The average home price in the Portland Metro rose 1% in June. Inventory also rose to 2.6 months from 2.3 months in May. While we are still in a seller’s market, it feels like housing market activity is starting to slow a little. This normally occurs this time of year as families prefer to be situated well ahead of the start of the new school year. Also, people tend to take vacations in July and August, which reduces the number of buyers actively looking at real estate during the summer. We will probably see home prices gradually decrease through the fall. Though, I would not bet against a 10% or higher increase in Portland home prices in the first half of 2025. We have seen that occur every year since 2020. Barring some kind of surprise, mortgage rates are the only obvious reason we could see a pickup in housing market activity in the second half of 2024. While mortgage rates have been falling over the last two weeks, we need to see a sustained drop in rates over a longer period of time.
The 30 year fixed rate fell to 6.77% across the United States last week. Mortgage rates initially spiked at the beginning of the month following the release of the Fed’s meeting minutes before retreating to current levels. The meeting minutes from June indicated the Federal Reserve is holding rates steady until it sees more data that supports the rate of inflation falling to 2%. On July 11th, the Fed received good news when it was reported the Consumer Price Index (CPI) rose 3% year over year in June. This was down from 3.3% in May. The bond market is suddenly pricing in three rate cuts this year as I finish writing this. Just two weeks ago the market was pricing in only one rate cut in 2024. However, the market has been incorrect in predicting the actions of the Federal Reserve several times this year. It appears increasingly likely the Fed is going to wait too long to cut rates. This would inevitably lead the US economy into a recession. By the time CPI hits 2% the unemployment rate will not stop rising even if the Federal Reserve cut the benchmark lending rate immediately. The reason is that rate cuts take between 6-18 months to make any meaningful impact on the economy. The Fed is stuck reviewing backward looking data rather than recognizing a clear trend of rising unemployment and falling inflation.
The US economy added 206,000 jobs in June. At the same time, job growth estimates for April and May were revised downward by 111,000 jobs. This unexpectedly caused the unemployment rate to rise to 4.1%. The unemployment rate is still quite low from a historical perspective. However, given the unemployment rate was 3.7% in December, the health of the job market is clearly deteriorating. There is a theory in economics called the Sahm Rule. If a 0.5% increase in the unemployment rate occurs over a 3 month period, it’s an early indicator the economy is already in a recession. The Sahm Rule has correctly predicted every US recession since 1970. Over the last 3 months, the unemployment rate has ticked up 0.3% so the 0.5% threshold has not been met. Regardless, economists are certainly keeping a close eye on the labor market.
The chances of another wave of high inflation are rising depending on which economic policies are implemented in 2025. There is a proposal for a 10% tariff on all goods imported into the United States with a 60% tariff on Chinese goods in particular. If you think prices are high now, imagine another 10-60% added to the cost of many items we use daily. Goldman Sachs economists estimate the implementation of the tariffs would add 1.1% to the rate of inflation and reduce US Gross Domestic Product (GDP) by 0.5%. That estimate does not include the economic impact of tariffs from other countries that will inevitably retaliate. There was some volatility in the stock market mid-week as jitters over US economic policy started to finally hit stocks. The stock market has been a very profitable place to invest over the last few years. As we get later into the economic cycle, tech stocks become riskier, especially as valuations become more stretched. Any pain from a recession, whenever it arrives, will likely initially be felt there.