June 20, 2017
The Deed is Done
The Federal Reserve Board's Open Market Committee met last week to consider raising short-term interest rates. As we approached the meeting, the consensus was that the Fed would move their Discount and Federal Funds Rate higher by one-quarter of one percent. The weaker than expected jobs report put a bit of doubt in some analysts' minds; however, most were still expecting the increase to be approved.
Thus, no increase would have been somewhat of a surprise and an increase of more than one-quarter of a percent would have been a major surprise. Therefore, the fact that the Fed moved by one-quarter of one percent was seen as somewhat of a non-event. Just as importantly, their statement released at the conclusion of the meeting provided us clues as to what the members thought of the state of the economy. The statement lauded the progress of the economy and downgraded their forecast for inflation. They continue to espouse a gradual rise in rates and, in the fourth quarter, the Fed expects to start selling off some of the assets they have amassed in the past to help the economy.
Anytime we are focused upon actions by the Federal Reserve Board, we have to remind our readers which interest rates the Fed controls directly. The Federal Funds Rate and the Discount Rate are rates the Fed charges member banks and member banks charge each other for overnight funds to balance their sheets. Thus, when we indicated that these are short-term rates, they are very short term. In reaction, other short-term rates such as three- and six-month T-Bills are affected most directly. On the other side of the coin, long-term rates, such as home loans, can move in tandem or have a different reaction, especially if the markets feel that the Fed is staying ahead of any threat of inflation. Thus, an increase in interest rates for home loans are not guaranteed to follow suit, though certainly the Fed's action last week does pose that possibility.
Rates were up slightly last week, remaining near their lowest levels of the year. For the week ending June 15, Freddie Mac announced that 30-year fixed rates rose two ticks to 3.91% from 3.89% the week before. The average for 15-year loans also rose slightly to 3.18%, and the average for five-year adjustables moved up to 3.15%. A year ago, 30-year fixed rates averaged 3.54%. Attributed to Sean Becketti, chief economist, Freddie Mac -- "The rate on 30-year loans rose 2 basis points over the week to 3.91 percent. However, our survey was conducted before investors drove Treasury yields sharply lower in a reaction to the surprisingly weak CPI release. If that drop in yields sticks, rates on home loans are likely to follow in next week's survey." Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.
Current Indices For Adjustable Rate Mortgages
June 16, 2017
|6-month Treasury Security
|1-year Treasury Security
|3-year Treasury Security
|5-year Treasury Security
|10-year Treasury Security
|| 1.724% (May)
|| 0.776% (May)
|11th District Cost of Funds
|| 0.645% (Apr)
|| 4.25% (June)
| Recent data has shown that renting can cost more than owning a home, and with millennials gearing up to the responsibility of owning a home, home builders are shifting their strategy in order to cater to this age group. In the first quarter of 2017, more new US households preferred to purchase a home than rent in the first quarter of 2017– the first time the scale has tipped that way in more than a decade, according to a Wall Street Journal report. Data from the Census Bureau indicated that 854,000 new-owner households were formed in the first quarter of the year, handily beating the 365,000 new-renter households formed in the same quarter. “They’re crawling out of their parents’ basements, they’re forming households and they’re looking to buy,” Doug Bauer, chief executive of home builder Tri Pointe Group told the Journal. Zelman & Associates, a housing-research firm, said that in Q1 2017, 31% of homes built by major builders were reportedly in the starter-home range (2,250 square feet). Millennials recently eclipsed baby boomers as the nation's largest generation, so it is imperative that they have quality long-term housing options," Steve Hovland, director of research for HomeUnion, told the Journal. Source: The Wall Street Journal
Today, homebuyers have returned to the market in full force, but the lack of new construction over the last decade has contributed to an inventory shortage that’s pushed home prices out of reach for many. Now, the same young homebuyers who must cope with bidding wars to buy a first home may face a shortage in another key resource: schools for their kids. State and local governments spent $12.6 billion on elementary school construction in 2016, according to Census Bureau data—the highest amount in six years, but a 31 percent decrease compared with 2008, even before adjusting for inflation. Meanwhile, while construction spending has plummeted, enrollment has increased by four percent. Most funding for school construction comes from local governments, said Alex Donahue, deputy director for policy and research at the 21st Century School Fund, a Washington-based nonprofit. With local finances continuing to suffer years after the collapse, there is less money for school funding in general, and facilities upgrades in particular. “Spending declined during the recession mainly because 80 percent of that spending is local dollars, and the local governments didn’t have the money,” Donahue said. The shortfalls were compounded by state and federal funding cuts to education. Thirty-five states provided less total funding per student for primary and secondary education in 2014 as compared to 2008, according to a report last year from the Center for Budget and Policy Priorities (CBPP) that covers the most recent available data. Quality of local schools, meanwhile, has long been a key selling point for house-hunters—part of a feedback loop that helps rich school districts get richer. “If there’s a period of under-investment, particularly in places that haven’t recovered yet, that has implications for subsequent generations,” said Ralph McLaughlin, chief economist at Trulia. “That potentially is widening income equality for the next generation.” Source: Bloomberg
Immigration is increasing to swell America’s population and foreign buyers will have a greater impact on future demand in the US housing market. That was a key message delivered at an international real estate forum as part of the 2017 Realtors’ Legislative Meetings & Expo. NAR’s Danielle Hale, managing director of housing research, was joined by Alex Nowrasteh, immigration policy analyst at the Center for Global Liberty and Prosperity at the Cato Institute, delivering presentations at the meeting. Nowrasteh spoke of the growing number of immigrant households with the 2015 American Community Survey estimating 43.3 million foreign-born residents. “Immigration affects rents and home prices far more than it affects the labor market,” said Nowrasteh. “An expected 1% increase in a city’s population produces a 1% uptick in rents, while an unexpected increase results in a 3.75% rise.” He also said that each immigrant adds 11.6 cents to housing value in the low-to-middle income counties in which they tend to reside. In total, $3.7 trillion was added to US housing wealth by 40 million immigrants in 2012. “A majority of foreign buyers in recent years are coming from China, which surpassed Canada as the top country by dollar volume of sales in 2013 and total sales 2015,” said Hale. “Foreign buyers on average purchase more expensive homes than U.S. residents and are more likely to pay in cash.” Source: MPA