January 30, 2024 – The Data Starts to Roll in

Economic Commentary

As we mentioned in our last column, this is an important period with regards to economic data and events. Late last week we got the ball rolling with the first estimate of economic growth for the 4th quarter (GDP). For the first three quarters of the year, the economy grew at an approximate rate of 3.0%, which is not bad considering the analysts were expecting a recession in 2023. Even more interesting is that the growth rate accelerated in the third quarter, not only defying predictions of a recession, but also showing few signs of a slowing economy.

The analysts had good reasons to forecast a slowdown in economic growth. After all, the Federal Reserve had jacked up interest rates during 2022 and the first half of 2023. This background served to make the final quarter of 2023 very interesting, and we were not disappointed as the estimate came in at 3.3%, which was stronger than expected. It should be noted that there will be two revisions of this number, but it is not likely that the annual rate of 3.1% for the year will change all that much.

The news will continue with a meeting of the Federal Reserve’s Open Market Committee taking place today and tomorrow. The Fed is expected to hold short-term interest rates steady for the fourth-straight meeting. The markets will be looking for hints of future activity directed by the Fed in their announcement issued after the meeting. The GDP report, as well as the report issued last week on personal spending and accompanying personal consumption expenditures inflation report (PCE) are certain to influence their language. And just to make things more interesting, this Friday we have the January jobs report, which represents the first official data of 2024.

Weekly Interest Rate Overview

The Markets. The Freddie Mac mortgage rate survey indicated slightly higher rates on home loans for last week; however, they began to fall after the strong economic growth data released as the survey period ended. For the week ending January 25, 30-year fixed rates rose to 6.69% from 6.60% the week before. In addition, 15-year loans increased to 5.96%. A year ago, 30-year fixed rates averaged 6.13%, approximately 0.50% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The 30-year fixed-rate has remained within a very narrow range over the last month, settling in at 6.69% this week. Given this stabilization in rates, potential homebuyers with affordability concerns have jumped off the fence back into the market. Despite persistent inventory challenges, we anticipate a busier spring homebuying season than 2023, with home prices continuing to increase at a steady pace.” 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

Aggregate household debt in the third quarter of 2023 stood at $17.29 billion, according to the New York Fed. U.S. mortgage balances stand at $12.14 trillion and home equity lines at $386 billion. Credit card balances stand at $1.08 trillion, according to Fed data. For homeowners in deep debt, does the recent mortgage rate downswing mean it’s time to refinance or add a second mortgage or home equity line-of-credit? If your credit card debt and the like is manageable, and you can continually knock down the balances each month, then you should consider staying the course. Protect your piggyback (home equity). Annualized, approximately 8% of credit card balances and 7.4% of auto loan balances transitioned into delinquency, according to the New York Fed data. Do whatever you can to keep the payments on time. Late charges and delinquencies will crush good FICO credit scores. If cash flow is a challenge or your savings are getting into the red zone (because your monthly household debt output is greater than your monthly net income), then it’s time to do some equity-tapping math. For example, let’s say you took out a $500,000 mortgage during the pandemic, with the rate sitting very nicely at 3.5%. Your home is worth $1 million. And you have a 750 middle FICO score. But you also have run up $25,000 of credit card debt at a 20% interest rate. The simple math tells us it’s obvious you don’t want to be trading a 3.5% fixed rate for something in the high-5s or 6s to get rid of a comparably small balance, but high rate. In this case, you should consider putting a HELOC or a fixed rate second mortgage behind your first mortgage. You may be able to find a no-closing-cost HELOC with starting rates lower than prime (prime rate is 8.5% today) or prime plus 1% or 2%. Even if you paid 10% on a HELOC, you are reducing your borrowing cost by 10%. Assuming interest-only payments, $25,000 of credit card debt at a 20% interest rate costs you $5,000 in annual interest. Chopping the rate down to 10% saves you $2,500 in interest charges. I should add that most HELOC’s have terms of 25-30 years. For the first 10 years, borrowers have the option of making interest-only payments. In year 11, the principal and interest amortization is required for the remaining term. That said, be disciplined and continue making the same payments as you were before the HELOC. That way, you’ll accelerate the credit card principal balance reduction with cheaper borrowing costs. And you don’t want to get caught up pushing credit card balances out over say 30-year HELOC term. Source: Jeff Lazerson for the Orange County Register

Multigenerational living is a common practice in many countries, including here in America. Prior to World War II, many extended families, particularly those of recent immigrants, lived together under one roof. After the war, though, a shift toward independent living took hold, spurred in large part by the rise of relatively inexpensive housing in the suburbs. But the practice never went away entirely. And over the last few years, it has gained steam because of a number of factors – the pandemic and high housing costs among them. According to the Pew Research Center, “the number of Americans living with multiple generations under one roof has quadrupled” to some 59 million over the last 50 years. For the most part, multigenerational living involves adult children, plus one or both parents and/or grandparents. Sometimes it’s a young adult returning to the nest after college or after a divorce. Sometimes it’s siblings choosing to live together, maybe to care for each other’s children or to pool resources while each saves for their own places. Whatever the arrangement, some builders have taken notice. The National Association of Home Builders reports a steady increase in the share of houses built with two or more main suites. According to the latest, yet-to-be-published NAHB survey, 45 percent of all buyers would prefer to buy a multigeneration home. But there are differences among ethnicities: Just 37 percent of white respondents said they would want such a place, compared with 72 percent of Latinos, 71 percent of Asian Americans and 61 percent of African Americans. In the resale sector, 14 percent of all buyers are multigenerational, according to the latest figures from the National Association of Realtors. Whether it’s young roommates or senior citizens, “people are supporting each other,” said NAR Deputy Chief Economist Jessica Lautz. If you already own a place, you really don’t have to worry about financing if you want to bring a parent or an adult child in under your roof. But if you are buying a place together, there are financing rules such as whose income can be used to qualify. Source: Lew Sichelman, The Housing Scene, Published by Banker & Tradesman

Despite an overwhelming percentage of millennials wanting to own homes, nearly half of the demographic cohort don’t think that homeownership is affordable for the average millennial. That’s according to the Real Estate Witch 2024 Millennial Home Buyer Survey, performed in October last year by Real Estate Witch and Clever. The study found that 78% of millennials still say that a home purchase is part of the American dream, but the difficult buying environment has impacted would-be millennial buyers practically and psychologically. Ninety-three percent of millennials in Clever’s study said that the market has impacted their homebuying plans, while 76% are concerned that it will get worse before they buy a home. Many have acknowledged that compromises will have to be made once they are able to buy, with Clever’s survey finding that 42% of millennials expect to make concessions on the characteristics of a home and 29% expect to make financial concessions. Additionally, 30% of millennials anticipate maxing out their budget, and 29% expect to pay more than a home’s asking price. Twenty-nine percent foresee having to take part in a bidding war, while 28% are preparing to have at least one offer rejected. Sixty-seven percent of millennials would be willing to buy a fixer-upper. Some potential millennial buyers would be willing to bite the bullet on some extreme problems: 67% said they’d buy a home containing asbestos, 62% would buy a home with mold and 58% would purchase a property with foundation issues. Prospective millennial buyers are also cognizant of the harsh interest rate climate, with 50% of millennials saying high interest rates are a barrier to homeownership and a whopping 96% indicating that high interest rates have affected their homebuying plans. Source: Scotsman Guide Note: October was the most recent peak for interest rates as affordability has improved since that time.