May 3, 2022 – Finally (The Fed). We don’t know about you, but we are tired of hearing that the Federal Reserve Board is going to raise rates at their next meeting.

Economic Commentary

Finally (The Fed). We don’t know about you, but we are tired of hearing that the Federal Reserve Board is going to raise rates at their next meeting. Many years ago, the Fed was somewhat secretive about their intentions so that they were not moving the markets with their words from day-to-day. Well, that era is definitely over. It seems as though a Fed Governor was giving testimony to Congress or a speech to some other organization just about every day for the past several months.

And they effectively “talked rates higher” each time they spoke. Yes, they are going to be diligent about fighting inflation. Yes, they are going to raise interest rates several times this year. Yes, they have stopped purchasing mortgages and bonds and are going to allow their tremendous holdings of these instruments to runoff over time. We have heard these things time and time again.

Well, the Fed meeting has finally arrived. We know what is most likely to happen — an .50% increase in the Federal Funds rate. And there will be headlines all over the media. But don’t be surprised if mortgage and other long-term rates do not move up in response to the Fed’s actions when the meeting concludes tomorrow. That is because the Fed has already “talked” those rates higher. Absent strong language in the statement released after the meeting concludes, the resultant feeling could be a modicum of relief.

Weekly Interest Rate Overview

The Markets. Mortgage rates were stable in the past week, though there continued to be volatility from day-to-day.  For the week ending April 28, 30-year rates fell one tick to 5.10% from 5.11% the week before. In addition, 15-year loans increased slightly to 4.40% and the average for five-year ARMs also climbed to 3.78%. A year ago, 30-year fixed rates averaged 2.98%, over 2.00% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The combination of swift home price growth and the fastest mortgage rate increase in over forty years is finally affecting purchase demand. Homebuyers navigating the current environment are coping in a variety of ways, including switching to adjustable-rate mortgages, moving away from expensive coastal cities, and looking to more affordable suburbs. We expect the decline in demand to soften home price growth to a more sustainable pace later this year.”  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

Rental prices are rising fast, and as leases come up for renewal, tenants may be shocked by just how much. A new report from realtor.com® shows that rental prices rose by nearly 20% from March 2020 to 2022. Asking rents are nearly 1.2 times higher than two years ago, says Danielle Hale, realtor.com®’s chief economist. That likely will lead to rising rental affordability challenges for more households. The U.S. median rental price reached a record high of $1,807 in March. However, March rental trends do show early signs that the pace of rent growth may be cooling, Hale adds. For the second consecutive month, rent growth has moderated when compared year over year. “We expect cooling to continue over time, but the jury is still out on whether rent growth will hit single digits by the end of 2022,” she notes. “This is largely due to the mismatch between rental supply, with vacancy rates at record lows, and demand rising as some would-be buyers potentially turn to renting in the face of higher home prices and mortgage rates.” Hale notes it is unlikely to see enough income growth to keep rents under 30% of monthly paychecks, especially given higher inflation. Source: Move.com

Adjustable-rate mortgages can carry some risks, but as rates rise, more home buyers may consider them. ARMs typically have a lower initial interest rate than 30-year fixed-rate mortgages, but the rate will change after a defined duration. Borrowers then must pay the rate set when their lock period expires, which can be risky if rates are moving up at the time. Even though interest rates currently remain at historical lows, recent increases have been a shock to some home buyers’ budgets. Rates have jumped by more than 90 basis points in just one month. Higher borrowing costs have coincided with higher home prices, too. The median list price for a home has reached $405,000, up 14% compared to a year ago, according to realtor.com®. Borrowers considering an ARM need to weigh how they’d be able to handle mortgage rate increases after their fixed-rate term expires, typically after three, five, or seven years. An ARM typically comes with caps on the annual adjustment, but these can vary among lenders. For example, lenders may cap the increase for the first adjustment at 2 percentage points. That would mean the new rate can’t be more than 2 percentage points higher than the initial rate, CNBC explains. A subsequent adjustment cap clause would tell the borrower how much the interest rate could increase in following adjustment periods. Borrowers should review all potential caps and risks fully with a lender before deciding which loan product to choose. ARMs often are chosen for purchasers of high-priced homes because the amount saved with the initial rate could be thousands of dollars per year. Source: CNBC

While the consistent and mounting pressure of student loan debt has been holding many back from purchasing a home, possessing a bachelor’s degree is still largely seen as a stepping-stone to entering the housing market. The share of homeowners without a high school education dropped by 30% since the last census in 2010, while those with a bachelor’s degree has increased by 18%. This data comes from a new analysis by Point2, a subsidiary of Yardi Systems Inc., using new and existing U.S. Census Bureau data. According to Point2, millennials are a key demographic to watch, as they are now entering the prime homebuying years of their life. But as economic pressure mount, Millennials were found to put off major life decisions—such as having kids or buying a home—at a higher rate than those of their predecessors in order to first get their finances and education in order. “So, while factors such as mortgage fluctuations or housing market volatility may explain the nationwide inability to own a home, this generational shift could answer for the increased ability of those with a degree,” said Alexandra Ciuntu, author of the report and writer for Point2. “We turned to the latest U.S. Census data to pin down the correlation between an individual’s education level and their chance at homeownership in the U.S. The findings highlight the idea that the higher the education, the higher the income, and the closer one gets to the American dream of homeownership.” The average annual income for someone with a degree was found to be $56,150, while those with a high school degree earned $25,350 annually. The median income in an owned household (nearly $81,400) is almost double that of rental households ($42,150) in the U.S. but it should be noted that this census data is skewed because renters typically live alone while homeowners live together. “In the U.S., 40% of homeowners have at least a bachelor’s degree, while 30% have some college or an associate’s degree, putting degree-holding homeowners at 70% in the United States,” Ciuntu said. “Alternatively, 23% have a high school diploma and just 7% of American homeowners have less than a high school education.” Source: MReport