January 28, 2025 – Good News is Bad News Revisited
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Economic Commentary
So, we added over two million jobs last year. That is good news, right? As we have been saying for a few years now, good economic news has now become bad news. How did more jobs for Americans become a bad thing? When the unemployment rate is low, consumers have more money to spend, and this boosts the economy and creates even more jobs. A great cycle!
First, we must factor in the concept of inflation. If consumers are making more money, but this higher income goes to purchase the same amount of goods as previously, then consumers are literally spinning their wheels. It is even worse for those on fixed incomes such as social security because the raises they have received are not covering the increases in their cost of living. It is true that inflation levels have come back close to normal, but consumers are still getting used to the price hikes they witnessed in previous years. In other words—prices are not dropping back.
Not all goods are higher. Gas prices are as low as they were before the pandemic. Other price hikes are lagging – such as property taxes on homes. And the continued proliferation of weather events is causing a spike in insurance prices. Further focusing on real estate, mortgage rates remain high even though house price appreciation has moved to normal levels. Why is the Fed reticent to force interest rates down, which would help ease one major inflation concern? If lower interest rates fueled another round of increases in house prices, we could kick off another inflation cycle. Speaking of cycles—if it sounds like we are talking in circles, then you have read this analysis correctly!
Weekly Interest Rate Overview
The Markets. The Freddie Mac rate survey showed a decline in mortgage rates last week, which was actually a reflection of rate movement from the end of the previous week in reaction to positive inflation reports. According to the survey, 30-year fixed rates decreased to 6.96% from 7.04% the week before. In addition, 15-year loans fell to 6.16%. A year ago, 30-year fixed rates averaged 6.69%, 0.27% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “After crossing the 7%-mark last week, the 30-year fixed-rate mortgage saw its first decline in six weeks. While affordability challenges remain, this is welcome news for potential homebuyers, as reflected in a corresponding uptick in purchase applications.” 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
Although most people prefer to remain in their current homes and communities as they age, many acknowledge that relocating could be a possibility in the future, according to the latest AARP Home & Community Preferences national survey. The vast majority of Americans age 50-plus would like to live in their current home (75 percent) and community (73 percent) for as long as possible, according to the study. The desire to stay put is even stronger among adults who are age 65-plus and those living in small towns or rural areas. Yet, the reality is that about half of adults 18 or older say they are not confident their community will continue to meet their needs as they age, and 44 percent of those age 50-plus expect to relocate at some point. Why do older adults plan to move? AARP finds that financial reasons are a big driver: 71 percent cite the cost of rent or mortgage; 60 percent want to lower the costs of housing and maintenance; and 55 percent say the high cost of property taxes is the reason for moving. About two-thirds of all adults would consider downsizing, but the kind of housing they prefer varies somewhat by age. Ideally, most still want a single-family home (75 percent of those 50-plus). An active adult community or neighborhood designed for people 55 and older with a mix of homes, townhomes, apartments, and mobile homes appeals to only 32 percent of those 50 or over. A continuing care community is a likely choice for just 29 percent of older adults. About half of all adults are either caregivers currently (13 percent) or expect to be at some time (34 percent), and a third (33 percent) will do that caregiving in their own home. To provide space for a loved one who needs care or a place to live, one in four older homeowners say they would consider building an accessory dwelling unit (ADU), a term that refers to such spaces as in-law suites, backyard bungalows, and garage apartments. AARP reports that among adults 50-plus who are unsure their community will be suited for them as they age, 41 percent say they will never leave their current home — regardless of their uncertainty or lack of confidence. Source: AARP
While recent housing market reports and trends have shown that older homeowners are unwilling to sell their homes for a variety of reasons, one of them may be the expected requirement to pay capital gains taxes stemming from the post-pandemic explosion of home-price appreciation, according to a report from Business Insider. While some homeowners are looking to cash in on the equity they’ve built up since the pandemic, these same increases in property values are driving up the number of home sales that the capital gains tax would be applied to. The capital gains tax is a federal tax that is applied when the sale of a particular asset — including a home, is sold “for more than a seller’s adjusted acquisition basis,” according to the IRS. Capital gains have applied to home sales with profits of more than $250,000 since 1997, when the median price of a U.S. single-family home was $124,800, according to data from the U.S. Department of Housing and Urban Development (HUD). The initial idea was for the targeted capital gains tax to apply to the most affluent homeowners. But according to data released by the U.S. Census Bureau late last month, that same median price now sits at $402,600. And considering the run-up in home prices in the early 2020s, these thresholds are likely to affect many home sellers, not just affluent ones, particularly since the tax is not indexed to inflation. The share of home sales subject to the tax has more than doubled in the past few years. Considering that the home is a central pillar of wealth for many Americans, including older homeowners, the concept of the tax biting into their finances is actively warding off some people from selling, according to CoreLogic chief economist Selma Hepp. Some homeowners are also in a challenging position because of high home prices in general – making it difficult to find another comparable home. Source: HousingWire