October 19, 2021 – Is The Fed Too Late? If we stay on this course, the Fed will soon start tapering their purchases of bonds and mortgages.

Economic Commentary

Is The Fed Too Late? If we stay on this course, the Fed will soon start tapering their purchases of bonds and mortgages. Not long after that process begins, they might even start raising short-term interest rates. Well, the government is famous for waiting too long to act and overreacting when they do act. Will this be the case this time? We are not sure, but there are two separate “too late” scenarios.

Scenario number one. We already know that inflation has increased throughout 2021 and is running hotter than the Fed would like. They have allowed inflation to continue without proactive actions to reign it in, because they feel that today’s inflation is “transitory”— or another word for temporary. But what if this inflation is not temporary and when the Fed acts, it is too late to control it as the economy expands? Out of control price increases, such as the recent run up of oil prices, could actually slow down the economy and cause a phenomenon we have not seen for many decades – stagflation.

Scenario number two. After a few hot quarters, the economy is actually beginning to slow down in the third quarter. The Fed’s movement to taper and raise rates could come at a time in which the economy actually needs another push to help us recover the jobs we have lost. But instead, they suppress an already slowing economy. Either scenario could happen, or the economy could stay on it’s present course and the Fed’s actions in moderation may have little or no effect. Only time will tell.

Weekly Interest Rate Overview

The Markets. Mortgage rates moved higher in the past week. For the week ending October 14, 30-year rates rose to 3.05% from 2.99% the week before.  In addition, 15-year loans increased to 2.30% and the average for five-year ARMs rose to 2.55%. A year ago, 30-year fixed rates averaged 2.81%, approximately .25% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac – “The 30-year fixed-rate mortgage rose to its highest point since April. As inflationary pressure builds due to the ongoing pandemic and tightening monetary policy, we expect rates to continue a modest upswing. Historically speaking, rates are still low, but many potential homebuyers are staying on the sidelines due to high home price growth. Rising mortgage rates combined with growing home prices make affordability more challenging for potential homebuyers.” 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

You may be wondering whether you’re a good candidate for refinancing and if so whether it’s the right time to do it. “If you can reduce your mortgage interest rate by ½ percent to ¾ percent and if you expect to be in the house more than three years, then it makes sense to look into refinancing,” says Greg McBride, senior vice president and chief financial analyst for Bankrate.com.  There is a break-even period and it will vary depending on the loan. Typically, after three years you start to reap the benefits of refinancing. Ask yourself, “Are you going to stay there or own the home long enough to take advantage of the refinancing?” says Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association. Another key factor is the cost of refinancing.  “See what else besides the rate is added to the mix,” McBride says. Most often, borrowers roll these costs into the loan amount. Other reasons to refinance are: to take cash out of your home for debt consolidation or to complete home improvement projects or to change the kind of loan you have. For example, if you have an adjustable-rate mortgage, you may prefer to change it to a fixed-rate loan so you won’t face larger monthly payments if the rate adjusts higher after its initial fixed period.  The bottom line–If it’s a smaller loan amount, even if you will get a rate reduction, it may not be worth it. Your savings depend on the loan amount and the rate drop. Smaller loans need a bigger rate drop to produce savings. Source: The Washington Post

The vacation-home market has boomed over the past year and is not likely to slow any time soon, even as the rest of the housing market starts to cool, Lawrence Yun, chief economist for the National Association of REALTORS®, told The Escape Home, a newsletter for second-home owners. Even as companies bring employees back to the office, vacation homes will remain in demand, Yun said. Part of vacation homes’ rise in popularity has been attributed to the growth in remote work. Overall, home sales are showing some signs of cooling.  But vacation homes will remain a hot commodity. Rental prices for vacation homes will likely continue to rise too, Yun said. “One near-certain aspect of the post-pandemic economy, when it comes, is the flexible work schedule,” Yun told The Escape Home. “It is very hard to envision five days a week in the office. Therefore, vacation-home sales will continue to move higher, this year, next year, and for the foreseeable future.” Source: MarketWatch

Experian, Costa Mesa, Calif., said despite a challenging year and a half, consumers are managing credit well with average credit scores climbing seven points since 2020 to 695 – the highest point in more than 13 years. The company’s 12th annual State of Credit report noted  many consumers were managing credit well before the pandemic’s arrival and the accommodations afforded by the Coronavirus Aid, Relief and Economic Security (CARES) Act may have helped consumers protect their financial health. At the same time, stay-at-home orders and record savings levels may have contributed to lower unsecured and total debt levels, lower credit utilization rates and fewer missed payments. “While these findings are positive, we recognize they do not tell the full story and many consumers face financial obstacles due to a limited credit history,” said Alex Lintner, President of Experian Consumer Information Services. The report found consumers have on average three credit cards with an average balance of $5,525, down from $5,897 in 2020 and $6,494 in 2019. Additionally, the report said average mortgage debt was $229,242; average non-mortgage debt was $25,112; and average auto loan or lease debt was $20,505.  The report said 2.3 percent of consumers had delinquencies between 30-59 days; 1 percent had delinquencies of 60-89 days; and 2.5 percent had delinquencies of 90-180 days. All of these numbers were down substantially from a year ago and two years ago. Source: Experian