Happy Holidays
It must be the
holiday season with so many gifts coming in. What else could explain good
economic news combined with lower interest rates and lower oil prices? Even though
the stock market is retreating, keep in mind that the Dow was below 12,000
approximately three years ago. Three years ago the unemployment rate averaged
just over 8.0% and it is now just below 6.0%. Initial jobless claims were in
the vicinity of 400,000 per week and now they are consistently below 300,000.
We mentioned last
week that it is surprising that rates and oil prices would fall in the face of
relatively good economic news. As surprising as it is--we are going to advise
you not to look a proverbial gift horse in the mouth. We are going to advise
you to enjoy the lower rates and lower gasoline prices for as long as they
last. That might be a few days, a few weeks or a few months. Or the markets
might reverse themselves by the time you read this commentary.
We do believe this
week's meeting of the Federal Reserve Board's Federal Open Market Committee
will be very interesting. The Fed is going to be reading signs of economic
recovery with no inflationary pressures. They are also going to be feeling the
worldwide turmoil going on and speculating whether events overseas will affect
our recovery. Some are saying that they might extend their bond purchases to
keep rates low. We don't think that an announcement of such will be in the
cards, but the phrase "considerable time" when referring to future
interest rate increases may stay as part of their vernacular. Of course, our
speculation is just that -- speculation.
The nation's youngest adults will spend more than $2 trillion in
the next several years on rent and mortgage loans, according to a recent report
by The Demand Institute. The number of new millennial households formed from
the beginning of 2014 through the end of 2018 is expected to reach 8.3 million.
They are likely to spend $1.6 trillion on home purchases and $600 billion on
rent during that time period, or "more on a per-person basis than any
other generation," the report said. The total is expected to equal one in
every four dollars spent on housing over that period. "The Millennials and
Their Homes: Still Seeking the American Dream," is based on 18 months of
research including interviews with 10,000 U.S. consumers, of whom more than
1,000 were millennials, and an analysis of housing market data from 2,200 U.S.
cities and towns. It found that contrary to popular belief, most millennials--born
between the early 1980s and the early 2000s--nurture the traditional aspiration
of purchasing a home and living in the suburbs. "As more of these young
adults increasingly venture out on their own, most will rent," according
to the report. However, so far nearly all already have cars and the vast
majority plan to buy a home in the future, the report finds. This generation
faces "unique financial challenges of homeownership today resulting from
graduating into a weak job market with growing student loan debt," agrees
Jeremy Burbank, a vice president at The Demand Institute and Nielsen, which is
likely why many young adults see alternative housing finance options, such as
"single-family rentals and rent/own hybrid contracts such as lease-to-own"
as their path to homeownership. Source: Source Media
Despite the jump in
the latest median single-family home price — $220,600, up from around $160,000
just a few years ago, according to the National Association of Realtors® — the
large price gains are not denting affordability. Even with home prices
climbing, home ownership remains affordable because low interest rates have
helped to offset the price gains, writes Lawrence Yun, NAR’s chief economist,
at NAR’s Economists’ Outlook blog. Also, incomes have risen slightly as the
unemployment rate has fallen, which also has helped to improve the
affordability picture. A home buyer buying a median-priced home at the current
interest rate and having a 20 percent down payment would make a monthly payment
of about $867. That is 15.9 percent of monthly gross family income, compared to
an average of 21.3 percent over the past 30 years, Yun notes. Source:
National Association of Realtors®
There is a fair
amount of payment shock headed toward select groups of homeowners with mortgages.
The reckoning has already started for people who took out home equity lines of
credit a decade ago, when homes were appreciating handsomely. What started as
interest-only draw down periods are now ending, and borrowers must start paying
off the loan's principal and its interest. Five years after the modifications
were made, the interest rates gradually reset, by increases of 1.0% annually to
the level that average primary interest rates were at the time of the
modification. Eventually, rates of some borrowers who were among HAMP's
earliest participants will be pushed to just over the 5.0% mark, which is
higher than the current average interest rates on 30-year, fixed-rate loans.
The Office of the Special Inspector General for the Troubled Asset Relief Program,
a federal watchdog agency, has estimated that about 33,000 borrowers will see
their first resets this year. While the median monthly payment increase will be
$200 at the end of the process, some borrowers will see their payments jump by
more than $1,700 monthly, according to the agency. Source:
The Orlando Sentinel
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