The Correction Adds Another Variable

September 1, 2015
ECONOMIC COMMENTARY
Last week we spoke about the factors the Federal Reserve Board must balance before making a decision about rates. This week we can add one more factor, a stock market correction. This year the Dow peaked at 18,286 in May. When we wrote our column regarding the fact that the markets were due for a correction on July 14, we were still around the 18,000 level. On August 25, the Dow closed at 15,666. That is a drop of well over ten percent, the standard of what is considered a correction.

What is causing the “adjustment”? There are plenty of possible factors, including the more severe drops in international markets, especially China. Other possible factors would be the devaluation of overseas currencies or the specter of coming rate increases. Or it could be, as we mentioned in the July 14 article, that we were just due for a correction. Markets can’t move straight up forever and this run without a correction has been way longer than average.

We also don’t know that the stock market will not bounce right back, which it started to in the middle of last week. But if it doesn’t, we expect a nervous stock market also to weigh on the Fed when they meet in a few weeks and consider a rate hike. The markets do not like uncertainty and there is plenty of uncertainty out there. In the meantime, the stock market’s correction has added the benefit of helping keep rates low for a while longer, giving more time for Americans to enjoy this added benefit. But don’t get too comfortable, because this week’s jobs report is about to add another factor into the mix.

WEEKLY INTEREST RATE OVERVIEW

The Markets. Rates on home loans were lower in the past week. Freddie Mac announced that for the week ending August 27, 30-year fixed rates eased to 3.84% from 3.93% the week before. The average for 15-year loans decreased to 3.06%. Adjustables were mixed, with the average for one-year adjustables unchanged at 2.62% and five-year adjustables falling to 2.90%. A year ago, 30-year fixed rates were at 4.10%, close, but still higher than today’s levels. Attributed to Sean Becketti, chief economist, Freddie Mac — “Events in China generated eye-catching volatility in equity markets worldwide over the past week. Interest rates also rocked up and down — although to a lesser extent than equities — as investors alternated between flights to quality and bargain hunting among beaten-down stocks. Amidst all this confusion, the 30-year fixed rate dropped to the lowest mark since May and the fifth consecutive week with a rate below 4 percent. Given the recent volatility, rates could change up or down significantly by the time this report is released. There are indications though that the unsettled state of global markets will make the Fed think twice before taking any action on short-term interest rates in September. If that’s the case, the 30-year fixed rate may remain subdued in the short-to-medium term, providing support for continued strength in the housing sector. Just this week, new home sales were reported to be up 26 percent year over year.”  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 August 28, 2015
Daily Value Monthly Value
Aug 27 July
6-month Treasury Security  0.22%  0.12%
1-year Treasury Security  0.36%  0.30%
3-year Treasury Security  0.99%  1.03%
5-year Treasury Security  1.49%  1.63%
10-year Treasury Security  2.18%  2.32%
12-month LIBOR  0.828% (July)
12-month MTA  0.198% (July)
11th District Cost of Funds  0.659% (June)
Prime Rate  3.25%
REAL ESTATE NEWS

Changes in down payment requirements have more influence over home buyers’ willingness to buy than changes in rates, according to a new study published by economists at the New York Federal Reserve. The Fed’s survey of buyers and renters found that the impact of interest rates may be overrated compared to even the smallest changes in down payment requirements. The study found that dropping the required down payment from 20 percent to 5 percent increases the willingness to purchase, on average, by 15 percent among buyers and 40 percent among renters. On the other hand, decreasing the interest rate on a 30-year fixed-rate loan raised the willingness to purchase a home by only 5 percent, on average. Buyers showed more influence by down payment changes even though the rate change could save them more money than the lower down payment. “A key takeaway is that the effect of a change in down payment requirements on housing demand strongly depends on households’ financial situation,” says economists Andreas Fuster and Basit Zafar of the New York Federal Reserve. “For instance, a loosening of down payment requirements will have little effect on the willingness to purchase for a new home of current owners with substantial equity, or of renters with substantial liquid savings. The results also imply that measures such as a loan-to-value (LTV) cap may predominantly affect the lower end of the housing market, and that the effect on house prices will depend on the state of the economy and other asset markets.” Source: Real Estate Economy Watch

One in three U.S. households say they plan to move in the next five years, according to a survey conducted by the Demand Institute of 10,000 households’ current living situations. And it’s the location of the home that will be driving most of those moving decisions — more so than the physical home itself. Seventy-five percent of the households surveyed cited one or more location-related reasons for why they were moving. The top reasons were the desire for a safer neighborhood (30%); being closer to family (27%); a change of climate (26%); being closer to work (25%), and moving for a new job (23%). More than half — 59% — of households say they don’t plan to go too far, with most indicating a move within 30 miles of their current home. For those seeking a location for climate reasons, the Western and Southern U.S. continue to be the top destinations. Many movers say they’re eyeing more walkable communities. Indeed, walkable communities have been reporting stronger home-price growth compared to less walkable communities, according to the Demand Institute’s report. Those who reside in walkable communities also are more likely to report that their quality of life has improved in the past few years due to their change in residence. Source: Demand Institute

Listings that disclose energy costs have a higher close rate, spend less time on the market, and sell at a higher percentage of the asking price than comparable homes that do not disclose such information, according to an analysis by Elevate Energy of homes for-sale in the Chicago area. The study found that attached homes – either a condo or townhome — that disclosed energy costs spent about 25 fewer days on the market compared to homes that did not disclose energy costs. Single-family homes that disclosed energy costs spent eight fewer days on the market. Researchers found that, on average, an attached home that was listed for $352,000 would have sold for $4,576 more if the listing had disclosed the home’s energy costs. The City of Chicago became the first city nationwide in 2013 to allow direct disclosure of residential energy costs – gas and electric – on the multiple listing service for single family or two- to four-unit homes listed for sale. In response, the Midwest Real Estate Data, the Chicago area’s multiple listing service, as well as city officials launched an “Energy eCompliance” tool to help listing agents in Chicago provide buyer agents and home buyers with an energy cost disclosure report for properties, available online. “Energy costs are such a significant issue to home buyers it is a no-brainer for MRED to assist its real estate professionals in providing the most accurate and timely information,” says Rebecca Jensen, MRED president and CEO. “At the same time, we are enabling our listing brokers to comply with the City of Chicago ordinance. A win for everybody, especially the consumer, and we are pleased to be a nationwide leader in this arena.” Source: Midwest Real Estate Data

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