Some are Enjoying the Sale

A View from the Beach

A View from the Beach

ECONOMIC COMMENTARY
February 23, 2016:   

While many are not too happy about the stock market retrenching and others who work in the energy industry are suffering through a retrenching, much of America is enjoying the sale going on right now. What is on sale? Gasoline and home loans. If these gas prices hold, we would expect a very busy summer vacation season and this should boost the economy. The American Automobile Association has indicated that the price of gas is now averaging over $1.00 per gallon less than the highs hit in 2015.

Lower than expected rates on home loans are fueling an increase in refinancing by homeowners. In mid-February, the share of applications for home loans which were refinances hit over 60% of the total market. Refinancing also puts more cash in consumers’ pockets. With the spring real estate season about to start, it remains to be seen whether low rates will also boost home sales. We will add our own speculation.

We believe that if the economy continues to produce jobs near the same rate it did in 2015, and if rates stay low, this could be a banner year for real estate. The only issue holding back real estate sales is the lack of inventory. We expect builders to ramp up to meet the demand produced. The bottom line is that owning is cheaper than renting in most areas of the country and the sale on home loans has made homeownership even more affordable.

WEEKLY INTEREST RATE OVERVIEW

The Markets. Rates on home loans were unchanged last week, holding close to 2015 lows. Freddie Mac announced that, for the week ending February 18, 30-year fixed rates remained unchanged at 3.65%. The average for 15-year loans also remained unchanged at 2.95%. The average for five-year adjustables increased slightly to 2.85%. A year ago, 30-year fixed rates were at 3.76%, slightly below today’s levels. Attributed to Sean Becketti, chief economist, Freddie Mac — “After another week of financial market oscillations driven by rumors of potential limits on oil production, the 10-year Treasury yield edged up 5 basis points, and the 30-year fixed rate on home loans remained unchanged at 3.65 percent. Despite this week’s uptick in Treasury yields, the 10-year is still 54 basis points lower than it stood at the end of 2015, while the 30-year fixed rate has dropped only 36 basis points over the same period.” Note: As of January 1, Freddie Mac is no longer providing survey data for 1-year adjustables. 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 February 19, 2016

Daily Value Monthly Value
Feb 18 January
6-month Treasury Security  0.45%  0.43%
1-year Treasury Security  0.53%  0.54%
3-year Treasury Security  0.88%  1.14%
5-year Treasury Security  1.21%  1.52%
10-year Treasury Security  1.75%  2.09%
12-month LIBOR  1.153% (Jan)
12-month MTA  0.350% (Jan)
11th District Cost of Funds  0.655% (Dec)
Prime Rate  3.50% (Dec)

REAL ESTATE NEWS
 Home prices may have been on the rise the last few years, but homes are still more affordable now than they were in the pre-bubble years, according to the latest Mortgage Monitor Report released by Black Knight Financial Services. Households are using 21 percent of the national median income to pay a home loan on a median-priced home. In 2000-2002, the average payment-to-income ratio was 26 percent, and in 2006, it was 33 percent. However, Black Knight’s report warns that if home prices continue to increase – as they have year-over-year for 43 consecutive months – the affordability picture in home ownership could start to change in two years. Black Knight factored in a continuing 5.5 percent annual home price appreciation as well as interest rate rises of 50 basis points a year. Under that scenario, “we see that in two years home affordability will be pushing the upper bounds of that pre-bubble average,” says Ben Graboske, senior vice president at Black Knight Data and Analytics. Source: Black Knight Financial Services — Note: The answer to rising prices and rents? Buy now as a home provides inflation protection!

Industry professionals say they are seeing increasing demand for properties that can easily be shared by extended family members, roommates, or even rented out to tourists. Indeed, for the year ending June 2015, 13 percent of buyers purchased a home to accommodate multiple generations, according to research by the National Association of Realtors®. What’s more, a quarter of all buyers say they want a separate suite in their home with a kitchenette to accommodate extended family members or roommates, according to research by John Burns Real Estate Consulting Inc. A recent survey by TRI Pointe found that 35 percent of young adults say they want to be able to rent out space in their homes, at least occasionally. “A lot of their motivation for doing that is to make the financial step of buying their home more doable,” says Linda Mamet, vice president of corporate marketing at TRI Pointe. Source: The Wall Street Journal

Baby boomers aren’t selling their houses as earlier generations did — they’re not downsizing fast enough as they approach and pass traditional retirement ages — and that’s contributing to inventory shortages of homes for sale as well as rising prices. Boomers are part of a “clogging up of the whole chain of home sales,” Sean Becketti, chief economist of Freddie Mac, said recently. “They appear to be staying in the family home longer than previous generations,” Becketti wrote in a new outlook report, “and the imbalance between housing demand and supply continues to boost prices.” In past generations, once the kids moved out, empty nesters either began to downsize by buying smaller single-family houses or they rented apartments. Boomers don’t seem to be in a rush to do either. So what’s the big deal? Why the concern about boomers staying put longer than expected? Everybody’s heard that 60 is the new 50 and that boomers are working longer than their parents and grandparents. Who really cares if they’re hanging on to their houses? Here’s who: People who sell, build and finance new and existing houses care — it’s their bread and butter — as do potential buyers squeezed by rising home prices on one hand and rising rents on the other. David Crowe, chief economist for the National Association of Home Builders, points to a feedback loop effect that is discouraging some boomers from listing and selling: Fewer listings mean more competition for a limited supply of homes in hot markets. That competition pushes up prices for everybody, including boomers who might like to downsize but can’t find a replacement home that’s both affordable and acceptable. But changes are coming, according to Fannie Mae —  “Boomers will not inhabit this vast inventory (32 million homes) forever,” and when their circumstances change — which they inevitably will with age — watch out. “Their actions will reverberate through the housing market.” Source: Ken Harney, The Nation’s Housing

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