April 13, 2021 – Is Inflation Coming? Our previous commentary spoke about the importance of inflation with regard to the future of interest rates.

Economic Commentary

Is Inflation Coming? Our previous commentary spoke about the importance of inflation with regard to the future of interest rates. We follow with a discussion regarding the threat of inflation. First, we must understand that all sectors of the economy do not experience inflation at the same rate. For example, today we see inflation in the housing and energy sectors.

Oil prices averaged just over $40 per barrel in 2020. This year, the price of oil has risen to over $60 per barrel. Though, the energy sector is known for volatility and that is why inflation at the core level is measured without the food and energy components. On the other hand, housing is not a volatile component and house prices have been rising significantly for the past few years. Rising lumber prices and increased demand have fueled this surge. Record low interest rates have lessened the severity of this effect, but as we have said — interest rates are rising.

Where don’t we see inflation? Wage growth has been steady during the past year, but mostly because most jobs lost last year were at the lower end of the salary scale. Thus, there is room to add plenty of jobs this year without exacerbating inflation. The jobs report released recently showed that the recovery is gaining steam. This is most likely why the Fed has indicated that inflation is likely to pick up in the short-term, but is not a threat in the long-term picture. At least for now.

Weekly Interest Rate Overview

The Markets. Rates moved lower for the first time in several weeks. For the week ending April 8, Freddie Mac announced that 30-year fixed rates decreased to 3.13% from 3.18% the week before. The average for 15-year loans fell to 2.42% and the average for five-year ARMs rose to 2.92%. A year ago, 30-year fixed rates averaged 3.33%, 0.20% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac – “After moving up for seven consecutive weeks, mortgage rates have dropped due to the recent, modest decline of U.S. Treasury yields. As the economy recovers, it should experience a strong rebound in the labor market. Combined, these positive signals will continue to bolster purchase demand. The drop in rates creates yet another opportunity for those who have not refinanced to take a look at the possibility.”   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.

Real Estate News

The spring homebuying season is here, but how many Americans have their credit score in tip-top shape to lock in that ideal rate for the largest purchase of their lifetime? A new study by Zillow has found that the average American does not fully understand exactly what causes their credit score to change and what impacts their score. When asked five questions about credit scores, the average American answered only two correctly, according to Zillow. The struggle to understand credit scoring wasn’t limited to just younger Americans that may have less experience building and utilizing credit. Quiz-takers were most likely (67%) to correctly answer that investments in the stock market do not typically impact their credit scores. Less than half (47%) correctly answered that credit scores can affect your home loan until the day you close, and just 41% knew that you should wait at least six months after taking out a car loan before applying for a home loan. Zillow research found a borrower with a “fair” credit score could pay 7% more over the life of a 30-year mortgage for the same home as an otherwise identical borrower with an “excellent” score. A recent report from the NY Fed’s Center for Microeconomic Data shows that median credit scores for mortgages of first-time homebuyers ended 2020 at around 740. This represents a far higher average than credit scores that were in the 680-700 range from 2002-2007. Source: DSNews

Mortgages guaranteed by the Department of Veterans Affairs were among the most popular last year, as thousands of current and former servicemen and servicewomen used the program to finance their houses. And now, legislation has been signed that expands eligibility for these loans. Under the new rules, members of the National Guard and Army Reserve who have been activated in response to the COVID-19 outbreak, recent civil disturbances and natural disasters are eligible for the benefits, which include mortgages with nothing down. Previously, they needed at least 90 days of consecutive active-duty service to qualify, or to have been members for six years. Currently, about 3.5 million veterans and active-duty personnel have VA financing. Under the new law, roughly 37,100 more are now eligible, plus the 26,000 or so who were called to Washington, D.C., after the Jan. 6 siege on the Capitol. Since 1944, when the GI Bill gave soldiers, sailors and airmen returning from World War II a housing benefit, the VA has guaranteed more than 25 million mortgages on their behalf. About 9 out of 10 VA loans are made without a down payment. VA loans now account for roughly 10% of the market. Despite all this activity, there’s a persistent myth among some realty and lending professionals that VA loans are inferior products that involve tons more paperwork than alternative choices. But that’s just not the case, according to the National Association of Mortgage Brokers, which calls them “an amazing benefit that veterans have earned.” Key statistics from mortgage origination platform Ellie Mae back-up this statement. The average time it took to close a VA loan last year was 51 days — just two days longer than a mortgage insured by the Federal Housing Administration, and three days longer than a conventional loan. Also, 78% of all VA loan applicants make it to the closing table, compared to 77% of wannabe FHA borrowers and 79% of those taking conventional financing. Source: Lew Sichelman, Uexpress

After the Great Recession in 2008 sent the housing industry into a tailspin, the Obama administration launched a tax credit for first-time homebuyers. The credit expired a decade ago due to the terms of the legislation, but, now, President Joe Biden has floated a similar proposal, and researchers are examining what a refundable, advanceable tax credit of up to $15,000 for first-time homebuyers might mean to the market. A Zillow study suggests the tax credit, on top of the American Rescue Plan, which has already been signed into law, “could catapult millions of renter households into first-time homeownership.” The research, available in full on Zillow.com, showed that a $15,000 tax credit could cover the entire down payment for homes in 40 of the 50 largest U.S. metros. “Legislation that reduces barriers to homeownership could allow millions of renter households to finally enjoy the stability and wealth-building owning a home can provide,” Zillow Economic Analyst Alexandra Lee said. “In 2020, a 3.5% down payment on a typical home sold was less than $15,000 in 40 out of the largest 50 U.S. metros. In 30 out of the largest 50 metros, even a 5% down payment on the typical U.S. home would be completely covered by a $15,000 tax credit,” Zillow reported. Still, a tax credit wouldn’t fix all the obstacles that prevent homeownership—the study also revealed that those who already face such hardships—especially Black and Latinx potential homeowners, would benefit less than their White counterparts. “Even though a tax credit for first-time homebuyers would likely stimulate minority homeownership, it could still disproportionately benefit white and Asian Americans who are better positioned to buy because of better access to credit and higher incomes,” Zillow’s researchers noted. Source: DSNews