October 10, 2023 – One More Rate Increase?

Economic Commentary

Back to the topic of higher rates for longer, as the members of the Federal Reserve Open Market Committee keep delivering a central message to the public at large through their statements. The message is that rates are not high enough to bring inflation down to where they would like. While they also say that they are willing to wait to see what the effect is of their previous rate hikes as they make their way through the economy, it seems like they are preparing us for at least one more rate hike this year.

Certainly, the bond market seems to have heard them loud and clear, as longer-term rates keep moving up in anticipation of the Fed’s next move. Plus, while the markets are still predicting that the Fed will start lowering rates next year, the number of moves forecasted downward has been narrowed. Thus, the markets are listening to the Fed and expecting higher rates for a longer period of time. And while all of this is very logical and espoused by experts, we would like to give you one familiar warning – nobody can predict the future.

We know the Fed is comprised of expert economists, but they are no better at predicting the future than other market analysts. We have already seen signs of the economy slowing down – especially within the housing market. While there are still no signs of an impending recession, this is just a reminder that the Fed did project a recession in the latter part of this year. It did not happen. And the surprising addition of over 300,000 jobs in September adds more evidence that we are not on the verge of a recession. On the other hand, this unexpectedly strong report gives the Fed plenty of ammunition for one more increase.

Weekly Interest Rate Overview

The Markets. Rates continued to rise last week as the markets kept reacting to strong statements from members of the Fed. Even the temporary resolution of government funding did not assuage the markets. For the week ending October 5, 30-year rates rose to 7.49% from 7.31% the week before. In addition, 15-year loans increased to 6.78%. A year ago, 30-year fixed rates averaged 6.86%, almost 1.0% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates maintained their upward trajectory as the 10-year Treasury yield, a key benchmark, climbed. Several factors, including shifts in inflation, the job market and uncertainty around the Federal Reserve’s next move, are contributing to the highest mortgage rates in a generation. Unsurprisingly, this is pulling back homebuyer demand.”  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

With the average 30-year, fixed-rate mortgage hitting a peak in August and September, homeowners face added affordability challenges, as reported by Freddie Mac. In response, some borrowers are turning to mortgage buydown points as a strategy to temporarily lower monthly payments, according to CoreLogic Economist Archana Pradhan. Mortgage buydown points allow homeowners to enjoy reduced monthly payments during the initial years of homeownership. For instance, on a $500,000 loan at an 8% interest rate, monthly payments would normally be around $3,670. But with a short-term rate drop to 6%, those payments can decrease to about $3,000. Notably, while mortgage buydown points offer short-term savings, interest rates incrementally increase over time. Historically, buydown points were more prevalent prior to the Great Recession, Pradhan said. She said lenders often provided them to borrowers who might not have qualified for loans without a complete ability-to-pay verification. However, post the 2010 Dodd-Frank Act, today’s mortgages have become more reliable and less risky, ensuring borrowers aren’t solely qualified based on initial terms. Mortgage buydown points’ popularity has surged recently as buydown activities increased notably as the average 30-year, fixed-rate mortgage surpassed the 6% mark, peaking in Dec. 2022. But with continued high interest rates, buydown point utilization has slightly dipped. On average, borrowers choosing buydown points face interest rates 17 basis points higher than those who don’t, which according to Pradhan suggests some buyers are prepared to pay more upfront to ensure reduced initial monthly payments. Source: National Mortgage Professional

One in 10 owners has been scammed by a contractor, a new study shows. Here’s why you should consider leveraging your list of reputable service providers for your clients. As home improvement demand remains strong for kitchen and bath remodels, as well as for outdoor renovations, reports of contractor scams are rising. These schemes are potentially costing homeowners thousands of dollars in losses. About one in 10 Americans have been a victim of a contractor scam, losing an average of $2,426, according to a new study of about 1,000 Americans from JW Surety Bonds. Baby boomers were the most likely to fall victim to contractor scams (15%), followed by millennials (13%), the survey shows. Maddie Weirman, a spokesperson for JW Surety Bonds, a nationwide provider, offers some of the following tips to avoid contractor scams:

• Ensure the contractor is licensed and insured. “Don’t be afraid to ask the contractor for proof of insurance,” Weirman says. By hiring contractors who are licensed and bonded, homeowners can have extra security; surety bonds provide financial security against contractor scams.
• Get everything in writing and review the contract carefully. “Make sure that this contract includes the contractor’s name and information and when the project is projected to start and end,” Weirman says.
• Never pay the full amount up front. While a deposit is common, Weirman says homeowners should not pay the full, agreed-upon amount until the project is complete to their satisfaction. Source: REALTOR® Magazine

More than four in five US homebuyers are factoring in climate risks when they shop for a new house, according to a new survey by real estate firm Zillow. Some 83% of respondents said they weighed at least one climate risk such as floods, extreme temperatures, wildfires, hurricanes or droughts in their purchase plans, according to Zillow’s poll of almost 12,000 prospective buyers conducted earlier this year. The perceived climate risks generally aren’t proving to be deal-breakers, but they are affecting attitudes, according to the study. Younger buyers in particular, “want to know if their home will be safe from rising waters, extreme temperatures and wildfires,” said Zillow senior population scientist Manny Garcia. While the concern over climate risks is nationwide, it’s strongest among homebuyers in the West, according to Zillow. Even so, most homebuyers across the country aren’t weighing a move to a region they consider less risky, and roughly one-quarter of them said they are considering moving to areas with more risks, the study said. Source: Bloomberg