July 9, 2024 – First Part of The “Two-Fer”


Economic Commentary

In the previous commentary, we promised a chance at a “two-fer” which could help put pressure on interest rates to ease down in the second half of the year. We have already had a decent move downward in interest rates, but there is so much more work to be done in this regard. On Friday we had the release of the jobs report, which represented the first leg of the “Two-Fer.” How did we do?

The economy added 206,000 jobs last month, which was in the range of expectations. However, the previous two months of job growth were revised downward by 111,000, lowering the net job gain. The headline unemployment rate rose one tick to 4.1%. Also closely watched by the Fed, wage growth increased 0.3% from the last month, and 3.9% from last year. Wage growth is slowing but still higher than the Fed’s inflation target of 2.0%. Overall, this report represents a positive first step in the two-fer that we were hoping for. Job growth is moderating, and inflation continues to cool.

As luck would have it, the second step is happening this week as well. The Bureau of Labor Statistics will be releasing both the Consumer Price Index (CPI) and the Producer Price Index (PPI). After the release of the jobs report, these inflation indices are of the utmost importance with regards to the mood the Fed will be in when they meet at the end of this month. Most market prognosticators are not predicting a move in July, but even a softening of tone could be helpful in bringing long-term rates down further. Let’s see what happens later this week.

Weekly Interest Rate Overview

The Markets. Freddie Mac reported that mortgage rates rose moderately in the past week as the jobs report approached. Fed Chair Powell indicated that inflation is cooling, but he added that it was not time to cut rates yet. 30-year fixed rates rose to 6.95% from 6.86% the week before. In addition, 15-year loans increased to 6.25%. A year ago, 30-year fixed rates averaged 6.81%, 0.14% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates increased this week, coming in just under seven percent. Both new home and pending home sales are down, causing active listings to rise. We are still expecting rates to moderately decrease in the second half of the year and given additional inventory, price growth should temper, boding well for interested homebuyers.” 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

Mortgage assumptions can save home buyers big money, but they can be difficult to find and even more difficult to process. Still, it’s a way for buyers to get a much lower mortgage rate than what’s now available. Though they now account for only a fraction of all house listings, government-backed mortgages — courtesy of the Federal Housing Administration (FHA), Veteran Affairs (VA) and U.S. Department of Agriculture (USDA) — are an overlooked home-buying hack saving a growing number of buyers hundreds of dollars a month and tens of thousands of dollars through the life of their mortgages. “Most agents aren’t even aware of what it entails and what to look for,” said Tyler Miller, a real estate broker who has been involved with several sales involving assumable mortgages with astoundingly low rates. Miller recently listed a four-bedroom house with an assumable 2.25% FHA mortgage with a monthly payment that’s about $1,700 less than it would be at the going rate. To tout the listing, he posted a TikTok video promoting the benefits. “I had some people tell me I was lying,” Miller said. “I said, ‘No, this is real.'” Assumable mortgages have been lurking in the shadows of unusually low rates in recent history. Such mortgages were last popular in the 1980s when rates hit a record 18.1%. At the end of 2020 and into early January 2021, rates fell to record lows, hovering around 3% for much of 2021 and causing home sales and prices to soar. That buying binge locked in thousands of mortgages at rates that likely won’t be that low again for decades. An estimated 80% of all VA mortgages now have a rate that’s less than 4%, and many of those rate-holders are now ready to sell. An estimated one-third of all mortgages in the U.S. are assumable now. Because many owners will hold onto those rates as long as possible, assumable mortgage listings represent only a fraction of homes currently for sale, making them one of the best-kept secrets for homebuyers these days. While some agents will include an assumable mortgage in the listing details, many homeowners don’t even know they have one — the details are buried in the fine print of their contract, which many buyers don’t carefully read. The equity gap is often the biggest hurdle. Because the buyer is essentially taking on the existing mortgage rather than receiving a new one, the buyer has to pay the seller the difference between the original mortgage balance and the current asking price. Plus, many VA mortgage holders are reluctant to let another buyer assume their mortgage because once they do, they forfeit the right to use the benefit to buy another one. Unlike FHA mortgages, VA mortgages are considered a government benefit with perks that include the ability to forgo private mortgage insurance and no-, or a low-down payment and competitive low rates. Source: Star Tribune

Despite experiencing the fastest Fed rate hike cycle in four decades, the U.S. economy has proven more resilient than in past economic cycles. One reason some economists believe this resilience exists is the greater buffer homeowners now have from spiked interest rates: Not only is 96% of mortgage debt in the U.S. fixed rate, but 38.5% of homeowners don’t have a mortgage at all. Unlike their homeowner counterparts in countries like the United Kingdom and Canada, the vast majority of U.S. homeowners aren’t seeing their payments adjusted to the new market rates. Additionally, the fact that many U.S. homeowners have no debt at all means that if they need to sell and buy a different home, they might be able to roll over the equity, buy it in all cash, avoid spiked interest rates, and avoid having to cut back on their discretionary spending, thus keeping the economy warmer. Between 2010 and 2022, the share of owner-occupied homes without a mortgage jumped from 32.1% to 38.5%. Why did the number increase so much? It boils down to the fact that older homeowners tend to be the ones with paid-off mortgages, and over the past decade, the U.S. population has aged as the massive baby boomer generation has entered its senior years. Indeed, over half of mortgage-free homeowners are baby boomers. On a regional level, regions with greater affordability and areas with a higher proportion of older populations tend to have a higher percentage of homeowners without mortgages. Since 2022, all-cash home buying, as a percentage of home sales, has increased, as many of these mortgage-free homeowners carried over equity to avoid taking on these higher rates. In Q1 2022, 25.8% of home purchases were made in “all cash,” according to Parcel Labs. In Q4 2023, 33.5% of home purchases were made in “all cash.” Source: Fast Company

As baby boomers increasingly seek to age in place in their own homes — a scenario supported by both the preferences of older homeowners and the realities brought on by elevated mortgage rates — this is clashing with the desires of millennials who wish to enter the housing market, as the combination of limited inventory and high costs are keeping these buyers on the sidelines of the mortgage market. This is according to a recent column published by Fortune, which examined the dynamics that could contribute to boomers staying in their homes longer while many millennials are challenged to enter the housing market in the first place. Data shared with the outlet indicated that baby boomers make up roughly one-third of all U.S. homeowners. They have added incentive to stay where they are — particularly if they have a low, pre-2022 mortgage rate or their home is paid off, the column stated. “In our current environment, where mortgage rates skyrocketed from historic lows throughout the pandemic to a more than two-decade high in October last year, being mortgage-free is like hitting the mother lode,” the column read. “It’s partly why boomers aren’t moving — because why give up no mortgage rate, or a substantially lower one, for one that’s in the 7% range plus a higher monthly payment?” Other factors are keeping millennials on the sidelines. The salary needed to buy a starter home, for instance, has nearly doubled since the start of 2019, according to data from Redfin. Meanwhile, inventory levels remain at historic lows that contribute to a severe lack of affordability across the country. On top of this, baby boomers are holding onto their larger homes that feature three bedrooms or more, according to data published by Redfin in January. While these factors combine to incentivize baby boomers to remain where they are, older Americans also may be making the choice to age in place based on comparisons with other options, such as dedicated long-term care or senior housing facilities. By and large, seniors are opting to remain in their homes — and even to undertake significant renovations to them — to avoid moving to such facilities, according to recent reporting from The Associated Press. But not all boomers and millennials are locked into this dynamic. Recent data from the National Association of Realtors (NAR) also showed that millennials recently surpassed baby boomers as the largest homebuying demographic. “The generational tug-of-war between millennials and baby boomers continued this year, with millennials rebounding to capture the largest share of home buyers,” Jessica Lautz, NAR’s deputy chief economist and vice president of research, said in the report. Source: HousingWire

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