September 24, 2024 – Finally!

Economic Commentary

It has been a full two and one-half years since the Federal Reserve started raising interest rates in reaction to the post-pandemic inflation surge. While many expected inflation to react immediately to the Fed’s medicine, the period of higher rates became very drawn out as inflation showed its stubbornness. Thus, the use of the phrase “higher for longer” became prevalent. Factors such as a red-hot labor market and a resilient economy kept feeding the fire.

Inflation has slowly come down over time. Annual inflation rates have moved under 3.0% — much closer to the Fed’s goal of 2.0%. Thus, it should be no surprise that the Fed moved to lower their Federal Funds rate at their meeting last week. The only question seemed to be whether the decrease would be 0.25% or a larger 0.5% decrease. Most market analysts were predicting 0.25%, but as the date came closer and the data continued to favor this Fed action, there were more calls for the larger drop.

That question has been answered with the Fed announcing a 0.5% decrease last Wednesday.  Since the markets had anticipated this move, there was also no surprise reaction in the markets.  As we have pointed out previously, long-term rates such as mortgages had already moved down substantially in expectation of the action. Therefore, the markets were hanging more on the Fed’s statement released after the meeting. The statement shed some light on how quickly they might act again as they monitor economic conditions.  The next Fed meeting is in early November, right after the election—and certainly another decrease could be in the cards. Time for more speculation to begin Time for more speculation to begin.

Weekly Interest Rate Overview

The Markets. Freddie Mac reported that mortgage rates continued to fall last week as the meeting of the Federal Reserve approached.  There was not a major reaction to the Fed decreasing rates mid-week as the markets moved in anticipation. 30-year fixed rates fell to 6.09% from 6.20% from the week before. In addition, 15-year loans decreased to 5.15%. A year ago, 30-year fixed rates averaged 7.19%, over 1.00% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates continued declining towards the six percent mark, reviving purchase and refinance demand for many consumers. While mortgage rates do not directly follow moves by the Federal Reserve, this first cut in over four years will have an impact on the housing market. Declining mortgage rates over the last several weeks indicate this cut was mostly baked in, but rates will likely fall further, sparking more housing activity.” 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

Homeowners are beginning to give up on waiting for lower mortgage rates. That could be good news for potential homebuyers. In the first quarter of this year, six of every seven homeowners with a mortgage, or 86%, have a mortgage rate below 6%, according to a Redfin analysis of the Federal Housing Finance Agency’s National Mortgage Database. That’s down from a record 93% in the second quarter of 2022, a sign that the lock-in effect is easing. The share of homeowners that have held onto their current mortgages has declined in the past two years — even for those enjoying rates below 3%. The so-called “lock-in effect” refers to homeowners electing to stay in their homes to hold onto their lower mortgage rates when they otherwise might have considered a move. Much of this was brought on by historically low rates at the height of the pandemic in 2020 and 2021, when they dipped below 3%. Since then, mortgage rates have more than doubled, driving many homeowners to stay put in anticipation of lower rates and a friendlier housing market. “I have a dozen or so homeowners who would like to sell, but aren’t willing to give up their 3% interest rate for one that’s more than twice as high,” Blakely Minton, a Redfin (RDFN) Premier real estate agent in Philadelphia, said in a statement. “Many of those sellers will list if rates get back down to 5%.” As a result, the lock-in effect has contributed to the U.S. housing shortage, which is estimated to be between 4 and 7 million homes. The short supply is also pushing up housing prices, which have continued to climb each month. The median sale price hit $439,455 in July, a 4.1% year-over-year increase. This phenomenon appears to be slowly but surely loosening its grip on the market, however. More and more homeowners are biting the bullet and giving up their low rates, largely out of necessity, according to Redfin. Major life events, like a job change or divorce, are giving people no other choice but to list their homes. And with mortgage rates finally starting to trend downwards, the “lock-in” effect could ease at a quicker pace than we’ve seen over the last two years. That said, it still has a way to go before Americans feel comfortable taking the leap: Just 2% of homeowners surveyed by Bankrate in June said they would purchase a home this year at a mortgage rate of 6% or higher. Meanwhile, 47% said mortgage rates would need to be below 5% for them to feel comfortable buying a home this year, and 38% said they’re looking for rates below 4%. Source: Quartz

Saving enough money for retirement is top of mind for many working adults. In fact, 53% of Americans feel behind on planning for retirement, according to a 2024 CNBC survey with SurveyMonkey. But you might be ignoring a key future asset you’re paying for in the present: your home. “People see the money in their bank,” says Jason Stein, a certified financial planner and founder of Bluepoint Wealth Advisors. “They see the money in their brokerage account, their 401(k)s, their [individual retirement accounts]. They don’t often think about the money that is built up in their home.” Here’s why financial experts say it might be smart to view your mortgage as part of your retirement savings, instead of an expense. You shouldn’t necessarily think of your mortgage payments as burdensome expenses. Instead, they can be seen as healthy debt, says Winnie Sun, a CFP and co-founder of Sun Group Wealth Partners. Certain types of debt can be considered healthy because they help fulfill a need like education or shelter. And for the most part, you can expect to make consistent, predictable payments at a fixed rate. Your mortgage payment can be thought of as two parts: the interest and the principal amount of your loan, Stein says. The only part of the payment that is a true expense is the interest. You can’t recover the interest you paid if you decide to sell your home, but you are able to regain the dollars spent paying down the principal. After you’ve paid off your mortgage, “you recover some of the value of those payments that you’ve made throughout the years” when you sell your home, even though there are transaction costs involved, he says. Your home serves an important need in the present as shelter, but is also a valuable investment for your long-term savings, Sun says. If you have a fixed-rate mortgage, she adds, you’re paying a constant, predetermined amount on your home, compared with say, paying rent each month, which could fluctuate. As the property appreciates, the option to sell your home in retirement becomes more viable. That cash can be factored into your retirement plan and take away possible worries about not saving enough. “Each year, you’re actually saving more than you realize, because you’re paying off a loan balance that at some point in the future can be recovered by selling the house, which also may have appreciated,” Stein says. Your expected cash flow in retirement likely includes sources like retirement account withdrawals and Social Security benefits. But those may not be enough to cover the lifestyle you want, and you may not want to cut out discretionary purchases, like travel, Stein says. That’s where selling your house might come into play. Source: CNBC — Editor’s Note: The author neglected to factor in the possibility of keeping the home and taking out a reverse mortgage, which can supplement retirement.

After a slowdown during the pandemic-related closures of 2020, immigration levels surged in 2022 and 2023. The Congressional Budget Office estimated that 2.7 million people immigrated to the country in 2022, rising to 3.3 million in 2023, far outpacing the 900,000-person annual average in the 2010s. These new arrivals are already having an impact on the housing market, but their full effect on household growth will take some time to be fully realized. Projecting the number of new households from the estimated 6 million new immigrants is difficult given the lack of full demographic information, but considering what is known about these new arrivals, alongside historical data, enables a clearer view of effects on household formation. The immigration surge’s impact on household growth will be determined by the headship rate—the share of adults who are heading their own household (i.e. ‘householders’)—of the new arrivals. In 2022, 34 percent of working-age immigrants who had arrived within the previous five years were householders, according to American Community Survey (ACS) data. Headship rates among immigrants, however, rise with time in the country. The headship rate of working-age immigrants who arrived earlier (from 2013–2017) and had more time to establish themselves was 41 percent in 2022, while those in the country for 20 years or more had a headship rate higher even than native-born adults, at 50 percent. Another complication for estimating new households is the fact that many of the newly-arrived immigrants are asylum seekers, which has likely delayed or reduced their household formation because of ineligibility to work. The typical asylum process requires those awaiting a decision to apply for a work authorization, which they can receive no sooner than 180 days after their asylum claim was filed. Once more information about the most recent immigrants is available, we will be better able to estimate the extent and timing of their effect on household formation and housing demand. In the meantime, historical data suggests that the millions of new immigrants are likely already having a large impact on household growth. Indeed, if the age distribution and age-specific headship rates of the current surge of immigrants are even roughly similar to recent patterns, the estimated 6 million new immigrants could result in well over one million new households over the next five years. Additionally, history suggests that immigrant household formation will grow considerably with time in the country, which could have substantial long-term implications for housing demand and labor markets in the communities where these new households form. Source: Joint Center For Housing Studies of Harvard University