Happy Holidays?

20140309-080351.jpgIt must be the holiday season with so many gifts coming in. What else could explain good economic news combined with lower interest rates and lower oil prices? Even though the stock market is retreating, keep in mind that the Dow was below 12,000 approximately three years ago. Three years ago the unemployment rate averaged just over 8.0% and it is now just below 6.0%. Initial jobless claims were in the vicinity of 400,000 per week and now they are consistently below 300,000.

We mentioned last week that it is surprising that rates and oil prices would fall in the face of relatively good economic news. As surprising as it is–we are going to advise you not to look a proverbial gift horse in the mouth. We are going to advise you to enjoy the lower rates and lower gasoline prices for as long as they last. That might be a few days, a few weeks or a few months. Or the markets might reverse themselves by the time you read this commentary.

We do believe this week’s meeting of the Federal Reserve Board’s Federal Open Market Committee will be very interesting. The Fed is going to be reading signs of economic recovery with no inflationary pressures. They are also going to be feeling the worldwide turmoil going on and speculating whether events overseas will affect our recovery. Some are saying that they might extend their bond purchases to keep rates low. We don’t think that an announcement of such will be in the cards, but the phrase “considerable time” when referring to future interest rate increases may stay as part of their vernacular. Of course, our speculation is just that — speculation.


The Markets. Rates again fell to their lowest level in more than a year in the past week. Freddie Mac announced that for the week ending October 23, 30-year fixed rates fell to 3.92% from 3.97% the week before. The average for 15-year loans decreased to 3.08%. Adjustables were mixed, with the average for one-year adjustables increasing to 2.41% and five-year adjustables decreasing to 2.91%. A year ago, 30-year fixed rates were at 4.13%, higher than today’s levels. Attributed to Frank Nothaft, vice president and chief economist, Freddie Mac — “Rates on home loans continued to fall this week after the yield on 10 year Treasuries dropped to their lowest point of the year. Existing home sales beat expectations in September clocking in at an annual rate of 5.17 million units, up 2.4 percent from August. Housing starts were up 6.3 percent in September adding a seasonally adjusted annual rate of 1.017 million units. Building permits rose 1.5 percent to a seasonally adjusted annual rate of 1.018 million units in September.” 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
Updated October 24, 2014

Daily Value Monthly Value
October 23 September
6-month Treasury Security 0.06%  0.04%
1-year Treasury Security 0.11%  0.11%
3-year Treasury Security 0.83%  1.05%
5-year Treasury Security 1.52%  1.77%
10-year Treasury Security 2.29%  2.53%
12-month LIBOR  0.578% (Sept)
12-month MTA  0.115% (Sept)
11th District Cost of Funds  0.667% (Aug)
Prime Rate  3.25%

  The nation’s youngest adults will spend more than $2 trillion in the next several years on rent and mortgage loans, according to a recent report by The Demand Institute. The number of new millennial households formed from the beginning of 2014 through the end of 2018 is expected to reach 8.3 million. They are likely to spend $1.6 trillion on home purchases and $600 billion on rent during that time period, or “more on a per-person basis than any other generation,” the report said. The total is expected to equal one in every four dollars spent on housing over that period. “The Millennials and Their Homes: Still Seeking the American Dream,” is based on 18 months of research including interviews with 10,000 U.S. consumers, of whom more than 1,000 were millennials, and an analysis of housing market data from 2,200 U.S. cities and towns. It found that contrary to popular belief, most millennials–born between the early 1980s and the early 2000s–nurture the traditional aspiration of purchasing a home and living in the suburbs. “As more of these young adults increasingly venture out on their own, most will rent,” according to the report. However, so far nearly all already have cars and the vast majority plan to buy a home in the future, the report finds. This generation faces “unique financial challenges of homeownership today resulting from graduating into a weak job market with growing student loan debt,” agrees Jeremy Burbank, a vice president at The Demand Institute and Nielsen, which is likely why many young adults see alternative housing finance options, such as “single-family rentals and rent/own hybrid contracts such as lease-to-own” as their path to homeownership. Source: Source Media

Despite the jump in the latest median single-family home price — $220,600, up from around $160,000 just a few years ago, according to the National Association of Realtors® — the large price gains are not denting affordability. Even with home prices climbing, home ownership remains affordable because low interest rates have helped to offset the price gains, writes Lawrence Yun, NAR’s chief economist, at NAR’s Economists’ Outlook blog. Also, incomes have risen slightly as the unemployment rate has fallen, which also has helped to improve the affordability picture. A home buyer buying a median-priced home at the current interest rate and having a 20 percent down payment would make a monthly payment of about $867. That is 15.9 percent of monthly gross family income, compared to an average of 21.3 percent over the past 30 years, Yun notes. Source: National Association of Realtors® 

There is a fair amount of payment shock headed toward select groups of homeowners with mortgages. The reckoning has already started for people who took out home equity lines of credit a decade ago, when homes were appreciating handsomely. What started as interest-only draw down periods are now ending, and borrowers must start paying off the loan’s principal and its interest. Five years after the modifications were made, the interest rates gradually reset, by increases of 1.0% annually to the level that average primary interest rates were at the time of the modification. Eventually, rates of some borrowers who were among HAMP’s earliest participants will be pushed to just over the 5.0% mark, which is higher than the current average interest rates on 30-year, fixed-rate loans. The Office of the Special Inspector General for the Troubled Asset Relief Program, a federal watchdog agency, has estimated that about 33,000 borrowers will see their first resets this year. While the median monthly payment increase will be $200 at the end of the process, some borrowers will see their payments jump by more than $1,700 monthly, according to the agency. Source: The Orlando Sentinel

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s