The Fed Meeting Finally Arrives

ECONOMIC COMMENTARY
December 15, 2015

The Federal Reserve Board’s Federal Open Market Committee meets today and tomorrow. This is the most anticipated meeting of the Fed in almost a decade. It has been exactly seven years since the Fed moved short-term interest rates to close to zero and it has been over nine years since the Fed actually raised short term rates. Now the markets are expecting the Fed to raise rates from these historically low levels once again.

The Federal Reserve has indicated all along that the markets would get plenty of notice before they raise rates. This notice is designed to prevent market shocks. One must remember that the Fed is only raising short-term rates. For example, the Federal Funds Rate is the rate banks charge each other overnight as they balance their holdings. The other rate controlled by the Fed is the Discount Rate, which is the rate they charge banks for borrowing money. All very short-term. The question is–how can these rates affect long-term rates that consumers pay for loans on cars, homes, credit cards and even student loans?

Some rates, such as credit cards which are pegged to the prime rates charged by banks, may go up instantly. Other loans which are based upon longer term rates such as home loans, are not as easy to predict. That is where the markets come in. The markets react to what the Fed may do before they take action. For example, rates on home loans have risen in anticipation of the Fed’s move. Now the markets will listen to what the Fed will say about potential future interest moves. So let’s see what the Fed has to say in addition to whether they raise rates.

WEEKLY INTEREST RATE OVERVIEW

The Markets. Rates on home loans were up slightly in the past week as a reaction to the previous week’s employment data. Freddie Mac announced that for the week ending December 10, 30-year fixed rates rose to 3.95% from 3.93% the week before. The average for 15-year loans increased to 3.19%. Adjustables were also slightly higher, with the average for one-year adjustables increasing to 2.64% and five-year adjustables rising to 3.03%. A year ago, 30-year fixed rates were at 3.93%, virtually the same as today’s levels. Attributed to Sean Becketti, chief economist, Freddie Mac –“The economy added 211,000 new jobs in November exceeding analysts’ expectations, and the prior two months were revised higher as well. This momentum is likely to cement a decision by the Fed to begin raising interest rates this month. Following the release of the employment report, Treasuries rose 7 basis points and in response the rate on 30-year fixed loans ticked up two basis points to 3.95 percent.” 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 December 11, 2015

Daily Value Monthly Value
Dec 10 November
6-month Treasury Security  0.55%  0.33%
1-year Treasury Security  0.71%  0.48%
3-year Treasury Security  1.25%  1.20%
5-year Treasury Security  1.68%  1.67%
10-year Treasury Security  2.24%  2.26%
12-month LIBOR  0.868% (Nov)
12-month MTA  0.285% (Nov)
11th District Cost of Funds  0.649% (Oct)
Prime Rate  3.25%

REAL ESTATE NEWS

Fannie Mae’s HomeReady Mortgage Program is now available. This program is designed to help low-to-moderate income citizens become homeowners, or refinance if there is limited equity in their home. The program features a low 3.0% down payment, as well as several other important features:

•The cash needed to fund the transaction can come from a gift and lender paid closing costs.
•The purchaser does not have to be a first time homebuyer.
•The program requires less expensive mortgage insurance than standard Fannie Mae products, which lowers the required payment.
•Homes purchased in lower income areas have no maximum income restrictions.

This program is sure to be a great alternative for those who are looking to purchase a home in 2016. And Fannie Mae has given America an early holiday present by making it available in December. Contact us if you or someone you know could benefit from this new home financing alternative.

Americans believe that real estate is the best long-term investment option for the second year in a row, according to a survey by Gallup. Gallup polled over 1,000 adults and found that 31 percent of respondents considered real estate to be the best long-term investment. Twenty-five percent of those surveyed said that stocks and mutual funds are the best long-term investment, followed by gold at 19 percent. This is a big change from 2011-2012 when gold was the most appealing investment. “Real estate took a pounding in home values and consumer confidence after the subprime mortgage crisis that started in 2007 spurred the financial crisis of 2008, deepening the 2007-2009 recession,” Gallup reports. “Gold gained appeal during this time, likely due to its tangible quality, but this has proved to be temporary.” While confidence in real estate declined during the global banking crisis and recession, real estate is now ranked as the top investment choice or tied for the top choice with all major gender, age and income groups. Besides real estate, stocks/mutual funds, and gold, survey respondents also listed savings accounts/CDs, and bonds as solid long-term investment options. Source: Gallup

A continuing decline in distressed inventory nationwide, particularly REO properties, has resulted in an accompanying continuing decline in the percentage of home sales that are all-cash transactions, according to data released by CoreLogic. At their peak in January 2011, cash sales accounted for nearly half of all residential home sales in the United States (46.5 percent). Since then, that percentage has steadily declined; in August 2015, it was reported at 31.7 percent, less than one-third of all home sales—a decline of more than 3 percentage points from August 2014, when it was 34.9 percent. Despite comprising more than half of all cash home sales, REO’s share of all residential home sales remained low in August at 6 percent—about one-quarter off of their peak in January 2011, when they accounted for about 23.9 percent of all home sales. Resales account for about 82 percent of all home sales and have the largest impact on the total cash sales share, according to CoreLogic. “Distressed sales (REO and short sales) typically sell at a price discount, with REO selling at the steeper discount,” CoreLogic Chief Economist Frank Nothaft said. “The discounts are attractive to investors, who can buy with less cash than if the house sold at full/market price, as would generally be the case with a resale or new construction. Thus, the drop in REO sales is a primary cause of the declining cash share.” Investors typically make up the largest share of all-cash buyers, but their share of all home sales is also declining. CoreLogic estimates that if the cash sales share continues its rate of decline experienced in August 2015, it will be back to its “normal” pre-crisis average of 25 percent by the middle of 2017. Source: DSN News

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