August 20, 2024 – Squeezing the Last Drop

Economic Commentary

The war on inflation has been a long-drawn-out affair. From a low of 1.23% during the height of the pandemic in 2020, inflation rose to 4.71% in 2022 and peaked at 8.00% in 2022. During the past 12 months, inflation has averaged approximately 3.0%, a drop of over 100% from the peak of 2022. That is also 50% higher than the Federal Reserve’s stated goal of 2.0%.

Though 50% seems to be a lot, from a numerical standpoint, we have lowered inflation a total of 5.0% from the peak and only have 1.0% to go. Thus, here is the question. Do we need to keep interest rates at their present level to bring inflation rates down one more percent? Today, the Fed’s federal funds rates are between 5.25 and 5.50%. This has pushed the prime rate of lending to 8.50%, mortgage rates to close to 7.0% and credit card rates to over 20%. Quite obviously this is putting a crimp in America’s wallets.

We are not arguing against the goal of continuing to bring inflation down. What we are questioning is whether we need interest rates at the level they were raised to in order to bring inflation down from 8.0%. The Fed lowering rates a percentage point or even more would still be much higher than they were during the pandemic. Yes, we are squeezing the very last drop out of inflation – but perhaps we don’t need to squeeze quite so hard at this point. That is why the markets are predicting that the next Fed meeting will be our first step to more reasonable interest rates.

Weekly Interest Rate Overview

Freddie Mac reported that mortgage rates were steady in the past week, holding to their recent lows of the past year. 30-year fixed rates rose slightly to 6.49% from 6.47% the week before. In addition, 15-year loans increased to 5.66%. A year ago, 30-year fixed rates averaged 7.09%, over 0.5% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “While rates increased slightly this week, they remain more than half a percent lower than the same time last year. In 2023, the 30-year fixed-rate mortgage nearly hit 8 percent, slamming the brakes on the housing market. Now, the 30-year fixed-rate hovers around 6.5 percent and will likely trend down in the coming months as inflation continues to slow. Lower rates are good news for potential buyers and sellers alike.”  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

Over the past 5 years, average rents have hit record highs in almost every major US metro area. Data from Spareroom, the leading roommate matching site, suggests that in 10 years most major US metro areas could become unaffordable for the average renter, if rents continue to rise at the same rate. SpareRoom compared the average monthly roommate rents in key metro areas* in the past five years (Q1 2024 and Q1 2019), which revealed that in 18 of the 27 cities, rents had increased by at least a quarter. Every metro area, bar San Francisco/Bay Area, saw rents rise by double digits, with 8 seeing rents up by 40% or more over the period. In many cases, it’s cities with historically more affordable rents where the biggest shifts are happening. The situation is already dire. A 2023 SpareRoom survey of 1,175 US renters revealed that 98% said they were concerned about the current state of the rental market, with high rents being their biggest concern (86%). 90% said that the housing available was out of their budget and a third said they’d already turned down a job offer to avoid having to move (32%). Matt Hutchinson, spokesperson for SpareRoom commented: “Roommate rents are a great indicator of how renters in general are coping, as they’re usually the most affordable living situation available to people. That means if rents are rising fast for roommates, people are struggling at the lower end of the housing spectrum, which can only filter upwards.” Source: Spareroom

At $42 billion worth of sales, international buyers purchased one-fifth (21.2%) less U.S. real estate from April 2023 to March 2024, compared to the previous year. The 54,300 existing homes sold is 36% fewer annually, and the lowest since the National Association of Realtors (NAR) began tracking in 2009. International buyers accounted for 2% of the $2.1 trillion in total U.S. existing-home sales during that period. “The strong U.S. dollar makes international travel cheaper for Americans but makes U.S. homes much more expensive for foreigners,” said NAR Chief Economist Lawrence Yun, accounting for the decline. “Therefore, it’s not surprising to see a pullback in U.S. home sales from foreign buyers. ”The average and median purchase prices for foreign buyers were the highest ever recorded by NAR, at $780,300 and $475,000, respectively. The top destinations for foreign buyers in the U.S. were Florida (20%), Texas (13%), California (11%), and Arizona (5%), followed by Georgia, New Jersey, New York and North Carolina (4% each). Florida has remained the top destination for foreign buyers for 16 consecutive years. All-cash sales accounted for half of international buyer transactions compared to 28% of all existing-home buyers. Canada led all countries of origin in the share of foreign buyer purchases of U.S. existing homes at 13%, followed by China and Mexico (11% each), then India (10%). China was first in U.S. residential sales dollar volume at $7.5 billion, which continues a trend dating back to 2013. Canada ($5.9 billion), India ($4.1 billion), Mexico ($2.8 billion) and Colombia ($0.7 billion) rounded out the top five. Non-resident foreign buyers (68%) were more likely to make an all-cash purchase than resident foreign buyers (36%). More than two-thirds of Canadian (69%) and Chinese (68%) buyers made all-cash purchases, the highest shares among the top foreign buyer nations. Source: NAR

U.S. Sen. Sherrod Brown, Chair of the Senate Committee on Banking, Housing, and Urban Affairs, and Sen. Mike Braun have announced the Senate passage of their legislation, the VA Home Loan Awareness Act, to help inform veteran homebuyers of their eligibility for the VA home loan program, which will assist more veterans in achieving the dream of homeownership. “This is an important step toward making the dream of homeownership a reality for more military families and veterans. Ohioans who have served our country should have every opportunity to get the VA home loans they’ve earned,” said Sen. Brown. “The House should quickly approve this bill so it can be signed into law.” The VA Home Loan Awareness Act aims to increase awareness of the VA home loan program by:

• Adding a disclosure informing veterans they may be eligible for a VA home loan under the Uniform Residential Loan Application (Form 1003);
• Directing applicants to consult their lender for more information about the VA home loan program;
• Instructing the Government Accountability Office (GAO) to conduct a review and report to Congress regarding lenders adoption of the URLA form updates.

Among veterans who choose not to use the VA loan when purchasing a home, 33% of them say it was because they were not aware of the program. This rate is even higher among surviving spouses as 46.3% of them said they did not know they were eligible for a VA loan at the time of their purchase. Studies show that on average, only half of all veterans say they were informed of the benefits of the VA home loan program by their lender. “Those who have risked their lives for our freedom should be able to afford a house in the country they’ve sworn to protect. I’m glad that the Senate has passed this bill to inform Hoosier veterans of the benefits they that have earned and deserve,” said Sen. Braun. Source: Mortgage Point