March 23, 2021 – How Much is a Trillion Dollars? Well, the issue of additional stimulus is resolved.

Economic Commentary

How Much is a Trillion Dollars? Well, the issue of additional stimulus is resolved. We keep hearing the term “trillion” being bantered about. How much is a trillion dollars? A trillion dollars is a million dollars multiplied by a million. Or if you prefer, a thousand billion. It has 12 zeroes: $1,000,000,000,000. That is a lot of zeros. Here is the kicker—the stimulus bill is just about twice that amount. To put this in perspective, the federal government normally spends between four and five trillion dollars each year.

Thus, the stimulus bill will increase this year’s budget by close to 50%. Again, that is a lot of spending. Here is the good news—that spending is one time only and afterwards the budget should return to normal, hopefully with increased tax revenue to help offset some of the deficit. That is unlike lowering taxes, which lowers revenue every year. Here is the bad news. The deficit created by the spending will cost the government billions of dollars every year in interest.

For example, in 2020, the government spent over $300 billion in interest. The more the government must borrow, the greater the risk that interest rates will rise and therefore increase these expenditures even further and may even slow the economy in the future. That is one risk of the stimulus plan. The other risk is inflation due to an overheating economy. Inflation can also cause higher rates. The risk of not spending the stimulus dollars? An extended period of recovery like we had after the Great Recession. So, let’s hope these dollars speed the recovery without overheating the economy.

Weekly Interest Rate Overview

The Markets. Rates continue to rise in the past week. For the week ending March 18, Freddie Mac announced that 30-year fixed rates increased to 3.09% from 3.05% the week before. The average for 15-year loans rose to 2.40% and the average for five-year ARMs increased to 2.79%. A year ago, 30-year fixed rates averaged 3.65%, over 0.50% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac – “As expected, rates on home loans continued to inch up but are still hovering around three percent, keeping interested buyers in the market. However, residential construction has declined for two consecutive months and given the very low inventory environment, competition among potential homebuyers is a challenging reality, especially for first-time 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

Joel Kan of Mortgage Bankers Association (MBA) says rising mortgage rates – in tandem with climbing Treasury yields – indicates the market and public are increasingly optimistic about the likelihood of an economic recovery. Greg McBride, chief financial analyst at Bankrate.com, notes that in 2020, when the economic outlook was poor and inflation was falling, Treasury yields and rates on home loans fell to record lows. Now that expectations of a post-pandemic economic surge are taking hold, bond yields and interest rates are retracing some of last year’s decline. “The passage of President Biden’s $1.9-trillion stimulus package will likely add to this optimism, thereby pushing rates higher,” Kan notes. However, Kan points out that rates, as measured by the 30-Year Fixed Rate Mortgage benchmark, remain at historically low levels. “This rate fell below 3% for the first time in history last fall, and we’re still at around 3% now,” he says. “Even if the rate rises to 3.4% by the end of this year – as MBA forecasts – it will still be moderate by historic standards.” Indeed, for context, the rate on the 30-Year Fixed Rate Mortgage averaged about 4% between 2010 and 2020, Kan points out. “Back in the 1980s, it was over 10%,” he adds. As such, Kan does not think rising rates will put a crimp on home sales this year, citing that inventory levels remain fairly tight. “However, rising rates could affect the timing of new purchases, as buyers might wait a little longer to see if rates ease somewhat,” he says. McBride cites that an improving economy is a “recipe” for strong home sales. “Whether rates are 3%, 3.5%, or even 4% matters less than whether prospective home buyers are confident in their jobs, income, and ability to make future mortgage payments,” he says. “Higher rates will take some momentum away from home sales, so the market might just be ‘sizzling’ instead of ‘red hot.’” As of now, MBA expects sales of existing homes to average about 6.4 million in each of the four quarters of this year (generally in line with sales recorded in the last two quarters of 2020), while sales of new homes should rise from 905,000 in the first quarter of this year to 979,000 in the fourth (above last year’s figures). Source: Forbes

In 2020, the housing industry saw record gains across the board, as rates hit record-lows and a new report revealed that single women purchased 8.7% more homes in the fourth quarter than 2019. The report, conducted by Redfin, also revealed that the number of home purchases by single women was close to twice as much as that of single men, which saw a 4.6% increase in home purchases. Meanwhile, couples bought 11.5% more homes in 2020 than 2019. The report also revealed that single women made up 15.7% of total home purchases nationwide in the fourth quarter of 2020, compared with 15.3% a year earlier. Single women were able to achieve this despite the pandemic-driven recession, which forced women out of the workforce at a greater rate than men, especially women of color. Prior to the pandemic, women earned just 82 cents for every dollar earned by men. The recession hit women-dominated industries—including restaurants, retail, and healthcare—hardest, and many women have chosen to leave paying jobs to take care of children. Meanwhile, single men made up 18.1% of home purchases in the fourth quarter, which was no too far off from the 18.3% a year earlier. Source: Redfin

An analysis of rent prices nationwide revealed that rents grew by the largest margin since the summer of 2019, with rents stabilizing in metros heavily affected by the pandemic. The Apartment List national report found that rents increased by 0.7% from January 2020 to February 2020, marking the biggest monthly gain since June 2019, when the market was in the middle of its summer boom. The increase is more than double the average 0.3% month-over-month rent growth in February in the past three years. This is also the second consecutive month that rent growth has outpaced the average of previous years. “Our national index has not been significantly disrupted since the early stages of the pandemic,” Apartment List wrote in the report. “Rents fell by 1.2% nationally from March through June of 2020, but rents are now just 0.1% lower than they were last June. Over the past eight months, national rent growth has been largely in line with the seasonal trend that we’ve observed in prior years.” Source: Apartment List