Exploring the U.S. Macro and Housing Outlook at the Servion Lending Conference

The spotlight of Day 2 at the Servion Lending Conference shone on Mortgage & Commercial Loan Resources, with a keynote address by none other than Leonidas Mourelatos, the Director of Real Estate Economics at Arch Capital Group. He provided a captivating glimpse into the U.S. Macro and Housing Outlook, unraveling five pivotal questions that are currently reshaping the industry. Let's dive into the insights shared by Leonidas, offering a unique perspective on what economists and homeowners are thinking, along with the associated risks.

1. Has the Recession Been Postponed, and When Might it Strike?

In a climate of economic uncertainty, the burning question on everyone's minds is whether the recession has been deferred. Leonidas paints a nuanced picture, suggesting that although earlier forecasts indicated a different timeline, signs of a recession might start appearing as early as October 2023, with a more concrete downturn projected for the second quarter of 2024. Interestingly, consumer confidence remains steady, with indicators such as real sales, disposable income, and consumer spending holding steady. Surprisingly, entrepreneurship is thriving at a rate surpassing pre-pandemic levels.

However, Leonidas sounds a note of caution: the reliance on outdated business cycle indicators could be misleading this time around. Banking institutions also appear apprehensive, as reflected in their tightened lending standards, although the correlation between these standards and the economic cycle seems somewhat off-kilter in the current scenario.

2. Are Consumers at Their Limit?

Our exploration of the future takes us into the heart of the labor market, where signs of normalization are evident. While job growth has decelerated, it has not collapsed entirely. Businesses still require a workforce, but sustaining the necessary growth in hours worked depends on a larger labor force. So, what about consumer sentiment? Leonidas points out that while jobs may not be as abundant as they once were, they are still accessible. Earnings potential remains solid, though not as spectacular as in the past. Real disposable incomes are on the rise, dispelling concerns about depleted savings. Based on pre-COVID-19 savings rate trends, it seems that households still have ample financial reserves.

3. Is the Current Mortgage Rate Regime the New Normal?

Hold onto your mortgage papers; rates are currently at a 22-year high, causing quite a stir. But there's a silver lining on the horizon. Market expectations indicate that rate cuts may commence in 2024. Leonidas adds reassurance by highlighting that inflation appears to be behaving for now. Nevertheless, the big question remains: will mortgage spreads remain elevated for an extended period? Leonidas suggests that the flow of mortgage-backed securities holdings does not support the notion of narrower spreads.

4. The Housing Market Conundrum: Tightness Despite Reduced Sales

The housing market continues to baffle experts. Home sales are trailing significantly behind their pre-pandemic pace, and available inventory has dwindled by a staggering 40% compared to pre-pandemic levels. Despite extended median days on the market, it remains 31% tighter than the pre-pandemic era.

Leonidas unravels this mystery, revealing that the housing market remains taut due to the persistent supply-demand imbalance. Even with reduced demand, the low supply of houses fails to meet current requirements, leading many sellers to choose staying put over moving.

5. When Will Home Prices Stabilize?

In our grand finale, we delve into the critical issue of home prices. While annual declines are in progress, the descent is gradual. Prices that peaked during the height of the COVID-19 pandemic are retracting, but not at a rapid pace.

Leonidas discloses a key insight – "months' supply" holds the answer, particularly in the top 100 metro areas, where the numbers appear robust. Months' supply reflects the ratio of new houses for sale to new houses sold and offers insight into how long existing inventory would last at the current sales rate without additional construction.

In conclusion, the Servion Lending Conference Day 2 provided a captivating journey into the future, led by the astute Leonidas Mourelatos. While the U.S. macro and housing outlook remain cloaked in uncertainty, one thing is certain: the intricacies of the economic puzzle continue to intrigue and captivate us all.