March 30, 2021 – What the Fed Keeps Saying. The markets are famous for reacting to what they think is going to happen.


Economic Commentary

What the Fed Keeps Saying. The markets are famous for reacting to what they think is going to happen, rather than what happened in the past. In this regard the markets are an indicator of the future. Like any indicator, the markets are not always accurate, but they are an indicator that bears watching. For example, for the past two months, the markets have pushed long-term interest rates higher.

This has happened despite the Federal Reserve Board keeping short-term interest rates close to zero — and in their last statement, they are willing to keep them near zero for a significant period in the future. So why the dichotomy? First, we must point out that the Fed controls short-term rates directly, but long-term rates indirectly. If the markets feel the Fed is not being diligent against inflation, long-term rates will rise regardless of what the Fed does or says.

On the other hand, the Fed is optimistic that economic growth could be robust this year. Especially since the stimulus package has been enacted. They also admit there could be a pick-up in inflation. Because of the slack in the economy – namely almost 10 million jobs not recovered – they feel there is room for growth without overheating the economy in the long-run. The markets obviously are sending another message. Who is right? Does someone out there have a crystal ball?

Weekly Interest Rate Overview

The Markets. Rates continued their upward climb in the past week. For the week ending March 25, Freddie Mac announced that 30-year fixed rates increased to 3.17% from 3.09% the week before. The average for 15-year loans rose to 2.45% and the average for five-year ARMs increased to 2.84%. A year ago, 30-year fixed rates averaged 3.50%, over 0.25% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac – “During the course of the pandemic, ‘home’ has become more important than ever. As a result, strong purchase demand continues—but buyers also outnumber the sellers. Since January, rates have increased half a percentage point from historic lows and home prices have risen, leaving potential homebuyers with less purchasing power. Unfortunately, this has disproportionately affected the low end of the market, where supply is the slimmest.”  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

A home often represents about 90% of the total wealth of a household. Homeownership often has long been pointed to as a way to build wealth over the long run. It also could help narrow racial income and wealth inequity gaps, writes Gay Cororaton, senior economist for the National Association of Realtors®, at the association’s Economists’ Outlook blog. But how much wealth potential can you gain over time? Cororaton offers the following scenario: Take a homeowner who purchased a single-family existing home 10 years ago at the median sales price of $170,567, with a 10% down payment. Then, they sold the home at the median sales price of $315,700 in the fourth quarter of 2020. They would have built up a home equity gain of $176,123. Over a 30-year period, that would jump to $307,979, Cororaton notes. “Wealth accumulation takes time, so the earlier households start owning homes, the greater the wealth accumulation,” Cororaton writes. Source: National Association of REALTORS(R) Economists’ Outlook blog

At the start of the spring homebuying season, U.S. homeowners looking to sell will earn record gains, as CoreLogic’s Home Equity Report for Q4 2020 shows that homeowners with mortgages (which account for roughly 62% of all properties) have seen their equity rise by 16.2% year-over-year, a gain of $1.5 trillion-plus in equity, and an average gain of $26,300 per homeowner, since Q4 of 2019. “Compared with a year earlier, home prices in December 2020 were up sharply—9.2%, according to the CoreLogic Home Price Index—boosting the amount of home equity for the average homeowner with a mortgage to more than $200,000,” said Dr. Frank Nothaft, Chief Economist for CoreLogic. “This equity growth has enabled many families to finance home remodeling, such as adding an office or study, further contributing to last year’s record level in home improvement spending.” Nationwide, states with strong home price growth and high home prices continued to experience the largest gains in equity, whereas states that were hard hit by the pandemic continue to experience dwindling gains. Source; DSNews

StorageCafe, Santa Barbara, Calif., reported more than 4.6 million multi-generational households in the U.S. as of 2020, the highest number in 50 years—and not for the usual reasons. The report noted multi-generational living has historically been associated with necessity, and its affordability is still a key asset. But now, more than just providing a temporary solution to economic challenges, the multi-generational household has evolved into an arrangement that mutually benefits family members. ‘Boomerang kids’ are now joined by older millennials who increasingly consider staying with mom and pop, enjoying shared expenses and assistance with childcare. Additionally, the report said as work from home has become so widespread, keeping people away from regular face-to-face professional interaction, sharing space with family is often a viable alternative to spending most of the day alone. The report said more than half the country’s 18- to 24-year-olds live with parents. And 17% of 25- to 34-year-olds — which include most of the Millennial cohort — do too, more than twice the number that did so 50 years previously. They may be joined in multi-generational households by grandparents and children. Ashley Ermer, professor of Family Science and Human Development at Montclair State University, noted adults are marrying later. “It used to be the case where young adults would marry in their early 20s, which also meant they were leaving their parents’ home in many cases,” she said. “The average first age of marriage in the U.S. is approaching 28 for women and 30 for men. The economy is another reason. Those in their late 20s/early 30s were entering the workforce in large numbers around or slightly after the Great Recession.” Source: StorageCafe

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