The Inflation Factor

June 23, 2015
ECONOMIC COMMENTARY
When the Fed does act to raise interest rates to prevent inflation, this is important to our economy. We have been suffering through a recession and tepid recovery for so long, many have forgotten that the Federal Reserve Board’s overriding purpose is to use monetary policy to protect us against inflation. In reality, inflation has not been a major factor in our economy for decades. The annual inflation rate in the United States has exceeded 3.0% only five times since 1991 and has not been over 4.0% during this same period of time.

This is not to say that lower levels of inflation do not affect our citizens. For example, if inflation averages 2.5% per year (a bit higher than the Fed’s current inflation target), prices will double in 28 years. That may seem like a long time, but consider this. If you bought a home of $300,000 today and the home increases in value at a 2.5% annual rate, it will be worth over $600,000 when the loan is paid off.

Likewise, if someone is paying $2,000 in rent today and the same rate of inflation is applied, their rent would rise to more than $4,000 in 30 years. Thus, the cumulative effect of inflation is significant even when the rate of inflation is low. And even when the general rate of inflation is low, certain areas exceed the general rate. For example, the rate of rent inflation has exceeded the general rate of inflation for the past several years. This has made it difficult for renters to afford housing while those who own are not subject to the same increased inflationary factors.

WEEKLY INTEREST RATE OVERVIEW

The Markets. Rates on home loans fell back a bit last week after a significant rise the previous week. Freddie Mac announced that for the week ending June 18, 30-year fixed rates fell to 4.00% from 4.04% the previous week. The average for 15-year loans decreased to 3.23%. Adjustables were stable, with the average for one-year adjustables remaining at 2.53% and five-year adjustables falling slightly to 3.00%. A year ago, 30-year fixed rates were at 4.17%, higher than today’s levels. Attributed to Len Kiefer, deputy chief economist, Freddie Mac — “Rates on home loans were down this week while housing data were generally positive. Although housing starts dropped 11.1 percent to a seasonally adjusted pace of 1.04 million units in May, housing permits surged 11.8 percent to its highest level since August 2007. Reinforcing this positive momentum, the NAHB housing market index rose 5 points in June, suggesting home builders are very optimistic about home sales in the near future.” 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 19, 2015
Daily Value Monthly Value
June 18 May
6-month Treasury Security  0.08%  0.08%
1-year Treasury Security  0.26%  0.24%
3-year Treasury Security  1.03%  0.98%
5-year Treasury Security  1.65%  1.54%
10-year Treasury Security  2.35%  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
 The Consumer Financial Protection Bureau announced on Wednesday a proposal to delay the effective date of the Integrated Disclosure rule until Oct. 1. “We made this decision to correct an administrative error that we just discovered in meeting the requirements under federal law, which would have delayed the effective date of the rule by two weeks,” said CFPB Director Richard Cordray. “We further believe that the additional time included in the proposed effective date would better accommodate the interests of the many consumers and providers whose families will be busy with the transition to the new school year at that time,” added Cordray. The required loan documentation consists of two new forms: the Loan Estimate and the Closing Disclosure to ensure compliance. It was originally set to go into effect on Aug. 1. These new forms consolidate the present forms and are meant to give consumers more time to review the total costs of their home loan. The Loan Estimate is due to consumers three days after they apply for a loan and the Closing Disclosure is due to the consumer three days before closing. The public will have an opportunity to comment on this proposal and a final decision is expected shortly thereafter. Source: DSNews

With interest rates and home prices expected to climb in the next year, the financial penalties of delaying or forgoing a home purchase in today’s market have become very steep, according to the inaugural Opportunity Cost Report released by realtor.com. The report examines a wide range of factors, including the long-term financial impact of owning versus renting a home, the likely monetary gain renters forego in waiting to buy and the financial benefits of homeownership by market. “Current market conditions give buyers the opportunity to build substantial wealth in the long-term, compared with renters and later buyers, in advance of the projected increase in interest rates and continuing price appreciation,” said Jonathan Smoke, chief economist for realtor.com. “The problem is inventory is low, which has many would-be home buyers –especially first timers – standing on the sidelines and missing out on potentially material financial gains.” Nationally, the estimated wealth an average buyer would accumulate over a 30-year period based on today’s dollars totals $217,726. Although some markets are more buyer-friendly than others, national data shows homeowners see significant financial benefits as compared to lifetime renters. In 88 percent of MSAs, buying a home produces a financial benefit of at least $100,000 over 30 years. Source: HousingWire

The first-time home buyer share of home purchases in April surged to its highest level in more than four years, the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey said. Tom Popik, research director for Campbell Surveys, Bethesda, Md., said the increase was spurred in large measure by a reduction in the cost of FHA loans; FHA recently reduced its annual insurance premium for FHA loans by 50 basis points to 85 basis points. “Cheap FHA financing looks like it’s making first-time home buyers come out in force,” he said. The report said first-time home buyers accounted for 37.6 percent of home purchases in April, up from 34.3 percent a year ago, based on a three-month moving average. The last time the first-time home buyer share of home purchases was above 37.6 percent was in August 2010 (40.0 percent). At that time, the annual MIP on FHA loans was 55 basis points. The report also noted 42.2 percent of purchases by first-time home buyers in April used an FHA loan, up from a low of 34.2 percent as recently as last September. FHA financing for first-time home buyers has taken market share from the government-sponsored enterprises and the Department of Veterans Affairs in recent months. Popik said while first-time home buyer activity has been helped by a reduction in FHA premiums, the first-time home buyer share of home purchases tends to peak each year in June or July, suggesting that the share could continue to climb. He said demand from first-time homebuyers is strong, with many seeing owning a home as cheaper than renting. Source: Mortgage Bankers Association

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s