March 28, 2017 –
No, we are not delving into the world of science fiction. We can’t change what happened. But sometimes it is interesting to wonder what would have happened if an event did not take place. In this case, we are referring to the Federal Reserve Board raising short-term interest rates. As we have previously explained, the move was a “no-brainer.” The markets were surely expecting the increase. Therefore, it would have been a surprise if the Fed held rates steady.
The markets don’t like surprises. And a layman might have surmised that rates would have come down if the Fed kept rates where they are. Yet, that conclusion is not necessarily accurate. If the markets feel that inflation is becoming more of a threat and the Federal Reserve is not doing its job to rein in inflation, then long-term interest rates could move up even faster than they have already risen. This is why the Fed can raise interest rates at times and long-term rates can actually go down — though presently short-term rates have not gone up high enough for the analysts to predict that they will halt economic growth.
More evidence on the state of the economy is on the way. This week we have a report on personal income and spending, and next week we will see another jobs report. Coming after a strong report for February’s data, you can be sure that market analysts and the Fed will be watching closely for evidence that the economy and inflation are heating up. If we see that evidence, there will be speculation that another rate increase will be coming sooner, rather than later. A disappointing jobs report could make the Fed pause and ponder whether they are moving too quickly. That would be bad news for the economy, but good news for rates.
The Markets. Rates bounced back down in the past week, not unusual for a week after the Fed raises rates, because the markets had moved up in anticipation of the action and there were no surprises. For the week ending March 23, Freddie Mac announced that 30-year fixed rates fell to 4.23% from 4.30% the week before. The average for 15-year loans decreased to 3.44%, and the average for five-year adjustables moved down to 3.24%. A year ago, 30-year fixed rates averaged 3.71%. Attributed to Sean Becketti, chief economist, Freddie Mac — “The 10-year Treasury yield fell about 10 basis points this week. The average rate on 30-year fixed loans moved with Treasury yields and dropped 7 basis points to 4.23 percent. This marks the greatest week-over-week decline for the 30-year rate in over two months, a stark contrast from last week’s jump following the FOMC announcement.” 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
Updated March 24, 2017
|Daily Value||Monthly Value|
|6-month Treasury Security||0.90%||0.65%|
|1-year Treasury Security||0.99%||0.82%|
|3-year Treasury Security||1.52%||1.47%|
|5-year Treasury Security||1.95%||1.90%|
|10-year Treasury Security||2.41%||2.42%|
|12-month LIBOR||1.713% (Feb)|
|12-month MTA||0.663% (Feb)|
|11th District Cost of Funds||0.616% (Jan)|
|Prime Rate||4.00% (March)|
Both buyers and sellers alike are feeling very good about the housing market this spring, even as home values hit new highs and mortgage rates move up. A monthly sentiment index from Fannie Mae rose to the highest level since 2011, when the survey began, thanks to a surprising surge from millennials. “Millennials showed especially strong increases in job confidence and income gains, a necessary precursor for increased housing demand from first-time homebuyers,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. Millennials are moving out of their parents’ basements and forming new households at a faster rate, according to Fannie Mae research. The leading edge of the millennial generation is entering the housing market in larger numbers today, with some venturing out of their desired urban cores to more affordable suburbs. Millennials delayed both marriage and parenthood, but that is now changing. Nearly half of millennial buyers had at least one child, according to the 2017 Home Buyer and Seller Generational report just released by the National Association of Realtors®. That is up from 45 percent last year and 43 percent two years ago. Children are the primary driver of homeownership, which is now sitting near a record low. Just 15 percent of millennial buyers chose an urban area, which is down from 17 percent last year and 21 percent two years ago. “Millennial buyers, at 85 percent, were the most likely generation to view their home purchase as a good financial investment,” said Lawrence Yun, chief economist at the Realtors. “These strong feelings bode well for even greater demand in the future as more millennials settle down and begin raising families.” Source: CNBC
Single-family housing starts surged in February to their highest level since late 2007, the Commerce Department reported. Overall, nationwide housing starts, including for both the single-family and multifamily sectors, increased 3 percent in February to a seasonally adjusted annual rate of 1.288 million units. Broken out, single-family production rose 6.5 percent in February to 872,000 units, the highest reading in nearly a decade. Multifamily starts, on the other hand, plunged 3.7 percent last month to 416,000 units. “The growth in the single-family arena is very encouraging, but may be partly attributable to unusually warm weather conditions throughout most of the country,” says Robert Dietz, chief economist of the National Association of Home Builders. “The modest drop in multifamily starts is in line with our forecast, which calls for this sector to continue to stabilize in 2017.” Single-family permits saw a 3.1 percent gain to 832,000 units, the highest level since September 2007. “This month’s gain in single-family starts is consistent with rising builder confidence in the housing market,” says Granger MacDonald, chairman of the National Association of Home Builders. “We should see single-family production continue to grow throughout the year, tempered somewhat by supply-side constraints such as access to lots and labor.” Source: NAHB
Seniors are sitting on a mountain of housing wealth. Homeowners ages 65 and older could access more than $3 trillion in extractable primary residence home equity, but only 6 percent of senior homeowners are interested in tapping into their home equity to help meet retirement financial needs. At the same time, nearly 37 percent of senior homeowners are concerned about their financial situation in retirement. Why are older homeowners so reluctant to draw on housing wealth to secure a more comfortable retirement? Many seniors simply want to avoid debt, while others face structural impediments to borrowing against home equity. There are multiple ways to access home equity, including selling the home and downsizing, using forward or reverse mortgage products to extract equity without selling the asset, and indirectly consuming home equity by underspending on home maintenance. But our recent analysis, supported by Fannie Mae, finds that seniors rarely use financing tools to access their home equity. The most important factor affecting low rates of home equity extraction among seniors is limited demand, which might arise for two reasons: Seniors are typically financially conservative and want to avoid debt and continued improvements in health and medicine are allowing more seniors to work and earn well into old age, reducing the need to depend on home equity extraction. Beyond these behavioral factors, structural impediments to equity extraction are also at play, including poor financial literacy, the complexity and high costs of some financial products, and fear of misinformation and fraud, particularly with reverse mortgages. As varied as these impediments are, they all lead to enormous untapped housing wealth, which represents a potential solution to the financial strains facing some elderly homeowners and a significant untapped market for the housing finance industry. Source: The Urban Institute