Here Comes the Fed

June 16, 2015
ECONOMIC COMMENTARY
For a period of time which was unprecedented, the meetings of the Federal Open Market Committee of the Federal Reserve Board meant nothing to the average American and the markets. After the financial crisis hit, the Fed moved rates down to historic lows. And when the economy was slow to recover, the Fed kept fiscal stimulus going by purchasing the mortgage backed securities and Treasuries. Yet, after this was accomplished there was not much to do until the economic recovery started moving.

The economy is producing over two millions jobs per year and now that the economic recovery is much more solid, the Fed is back in the news. Last year, they stopped the aggressive purchase of securities. And now it is inevitable that they will start raising short-term interest rates as the recovery continues to get stronger. Chairperson Yellen as much as guaranteed it in a speech last month. Thus, all eyes will be on the FOMC meeting as it convenes today.

In general, we are not looking for the Fed to raise rates this week. But we are looking for a better indication as to when they might make a move at a later meeting, now most likely in September, after the second quarter economic data is released. The markets are already speculating as to how quickly the second move may come. In other words, when rates start up again, how fast will they move? Keep in mind that the Fed directly controls short term rates but only indirectly affects long-term rates through their actions. And long term rates have already started their move upward in anticipation of the Fed’s moves.

WEEKLY INTEREST RATE OVERVIEW

The Markets. Rates on home loans rose in the past week to their highest levels of the year in response to the strong jobs report. Freddie Mac announced that for the week ending June 11, 30-year fixed rates remained at 4.04%. The average for 15-year loans increased to 3.25%. Adjustables were mixed, with the average for one-year adjustables falling to 2.53% and five-year adjustables rising to 3.01%. A year ago, 30-year fixed rates were at 4.20%, higher than today’s levels. Attributed to Len Kiefer, deputy chief economist, Freddie Mac — “Rates on home loans rose above 4 percent for the first time since November 2014, as Treasury yields surged. Markets are responding to strong employment data. In May, the U.S. economy added 280,000 jobs. Moreover, job openings surged to 5.4 million in April, up over 20 percent from a year ago.”   Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.  
Current Indices For Adjustable Rate Mortgages
Updated June 12, 2015
Daily Value Monthly Value
June 11 May
6-month Treasury Security  0.10%  0.08%
1-year Treasury Security  0.28%  0.24%
3-year Treasury Security  1.12%  0.98%
5-year Treasury Security  1.74%  1.54%
10-year Treasury Security  2.39%  2.20%
12-month LIBOR  0.734% (May)
12-month MTA  0.168% (May)
11th District Cost of Funds  0.680% (Apr)
Prime Rate  3.25%
REAL ESTATE NEWS
 New residential construction in the U.S. surged in April to the highest level in more than seven years, indicating the industry has moved beyond a weather-related soft patch to regain strength. Housing starts jumped 20.2 percent to a 1.14 million annualized rate, the most since November 2007, from a 944,000 pace in March, a Commerce Department report showed. The median forecast of 83 economists surveyed by Bloomberg was 1.02 million. More permits, a proxy for future construction, were issued than at any time since June 2008. An improving labor market and mortgage costs close to multiyear lows are reviving residential construction, a sign that the weakness in early 2015 was probably due to harsh winter weather. Builders including PulteGroup Inc. have said the spring selling season is off to a good start, and sentiment data for May showed developers are optimistic about the next six months. “Housing demand is clearly picking up,” said David Sloan, a senior economist at 4Cast Inc. in New York, whose estimate for the level of starts was the closest in the Bloomberg survey. “Housing should show quite strong momentum over the next few quarters. Permits also suggest solid underlying demand.” Source: BloombergThe number of metro areas seeing double-digit price appreciation doubled in the first quarter of this year compared to last quarter, according to the National Association of Realtors®’ latest quarterly housing report. Strong demand mixed with tight inventories of homes for-sale continues to push up home prices nationwide. The median existing single-family home price rose in the first quarter in 148 out of the 174 metro areas NAR tracks. Only 25 areas recorded lower median prices compared to a year earlier, while 51 metros saw double-digit increases – a sharp increase from the 24 metro areas in the fourth quarter of 2014. At the end of 2014, home prices had mostly moderated to healthier, more sustainable levels of growth, but now prices are picking up again, says Lawrence Yun, NAR’s chief economist. The median existing single-family home price in the first quarter was $205,200 nationwide, up 7.4 percent from the first quarter of 2014. Inventories remain tight. By the end of the first quarter, there were 2 million existing homes available for sale, with the average supply during the first quarter at 4.6 months – down from 4.9 months a year ago. Source: NAR

House flipping increased 6.5% in the first quarter compared the fourth quarter of 2014, according to Auction.com’s Real Estate Investor Activity Report. The report finds that investors continue to prefer to flip properties as opposed to renting them. Rick Sharga, executive vice president for Auction.com, says that part of the reason investors prefer flipping right now is because inventory is tight, which, in turn, is driving up prices, which, in turn, makes it tough to rent homes at reasonable rates. “It seems clear that the unusually low inventory of homes for sale has led to higher home prices, which makes it challenging for investors to rent homes out at a rate that’s profitable and still affordable for tenants,” Sharga says. “So, in many states a large number of investors have decided that the best opportunity today is to meet the demand of prospective homeowners by buying, fixing and re-selling investment properties.” Source: MortgageOrb Note that these rising prices will also increase rents which should encourage more homebuying.

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