October 8, 2024 – We Want More!

Economic Commentary

The Federal Reserve has lowered their Federal Funds Rate. As we have indicated, the move was expected – and the bond markets had strongly anticipated this move. But the Fed lowered their base rate by 0.5%, yet mortgage rates have moved down approximately 1.25% from their peak earlier this year. Why is that? Because the markets are expecting more moves by the Fed in the coming months. These actions will not take place before the elections as the Fed does not meet again until early November.

Not surprisingly, the Fed will be in their “blackout” or “quiet” period while the elections progress. The schedule is planned that way so that actions or words by the Fed do not affect the electoral process. In a normal month, the Fed Governors are blabbing away in front of Congress or giving addresses during economic conferences. But don’t expect any noise from the Fed as October comes to a close. On the other hand, the November meeting will start the day after the election—so that will be a wild and crazy week!  Meanwhile, we will soldier on with plenty of data in the month of October.

We started the month with the September jobs report on Friday.  In September the economy added 254,000 jobs – much more than expected. In addition, the previous two months of data were revised upward by 72,000 jobs, for a net gain of over 300,000 jobs. The headline unemployment rate fell one tick to 4.1%. And wage inflation grew by 0.4% from last month and 4.0% over the last year. Overall, a strong report which will make the Fed more reticent towards another large rate decrease.  On the other hand, there will be plenty of data for the Fed to chew on before they meet again in four weeks. 

Weekly Interest Rate Overview

The Markets. Freddie Mac reported that mortgage rates rose slightly last week and the increase accelerated after the jobs report was released on Friday. 30-year fixed rates rose to 6.12% from 6.08% from the week before. In addition, 15-year loans increased to 5.25%. A year ago, 30-year fixed rates averaged 7.49%, over 1.25% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The decline in mortgage rates has stalled due to a mix of escalating geopolitical tensions and a rebound in short-term rates that indicate the market’s enthusiasm on rate cuts was premature. Zooming out to the bigger picture, mortgage rates have declined one and a half percentage points over the last 12 months, home price growth is slowing, inventory is increasing, and incomes continue to rise. As a result, the backdrop for homebuyers this fall is improving and should continue through the rest of the year.”  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

Thanks to the runup in housing prices, homeowners now have more than $32 trillion in home equity as of the first quarter of 2024, according to the St. Louis Federal Reserve — an all-time high. While the average borrower sits on roughly $214,000 in equity that can be tapped, 60% of homeowners have at least $100,000, the Intercontinental Exchange’s Mortgage Monitor also found. Tappable equity is the amount most lenders will allow you to take out while still leaving 20% in the home as a cushion. Rising home prices have “continued to build the fortunes of existing homeowners, pushing tappable equity to its highest level ever,” said Andy Walden, vice president of research and analysis at the Intercontinental Exchange. Currently, with mortgage rates higher than normal, fewer homeowners are jumping at the chance to do a cash-out refinance. “As rates come down, you might see more opportunities for a cash-out refi, but nobody is going to confuse it with 2021,” Greg McBride, Chief Economist of Bank Rate said, referring to the period of “ultra-low” rates after the Fed slashed its benchmark to near zero. And yet, some homeowners are already more willing to refinance now that mortgage rates are down from recent highs — as of the latest reading, mortgage refinance demand is more than 100% higher than a year ago. Alternatively, a home equity loan is a type of second mortgage, which allows borrowers to pull cash while using the house as collateral. In this case, the loan comes as a lump sum with a fixed rate. “A home equity loan could be a good option for homeowners who want to raise money to pay for renovations, either to make the home more to their liking, or to fix it up before selling the home next year,” said Holden Lewis, home and mortgage expert at NerdWallet. However, the current average home equity loan interest rate is about two percent higher than current mortgage rates, according to Bankrate. In this case, as well, “elevated rates have contributed to homeowners’ reluctance to take out fixed-rate home equity loans,” Lewis said, “but some of that trepidation will melt as rates drop.” Otherwise, a home equity line of credit, also known as a HELOC, lets you borrow money against a portion of your home’s equity. Instead of taking out a home loan at a fixed amount, a HELOC is a revolving line of credit — but with better rates than a credit card — that you can use when you want to or just have on hand. The average HELOC interest rate is even higher, according to Bankrate. While those rates are high compared with the typical mortgage or home loan, they are significantly lower than what it costs to borrow on credit cards, which charge more than 20%, on average. The cost of HELOCs will come down as the Federal Reserve lowers their Federal Funds Rate. Source: CNBC

CoreLogic released its Homeowner Equity Insights report for the second quarter, finding that U.S. homeowners with mortgages saw their overall equity increase by 8% year-over-year. Overall, the equity for those homeowners has increased by a total of $1.3 trillion from Q2 2023. That brings total net homeowner equity to more than $17.6 trillion. “Persistent home price growth has continued to fuel home equity gains for existing homeowners who now average about $315,000 in equity and almost $129,000 more than at the onset of the pandemic. The substantial accumulation of home equity for existing homeowners has served as an important financial buffer in times of uncertainty, as some homeowners are facing higher costs of homeowners’ insurance and taxes and have had to tap into their equity to prevent falling behind on their mortgages,” said Selma Hepp, Chief Economist for CoreLogic. “As a result, mortgage delinquency rates have remained at historical lows despite the inflationary pressures and higher costs of almost all non-mortgage, homeownership-related expenses.” The average U.S. homeowner gained approximately $25,000 in equity over the past year. The total number of mortgaged residential properties with negative equity fell by 4.2% from Q1, to about 960,000 homes total. That represents about 1.7% of all mortgaged properties. Year-over-year, national negative equity was down by 15%, or about 169,000 fewer homes. Source: CoreLogic

Nearly half of all renter households in the US were cost-burdened in 2023, meaning they paid more than 30% of their income towards housing costs, according to new government data. The data was released as part of the US Census Bureau’s 2023 American Community Survey and underscores the gravity of America’s home-affordability crisis. “Housing costs rose between 2022 and 2023 for both homeowners and renters,” Molly Ross, a survey statistician at the Census Bureau, said in a statement. “The median cost of housing for renters rose from $1,354 to $1,406 (after adjusting for inflation).” That equates to a 3.8% increase in rent, outstripping the 1.8% increase in home values, according to the Census Bureau. Households that spend more than 30% of their income on rent are considered “cost-burdened” by the US Department of Housing and Urban Development. The survey also found that the share of Americans’ income paid toward rent differed by race. In 2023, 56.2% of Black or African American households spent more than 30% of their income on housing costs, compared to 49.7% of the total population. Among Hispanic households, 53.2% were cost burdened. The survey found that renters shouldered a higher cost burden as a percentage of their income compared to homeowners in 2023. Source: CNN