November 19, 2024 – Back to the Inflation Picture

Economic Commentary

The election is over. The Federal Reserve has met and made their decision regarding short-term interest rates. The next question is – where do we go from here? While the Fed has lowered their rates, mortgage rates actually increased leading up to the election and the meeting of the Fed. And this increase was not a small bump in rates, as mortgage rates rebounded by over a half percentage point from their lows.

It is quite obvious that the Fed does not directly control the direction of mortgage rates. Long-term interest rates, as reflected in the bond market, react to what traders believe will happen – or the economic scenario. For example, the Fed raised rates to bring inflation down. They are now lowering rates because inflation is near their 2.0% annual target. If the markets believe that inflation is really under control, they will act in concert with the Fed’s action and long-term interest rates such as mortgage rates will move lower.

Conversely, if the markets are not convinced that the Fed is satisfied that the inflation battle has been won, they will be subject to volatility like we have seen. Inflation is not the only factor. For example, if the government must increase borrowing because budget deficits are soaring, that can also cause interest rates to rise. But inflation is a big part of the picture. Speaking of inflation, the latest consumer price index was released last week, and it showed that prices continued to moderate, but especially the core numbers excluding inflation continue to be higher than the Fed’s 2.0% target.  On the wholesale side, the numbers were congruent with the retail inflation results. This likely signals that the Fed will continue to act with caution with regard to the future of interest rates. 

Weekly Interest Rate Overview

The Markets. According to Freddie Mac, mortgage rates were stable in the past week. However, there was a lot of volatility day-to-day. 30-year fixed rates fell one tick to 6.78% from 6.79% from the week before. In addition, 15-year loans also decreased slightly to 5.99%. A year ago, 30-year fixed rates averaged 7.44%, more than 0.50% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “After a six-week climb, rates have leveled off, but overall affordability continues to be an issue for potential homebuyers. Freddie Mac’s latest research shows that mortgage payments compared to rents on the same homes are elevated relative to most of the last three decades.” 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

The value of homeownership continues to assert itself, with a report by First American Data & Analytics showing how Americans who own their homes accumulate more wealth over time than those who rent the place in which they live. “In deciding whether to rent or own, it’s important to remember the wealth-building power of equity accumulation,” First American Chief Economist Mark Fleming said in his analysis of the company’s latest Real House Price Index (RHPI) data, adjusted for income and interest rate changes. “Even homeowners who bought at the height of the housing boom in 2006 have gained $169,000 in equity, while renters over that same time period cumulatively lost $229,000 in wealth.” The RHPI showed that prices decreased by 3.1% between August and Sept. 2024, falling 9.2% year-over-year. Consumer house-buying power, or how much one can purchase based on changes in income and mortgage rates, increased 3.7% in September from the month prior and increased 14.5% year over year. Fleming emphasized that while improving affordability is providing some relief, it’s still a long way from the historical average. Source: First American

Prospective home buyers may have a magic number in mind when it comes to a mortgage rate they will accept—and most lenders are not even close to reaching it. More than half of would-be home buyers—56%—say they’re waiting for mortgage rates to fall to a range between 5.5% and 5.75% before making a home purchase, according to HomeLight’s 2024 Lender Insights Report. Mortgage financing giant Fannie Mae and the Mortgage Bankers Association recently predicted that the 30-year fixed mortgage rate likely will average about 6.2% by the end of 2024. So, some prospective home buyers may have a long wait. Home buyers continue to express anxiety over high interest rates, despite rates being considerably lower than a year ago, when the average approached 8%. Interest rates have made monthly payments far cheaper than those of a year ago. “The monthly savings a home buyer could have on a $400,000 home is $270 compared to last year,” Jessica Lautz, NAR’s Deputy Chief Economist, notes. That said, housing affordability constraints continue to press on the market. Source: Realtor Magazine

Homeowners collectively have more than $35 trillion in home equity, reports the Wall Street Journal. “More homeowners are borrowing against the rising value of their properties, suggesting that the worst of the remodeling slump has passed. “Analysts and building-products executives are forecasting lower interest rates will fuel a rebound next year in spending on new kitchens, bathrooms and decks, reviving a reliable source of economic activity and stock-market gains. “Spending on home repairs and renovations surged during the pandemic, when Americans were cooped up at home. Then it contracted for the first time since the aftermath of the 2008 mortgage meltdown, as the highest borrowing costs in a generation slowed home sales and made it expensive to tap home equity to pay for big jobs. “Now, with the Federal Reserve cutting interest rates, the mountain of home equity that Americans have amassed thanks to sharply rising property values is getting cheaper to access. The latest reading of a closely watched gauge of repair and renovation spending predicts a return to growth next summer. Spending should reach an annual rate of $477 billion by this time next year, Harvard University’s Joint Center for Housing Studies said. That would approach the record annual rate of $487 billion reached a year ago, before high rates took a toll. Though the slump has been relatively mild and is expected to be short-lived, the decline from record highs has dented building-products businesses. Rock-bottom borrowing costs and stay-at-home orders pulled forward a lot of remodeling projects during the pandemic. But over the past two years, expensive financing has prompted many people to defer pricey repairs and renovations, even as their home values continued to swell, according to John Burns Research & Consulting. Americans have more than $35 trillion in home equity, up 81% from the end of 2019, according to the Fed. That is an average of about $400,000 per U.S. homeowner, John Burns estimates. “’We think there’s $30 billion in remodeling spending just sitting on the sidelines today, waiting to be spent,’ said Matthew Saunders, senior vice president of building products research at John Burns. The firm recently polled 475 households that said they are waiting for lower rates to use home-equity lines of credit to fund projects. They broke down into two groups: 30-somethings planning work in the $60,000 range and older homeowners eyeing updates that will cost closer to $30,000. Source: The Wall Street Journal