lagging while other economic indicators show signs of s slowdown. The Fed does not want to over hike rates into a slowing economy and be the reason for the recession. So, while the market is currently pricing in two more rate hikes and a rate cut in December, this story could quickly change once again.
Bottom line: Rates and inflation have peaked. Housing activity has jumped in the past weeks as a result. The incoming data will determine how much better rates can get in the next few weeks leading to the next Fed Meeting.
Looking Ahead
Next week’s CPI is a very important number. If it meets or comes in lower than expectations, we could see home loan rates revisit the levels seen last week right before the Jobs Report last Friday. We will also see the latest readings on housing and the strength of the consumer, by way of Retail Sales. As fast as the story changed when the strong jobs data hit, things can change quickly upon these reports.
Breaking News: Today’s CPI Inflation
Partner, Mortgage Consultant CMPS
O’Dette Mortgage Group
February 14, 2023
The all important CPI (consumer price index) inflation came out this morning and mixed news; the year over year January CPI report fell to 6.4%, which was a hair lower than last month’s 6.5% – which is good, but higher than market expectations of 6.2% – which could have been better.
Reminder inflation is the arch enemy of bond prices, and therefore mortgage rates, and the reason we’ve seen mortgage rates improve since what appears to have been the peak in November is because inflation has been coming down. CPI peaked last summer at 9.1%, and has since been steadily decreasing. It was the November & December CPI reports coming in lower than market expectations that were the impetus for mortgage rates improving over the past few months, and then last months data at 6.5% came in right at expectations, so today’s report was much anticipated and bucked the prior three month trend and came in higher than expectations.
Looking at the numbers from a month over month perspective, which is arguably the most relevant in measuring present trend, the month over month figure was up 0.5%, which was up from 0.1% last month. Shelter (housing) is the biggest factor here increasing 0.7%, making up the majority of the month over month numbers. National housing costs are not coming down.
This month’s jobs & CPI reports are now behind us, the labor marker remains very strong, and inflation is moving lower, albeit slowly. Inflation creeping lower is good, but as expected we should not expect a straight-line drop in prices, and there will be slower and outright pauses in declines going forward.
As a result of this morning’s CPI report, bond yields/mortgage rates have ticked a hair higher. See chart below of the 10 yr T, which jumbo rates are based on, for a graphical context. As you can see, rates peaked first week in November, have since come down a bit, and now giving up a bit of ground.
Regarding conversations with clients; 30 yr fixes in the 6%’s with option of getting into the 5% with points, is a healthy “normal” place for them to be, and still well below historical long term averages. We’re still seeing jumbo rates notably lower than conforming (approx ~.625% .75%). Lastly, even after rates have improved, considering grossing up a sale price & requesting a seller credit can still be a good strategy to get buyers into not just a more palatable rate, but one that is really quite good and a loan they may hold for as long as they’re in the property.
Good Economic News is Good News
Interest rates hover near the best levels since September, despite several good economic readings reported. Let’s discuss what happened and see what is coming next week.
“Hey, alright now And don’t it feel good” – Walking on Sunshine by Katrina and the Waves
O’Dette Mortgage Group
January 30, 2023
Economy Grew to Finish 2022
Gross Domestic Product, a measure of economic growth, for the Fourth Quarter 2022 showed the economy expanded at a 2.9% annual rate, down slightly from the 3.2% rate in the Third Quarter 2022. Seeing the economy grow in the back half of 2022 after negative growth in the first half of 2022 is good news.
This positive reading elevates the chance of a “soft landing” by the Fed, where they hike rates to slow inflation but do not slip us into a recession.
Unemployment Line is Historically Short
Initial Jobless Claims for December came in at 186,000…the lowest reading in 9 months. This is also good news as it tells us the length of the unemployment line. If the amount of people signing up for first time unemployment benefits remains near historical lows, it further lowers the chance of a recession. Moreover, it highlights the continued strength in the labor market, and this is paramount as jobs buy homes. Yes, we want interest rates to move lower but if someone doesn’t have a job or is in fear of losing their job, they can’t commit to a home purchase. Let’s hope the labor market remains strong as the Fed continues to hike rates to slow demand and lower inflation.
New Home Construction Costs Coming Down
The National Association of Homebuilders reported that building materials costs, less energy, are up 8.3% which is a big increase annually. However, the price growth is down a staggering 60% as input costs increased over 16% in 2021.
We should expect input cost growth to slow further in response to slower demand and further reopening of supply chains. This is another positive theme as we move through 2023.
Smaller Fed Rate Hike Still Priced In
One of the headwinds to the economy is the threat of higher short-term rates by the Federal Reserve. The good news there? After four consecutive .75% rate hikes, followed by a .50% hike in December, the financial markets are fully pricing in a smaller .25% hike at next week’s Fed Meeting.
The markets also believe the Fed will raise rates by another .25% in March and then pause to allow all the hikes that date back to last summer to seep into the economy.
This means the Terminal Rate, or the fancy way of saying the peak in the Fed Funds Rate, is going to be in a range of 4.75- 5.00%. From there we will have to continue to watch the standoff between the Fed who says they want to keep rates higher for longer. Additionally, with no rate cuts this year versus the financial markets, which are starting to “price in” as many as two rate cuts later this year.
Bottom line: The economy is showing mixed signals, but the labor market remains strong, and we are nearing the end of Fed rate hikes. So, the plan to land the U.S. economy softly and avoid a deep recession remains very much in play. That is good news for housing and the economy.
Looking Ahead
Next week is Fed week. As of this moment, the markets fully expect the Fed to raise rates by .25%. Anything other than that would be a surprise and generate a lot of market volatility. The Fed generally looks to avoid sending the market mixed signals but the markets will be on edge.
Have you experienced property damage due to the 2022/2023 Winter Storms?
A federal emergency declaration has been proclaimed by President Biden and financial assistance may be forthcoming. While the federal government has not yet declared a disaster (a different designation that provides different resources) for California that could authorize direct financial assistance to affected residents.
Placer County requests those who have suffered damage to report it HERE.
If the issue is life threatening please dial 911. The intention of the survey is to allow the reporting of non-emergency issues during periods when the Emergency Operation Center is active. Your answers to the brief survey will help better document the extent of damage these storms have caused, so Placer County can continue to advocate for all available support for impacted residents.
With more weather still in the forecast, please use the Ready Placer Dashboard for the latest on road and weather hazards and to access resources to help protect your family and property.
Breaking News: CPI Report at 6.5%
The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The U.S. Bureau of Labor Statistics (BLS) calculates the CPIas a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.
O’Dette Mortgage Group of Synergy 1 Lending
January 12, 2023
January’s CPI (consumer price index) inflation data was released this morning and came in right at expectations of 6.5%. This is good news as it’s notably lower than December’s reading of 7.1%, and CPI inflation has now moved lower for 6 consecutive months, with the last 3 CPI reports being the real catalyst in mortgage rates lower. While this 6.5% CPI figure remains notably higher than the Fed’s target of 2% inflation, today’s report was still good news in the context of how inflation/mortgage rate are recovering from the distortion created by the Fed’s red line full throttle bond purchase program during Covid, and all supply chain related Covid issues which are mostly in the rear view mirror. Here’s some context to share with clients and what it all means for mortgage rates.
We’re currently in this interesting window of time where it’s valuable for real estate investors to understand that increases to the Fed Funds rate does NOT mean mortgage rates increase. Sometimes reiterating the mechanics of what determines mortgage rates (bond prices, which have move significant been determine by 2 things in the past few years: the Fed’s bond purchase program and inflation) can instigate the question of; “why does it matter if the Fed hiking the Fed Funds rate isn’t what drives mortgage rates higher, it seem they’re usually moving in the same direction?”, in other words – does it really matter if it’s correlation or causation?
Answer: yes – very much so, and the current market is precisely why it’s so important to clearly communicate the differences & mechanics for clients. As of November, we are now in a phase where the Fed will continue to hike the Fed Funds rate, while mortgage rates are moving lower. This is key for those looking to capitalize on a real estate opportunity before mass market sentiment pendulums back.
Here’s what’s going on with inflation mortgage rates: CPI, a primary measure of inflation, had peaked at 9.1% this past summer. The Fed hikes the Fed Funds rates (short term consumer debts) to fight this inflation. The November & December CPI reports both came in notably lower/better than the market expectation, this benefited bond prices, and therefore mortgage rates. Since mid-November we’ve been talking about how; unless we got surprisingly bad news on inflation in the months ahead, it looks like mortgage rates peaked that first week in November. Today’s CPI data coming in right at expectations further reinforces this trend. To put into perspective, the 10 yr Treasury, which is what Jumbo mortgage rates follow, hit ~4.35% that last week of October, then had it’s best day of the year the same day the November CPI report came in lower than expectations, then again moved another leg lower after the December CPI data, and is settled in today at ~3.4%. This is significant good news as we all know higher mortgage rates are part of the downward pressure on real estate prices, and vice versa.
We’re still seeing Jumbo rates today a bit lower than conforming, and the larger loan amounts actually pricing the best. For example today, a ~$2.0M purchase with 20% down, can get a 30 yr fix in the 5%’s with no points, and as low as ~5.25% with a little over a point. This is a historically healthy place for mortgage rates to be.
In sum, the headlines will soon again talk about rates moving higher when the Fed increases the Fed Funds rate again, which is coming, and meanwhile mortgage rates have already come down to a healthy level.
The Winds of Change – 2022 Year in Review
Change is the only constant in life. After two years of a COVID-fueled buying frenzy that produced stratospheric price spikes across all segments of the market, 2022 brought a bucket of icy lake water on the head. A dramatic reversal of economic conditions fueled by the Ukrainian conflict, historic interest rate hikes, a crypto collapse, and the erosion of equities rippled through Tahoe real estate. For the first time since COVID, we saw a noticeable lack of urgency as buyers were willing to wait on investing in vacation homes. By mid-summer, both supply and days-on-market had distinctly increased. Gone were the days of multiple offers within days of listing homes and the manic-ness we experienced since the pandemic onset. By the third quarter, we saw a palpable calm in luxury real estate sales. In fact, only 11 single-family lakefront homes between Rubicon Bay and Incline Village sold all year, the lowest we have seen since before our reporting began in 2006. Yet, median price has been slow to respond. As a result, in 2022, each micro-region (with the exception of lakefronts due to small sample size), saw median price reach historic highs, while sales volume decreased significantly. The disparity between median price and demand, alongside uncertain market conditions, continues to contribute to buyers willing to remain on standby, waiting for market corrections and for economic indicators to improve confidence.
As sellers reset to the new normal, we expect buyers to start to again pull their paddles from beneath their chairs in 2023. For buyers who have been patiently awaiting value opportunities, 2023 should present well. While the selling environment is not as favorable as it has been over the past few years, sellers can still take advantage of the historic run-up in pricing from COVID. However, it will be imperative that sellers adjust expectations on pricing and time on market. As we close the chapter on the COVID-driven real estate binge, the winds of change will still blow in opportunities around Lake Tahoe.
Points of Interest: January – December 2022
- Single family homes sold decreased 19% year over year.
- Median price increased 7% year over year and is on a 7-year growth trend.
- Sales volume reached a 8-year low. Median price reached an historic high.
- 210 of 903 homes (23%) sold over $2 million.
Points of Interest: January – December 2022
- Single family homes sold decreased 10% year over year
- Median price increased 24% year over year and is on a 5-year growth trend.
- Sales volume reached a 6-year low. Median price reached an historic high.
- 210 of 903 homes (63%) sold over $2 million.
Your Guideline to Short-Term Rental in Lake Tahoe
If you are looking to purchase a home to use as a short-term vacation rental (rental periods of less than 31 nights), you will be required to apply for a permit with the county in which the home is located. While Lake Tahoe falls into two different states, we have five different counties around the lake, that each have their own set of requirements and their own application processes. The guidelines have gone through numerous renditions and are always subject to change, so your best resources will be found on the county websites, organized below.
Let’s start with the counties. In the below map of Lake Tahoe, you will see four counties, with Truckee falling into both Placer County and Nevada County (detailed in the second map), and in some neighborhoods, it may even come down to what side of the road you live on! Northstar lies in Placer County, while Tahoe Donner is in Nevada County. The town of Truckee lies in Nevada County, which has additional restrictions, including that your home can not be short-term rented within one year of purchase.
Notably, many gated communities and some condo complexes and HOAs will not allow rentals for less than 31-day periods. If renting your home for short increments of time is a requirement for your purchase, this may dictate neighborhoods that you search in.
Some counties experience waitlists for permits. If renting your home is a necessary part of your purchase, you may want to call county offices to determine the waiting period.
Below, we provide links for more information on each county’s Short-Term Rental program and application process.
Placer County, CA
Short-Term Rental Program Information
Short-Term Rental Permit Application
Nevada County, CA (Town Of Truckee)
Short-Term Rental Program Information
Short-Term Rental Permit Application
El Dorado County, CA
Vacation Home Rental Program Information
Vacation Home Rental Permit Application
Washoe County, NV (Incline Village & Crystal Bay)
Short-Term Rental Program Information
Short-Term Rental Permit Application
Douglas County, NV
Vacation Home Rental Program Information
Vacation Home Rental Permit Application
Navigating the Path to Homeownership
UPCOMING EVENT
Want to buy a home in Tahoe/Truckee but not sure where to begin? Join Amie Quirarte with Tahoe Luxury Properties and Chelsy Delia with The Rice Team at Guild Mortgage for an informative presentation on Navigating the Path to Homeownership from two home-buying experts who will guide you on a path toward buying your first home.
New Developments Breaking Ground in Lake Tahoe
With a wave of new development projects underway, revitalization of Lake Tahoe continues. Read our summary of upcoming projects below, and see the significant investments being made to North Lake Tahoe. Links are provided to take you to developers’ websites with more detail.
The Waldorf Astoria by EKN
© 2022 HiltonHotel giant Hilton announced plans for the luxury Waldorf Astoria Lake Tahoe to be located on the 15-acre site of the former Tahoe Biltmore Hotel and Casino on the Nevada side of North Lake Tahoe. Slated to open in 2027, the newly built resort will feature 76 guest rooms and 61 Waldorf Astoria-branded residences. Hilton signed a brand and management agreement for the Northern Nevada project with EKN Development Group.
Boatworks at Tahoe
At the site of the Boatworks Mall in Tahoe City, there are plans to develop the approximately four acres to a development that includes a lakefront hotel, 31 residential condominium units, and 8,000 square feet of commercial retail space along North Lake Boulevard. Boatworks at Tahoe, LLC acquired the Mall in 2019 and the adjacent 35-room Tahoe City Inn in late 2018.
Homewood Mountain & Lake Club
Homewood Mountain Resort is switching to a members only model with 175-180 residences to be built around the base of the ski resort area, plus a hotel with 15-20 rooms. Memberships offer lifelong access to skiing. Purchasing a residence will include a membership and an additional number (TBD) of non-residential memberships will be sold. The Discovery Land Company operates a vast portfolio of private residential clubs and resorts, including the famed Yellowstone Club.
Tahoe City Lodge
Located in downtown Tahoe City, a new luxury development is opening its doors to a limited number of astute buyers. Tahoe City Lodge, the first new resort development project in over 50 years, is scheduled to break ground in Spring 2023, with estimated completion in Winter 2024/2025. This will be a four-star hotel with 65 resort condominiums and a restaurant and rooftop bar.
Hyatt Lake Tahoe
Larry Ellison’s investment firm acquired the lakeside resort for $345M on September 3. At more than $817,535 a room, the deal for the property in Incline Village, Nevada, set a per-room record for hotel pricing in the Tahoe market, according to Atlas Hospitality Group President Alan Reay. The deal includes the 16-acre main Hyatt property at 111 Country Club Drive, as well as an adjacent 8.5-acre parcel on the lake’s shore that contains 24 cottages and the Lone Eagle Grille restaurant. The 12-story resort features 422 guest rooms, including 35 suites, restaurants, spa, casino, and more. According to the website, Hyatt Regency will be undergoing renovations to enhance the guest experience from late April 2023 through April 2025. During this time access to Lake Tahoe, the beach and the pier will be unavailable.
39°N Lake Tahoe
39°N is a vibrant new hotel, housing, restaurant/retail and community space right in the heart of Kings Beach. 39°N is anchored by a 153-room hotel and will offer 36 for-sale townhomes and 74 units of for-rent workforce housing. The project is intended to bring a new energy to the Kings Beach core.
Nine 47 Tahoe
Nine 47 Tahoe is a luxury development of 40 mountain modern condominiums located in Incline Village, starting at $2.5M. The development boasts reserved garage parking, stunning courtyards, a rooftop deck and a dog washing station. Residences include two, three, and four bedrooms ranging 1,525 to 4,171 square feet.