November 26, 2024 – The Budget Deficit

Economic Commentary

The initial response to the President-elect’s victory was a huge Wall Street rally. Despite the fact that there were already significant gains in 2024, stock market indices reached new heights immediately after the election. The bond market? Not so much of a rally, despite the fact that the Federal Reserve lowered their benchmark lending rate at a scheduled meeting which took place right after the election. The question is – why was there such a strong response in equities, but not so much in bonds?

There certainly was the opportunity for a bond market rally as interest rates had risen significantly during October after reaching their low point in September. The answer might be related to concern regarding the budget deficit. Remember that we just finished the election season. No candidate gets elected without promising the public goodies in the form of lower taxes, tax credits and/or spending in certain areas. There was little discourse from either side as to address the burgeoning federal deficit.

The more money that the federal government borrows to fund the deficit, the more pressure there is on interest rates. Just like housing prices, if there is more demand for money, the price of that money goes up—or in this case, the bond market falls. Thus, there is a concern that more government spending or lower revenue will put pressure on rates. In reality, Congress must agree to these changes and there are enough deficit hawks in Congress to at least ask the question – how are we going to pay for all this? We are not saying that the promised agenda will not be implemented, but there will be compromises struck. Thus, the budget deficit is real and needs to be part of the conversation which will start next year. For now, we will just close with – Happy Thanksgiving and look for an announcement on new loan limits for 2025 this week or next.

Weekly Interest Rate Overview

The Markets. According to Freddie Mac, mortgage rates increased last week as the market’s volatility continued post-election.  30-year fixed rates rose to 6.84% from 6.76% from the week before. In addition, 15-year loans also increased to 6.02%. A year ago, 30-year fixed rates averaged 7.29%, just under 0.50% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates ticked back up this week, continuing to approach 7 percent. Heading into the holidays, purchase demand remains in the doldrums. While for-sale inventory is increasing modestly, the elevated interest rate environment has caused new construction to soften.” 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 record number of Americans in 2024 used an inheritance to help finance a down payment on their first home. That’s according to a new survey from the National Association of Realtors, which found Americans who bought homes for the first time between July 2023 and June 2024 were older and wealthier than in previous years. The survey found that first-time homebuyers had a median household income of $97,000, up from $95,900 last year, and the median age of first-time buyers rose to 38 years old, a new record high. A generation ago, a typical first-time homebuyer was in their late 20s, according to the report. “We’re seeing a dichotomy in this real estate market where those first-time homebuyers are not just your traditional first-time buyers, like schoolteachers or first responders, really entering into the market,” said NAR deputy chief economist Jessica Lautz. “The people who can get in are really a select few.” So few, in fact, that in the last year, first-time purchasers shrank to just 24% of all homebuyers — the lowest share since NAR began collecting data in 1981. One-fourth of first-time buyers used a gift or loan from a relative or friend to help finance the purchase of their home, according to the report. That’s a slightly higher share than in 2022 and 2023 but lower than the pre-pandemic average of 31% between 1997 and 2019. A record high of 7% of first-time buyers used their inheritance to afford a down payment. Lautz estimated that the drop in first-time homebuyers using help from their families to purchase a home might be connected to typical first-time buyers getting older and perhaps having their own money to make the purchase. “Everyone’s situation is different, but that’s one of the things that seems to be working in conjunction. That seems to be dropping off at the same time as the median age is crawling up,” she said. Source: CNN

The average homeowner has accumulated nearly $150,000 in housing wealth over the last five years. Homeowners continued to see their equity grow in the third quarter, with nearly 90% of major U.S. metro areas posting increases, the National Association of REALTORS® reported. Home prices do appear to be slowing down slightly from their rapid gains in recent years, which could help to improve housing affordability for more home buyers. For example, in the second quarter, the national median home price had climbed nearly 5% year over year compared to 3.1% in the third quarter. The national median price for an existing single-family home was $418,700 in the third quarter, NAR reports. Nearly 13% of markets—or 29 out of the 226 that NAR tracks—posted home price declines in the third quarter, up slightly from nearly 10% in the previous quarter Nevertheless, “home prices remain on solid ground as reflected by the vast number of markets experiencing gains,” says NAR Chief Economist Lawrence Yun. “Even with the rapid price appreciation over the last few years, the likelihood of a market crash is minimal. Distressed property sales and the number of people defaulting on mortgage payments are both at historic lows. Housing affordability has been a challenge, but the worst appears to be over. Rising wages are outpacing home price increases. Despite some short-term swings, mortgage rates are set to stabilize below last year’s levels. More [housing] inventory is reaching the market and providing additional options for consumers.” Source: NAR

A TransUnion survey found that many consumers feel their existing auto and new mortgage payments are putting a strain on their household finances, and the prospect of falling interest rates has them ready to consider refinancing those loans. “We surveyed this specific group of recent borrowers to better understand the drivers of refinance for both mortgages and auto loans,” said Jason Laky, executive vice president and head of financial services at TransUnion. “Millions of people financed homes and autos during this period of high interest rates, and many will look to refinance as interest rates decline.” When asked the biggest factor that would ultimately drive them to pull the trigger on a refinancing decision, 70% of these recent home buyers said that a more favorable loan term would be a key driver for them. However, a nearly identical percentage said that better interest rates (67%) and a cash-out refinance (61%) would also be significant drivers, reflecting broad economic interest. “For many of these recent home buyers, their mortgage payment is their largest single payment each month,” said Satyan Merchant, senior vice president and mortgage and auto business leader for TransUnion. “The upside is that it is a payment that can be refinanced if the economic climate allows for it, and as interest rates begin to fall, this group of consumers should begin exploring this option.” Source: Global Newswire