October 22, 2024 – Quiet Period?

Economic Commentary

Before every meeting of the Federal Reserve there is a blackout period in which the members have to refrain from talking to the public and the media regarding the state of the economy and their policies. This particular blackout period, which starts in a few days, takes on special importance because it is also the period before the election. With so much noise going on during the next two weeks, any organization being quiet will be something of a pleasure.

However, we should not lose sight of the fact that the Fed meets right after the election with a potential rate-cut in the cards. And as close as the election is predicted to be—there is a chance that a winner will not be known as the meeting progresses. There may be counting of ballots still occurring. The Federal Reserve prides itself on being “non-political” and therefore, the results of the election should not affect their decision on rate policy one way or the other.

There will be some important data released before all this happens. First, we should see the advanced reading of economic growth for the third quarter. We had solid growth in the first half of the year and any sign of weakness could solidify the case for another rate cut. We will also see reports on personal income, spending and personal expenditure inflation for September. Then comes the election just before the Fed meets. And the data does not stop there, as at the end of the first week of November we will have the October jobs report.

Weekly Interest Rate Overview

The Markets. Freddie Mac reported that mortgage rates continued to rise last week as the economy continues to show unexpected strength. 30-year fixed rates rose to 6.44% from 6.32% from the week before. In addition, 15-year loans increased to 5.63%. A year ago, 30-year fixed rates averaged 7.63%, more than 1.00% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The 30-year fixed-rate mortgage increased for the third consecutive week, moving closer to 6.5%. In general, higher rates reflect the strength in the economy that is supportive of the housing market. But notably, as compared to a year ago, rates are more than one percentage point lower and potential homebuyers can stand to benefit.” 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

U.S. home buyers are gaining tens of thousands in purchasing power as mortgage rates drop. With 30-year fixed mortgage rates declining from 7.79% in October 2023 to 6.2% in mid-September, home buyers in the 100 largest U.S. cities have gained a median of $70,000 in additional buying power for the same $2,100 monthly payment, according to a Realtor.com analysis. In other words, a U.S. buyer can now afford a home $70,000 more expensive than what they were planning to purchase last year. The findings are based on the monthly payment for a median-priced home in the U.S., a 20% down payment and a 6.2% mortgage rate. The analysis applied the same method to each of the 100 largest cities, calculating how much extra buying power homebuyers have in each local market compared with last year. Perhaps unsurprisingly, buyers in cities with the most expensive homes saw their spending power increase the most. Those savings will likely grow, too. With the Federal Reserve cutting its benchmark federal funds rate by 50 basis points last week, mortgage rates are forecasted to decline to 6% or less at some point in 2025. If that happens, additional buying power for homebuyers in the 100 largest metro areas would increase to $84,800 for a median-priced home, compared with October 2023, according to the analysis. Source: CNBC — Editor’s Note: It should be noted that a 20% downpayment is not required for most owner-occupied homes

Student loans are often seen as a major obstacle for young homebuyers, but the impact is nuanced depending on the borrower. While it’s true that debt levels are higher today than in past decades, First American Senior Economist Sam Williamson analyzed data from the 2022 Survey of Consumer Finances (SCF) — the most recent data available — to identify trends that help put the weight of student loan debt into perspective. Williamson found that student loan payment-to-income ratios have decreased, helping borrowers better manage both student loans and mortgages. Despite the rise in average loan balances from $12,600 in 1992 to $40,600 in 2022, the share of income young households spend on student loan repayments dropped from 7.4% to 5.9% between 2016 and 2022. The average inflation-adjusted income for young households with student debt increased from $73,000 to $122,000 between 1992 and 2022 – an increase of nearly 70%. Much like a mortgage, monthly student loan payments depend on more than just the loan amount and income of the borrower. The average loan repayment term has almost doubled from 7.5 years in 1992 to 13.9 years in 2022, lowering monthly payment-to-income ratios. Just as extending a mortgage term from 15 to 30 years allows home buyers to borrow more money for a similar monthly payment, almost doubling the student loan repayment term accommodates more debt for a similar monthly payment. Student loan interest rates have declined. The average annual interest rate on student loans has decreased by two percentage points, from nearly 8% in 1992 to around 6% in 2022. Longer repayment terms and lower interest rates have increased “education-buying power,” while lowering payment-to-income ratios. First American’s report identified that higher education achievements typically translate into house-buying power. Among millennials, the gap in house-buying power between those with a high school diploma (or some college/associate degree) and those with a bachelor’s degree was approximately $250,000 in 2022, adjusted for inflation. Source: National Mortgage Professional

Despite seasonally driven demand, rents across the U.S. dipped by $5 (or -0.3%) year-over-year and nationwide to a median rent of $1,753, according to the Realtor.com August Rental Report. Although affordability improved as a top-level trend, affordability varies widely by metro area and did not improve everywhere. “One way to think about housing affordability is to use the 30% rule of thumb, where housing expenses including rent or mortgage, utilities and HOAs or other fees should not exceed more than 30% of your income,” said Danielle Hale, chief economist at Realtor.com®. “Amid easing rents and growing incomes, rental affordability improved in a majority of U.S. major metros compared to last year, and crucially, typical asking rent is less than 30% of the typical household income nationwide. Although this is great news for many renters, housing affordability is still a challenge as rents are still considerably higher than before the pandemic and still above the 30% threshold in six of the metros Realtor.com examined.” In August 2024, nationwide rent was more affordable than in the previous year. Renters earning the typical household income devoted 25.1% of their income to lease a typical for-rent home (vs. 25.9% in August 2023). Source: NAR