Discussing the FOMC minutes and the Fed raising their benchmark rate, mortgage defaults, several good indicators for the economy, the shortage of starter homes and much more!
The Fed Speaks
We heard from the FOMC yesterday and they are raising their benchmark rate. Check out some of the highlights:
Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
While the Fed does not directly set mortgage rates, you can expect this to lead to even more increases in the coming weeks. Plus, the Fed indicated they will be 2 more rate increases in 2018.
Will higher mortgage rates cause the housing market to slow down? I do not think so but it will hurt some home buyers. It will impact the buying power and decrease the homes that many will be able to afford.
Sellers may find that there are fewer buyers that can afford their home. This could lead to some homes taking longer to sell.
NAR Chief Economist Lawrence Yun said:
We are in the middle innings of monetary policy normalization. Interest rates that the Fed directly controls – the federal funds rate – were raised three times in 2017. Today’s action is the first of three rate hikes in 2018. Another three hikes are likely on deck in 2019. Mortgage rates do not move one-to-one with the Fed tightening, but clearly consumers should anticipate higher mortgage rates as time proceeds.
The tight labor market will hurry-along the Fed to raise rates. Housing costs are also rising solidly and contributing to faster inflation. The one thing that could slow the pace of rate increases would be to tame housing costs through an increased supply of new homes. Not only will more home construction lead to a slower pace of rate hikes, it will also lead to faster economic growth. Let’s put greater focus on boosting home construction.
I know that many will interpret the Fed raising their benchmark rate as bad but it isn’t totally bad. It does indicate that the economy is doing well and could lead to better interest rates on savings accounts.
Remember, that as of today, mortgage rates are STILL low compared to the past. Rising home prices are a bigger detriment to most potential home buyers than mortgage rates today!
First Mortgage Default Rate Unchanged
According to the S&P/Experian Consumer Credit Default Indices for February 2018, first mortgage default rates were unchanged at 0.72%. However, bank card default rates continue to climb and are at their highest rate since October 2012.
David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, said:
The overall consumer credit default picture continues to be favorable. Default rates on first mortgages and auto loans are little changed in the past year or two. Recent small increases in mortgage and automobile loan interest rates do not appear to be affecting default trends. The currently favorable economic conditions –low unemployment, stable inflation and expectations that current conditions will continue– all support the good credit default conditions.
Blitzer goes on to say that the high default rate on bank rate cards is an “anomaly” and could indicate “unrecognized issues”. It could be that some people are still having to rely on credit to pay for normal living expenses.
Needless to say this is unsustainable and not good for the long term health of the economy or society.
Quicken Loans Accused of Stealing Trade Secrets
Quicken Loans Inc. was sued by real-estate data analytics startup HouseCanary Inc., which accused the mortgage-lending firm of trying to steal its data and technology through a sham licensing agreement so it could develop competing appraisal software.
The lawsuit was filed days after San Francisco-based HouseCanary won a jury trial against the affiliate, Amrock Inc., which calls itself the biggest independent title-insurance and valuation firm in the U.S. Jurors in Texas last week said Amrock stole HouseCanary’s trade secrets “with malice” and awarded the startup $706 million in damages.
In its March 16 complaint, HouseCanary claims Quicken officials directed Amrock to secure the licensing agreement in 2015 under false pretenses. Once Quicken and Amrock had what they wanted, Amrock backed out of the deal, refused to pay a $5 million fee and falsely accused HouseCanary of providing useless software that never worked properly, according to the complaint.
Automated valuation tools are very popular but I still feel that the expertise of an appraiser cannot be beat. Both consumers, banks and business owners should never think that a computer can be their sole source for obtaining the value of a property.
Perception and Reality
Forty-one percent (41%) of Likely U.S. Voters now think the country is heading in the right direction, according to a new Rasmussen Reports national telephone and online survey for the week ending March 15.
Strong consumer confidence is needed if we are going to see a robust economy and healthy housing market. If most consumers are not confident, then we cannot expect them to buy big ticket items such as a house.
Chemical Activity Barometer Increases Again
The American Chemistry Council just reported that the Chemical Activity Barometer expanded 0.2 percent in March on a three-month moving average (3MMA) basis. This is the sixth consecutive gain following the 2017 hurricanes. The barometer is up 3.8 % on a 3MMA compared to a year earlier.
The Chemical Activity Barometer is a leading economic indicator derived from a composite index of chemical industry activity. With a history back to 1912, the Chemical Activity Barometer has been shown to give a good indicator of where things are headed by about 8 months.
Construction Job Openings Near Post-Recession High
From Eye On Housing:
According to the BLS Job Openings and Labor Turnover Survey (JOLTS) and NAHB analysis, the number of open construction sector jobs increased to 250,000 at the start of the year. The post-recession high count of open, unfilled construction jobs was 255,000 in July of last year. The number of open construction sector jobs was 159,000, a year ago in January 2017.
The overall trend for open construction jobs has been increasing since the end of the Great Recession. This is consistent with survey data indicating that access to labor remains a top business challenge for builders.
This is both good and bad. It is bad that builders are having a hard time finding qualified employees. But it is good that there is high demand for construction jobs.
Will the Rollback of Financial Regulations Be a Bad Thing?
A new banking bill won’t just impact the big banks like Chase and Wells Fargo — if it becomes law, it will impact most Americans too.
The Senate approved a bill last week that will roll back some aspects of the Dodd-Frank banking reform bill, which was passed in 2010 after the financial crisis. It will make many small and midsize banks exempt from parts of Dodd-Frank. The bill was sponsored by Mike Crapo, a Republican senator from Idaho. It will now move to the House, where it could be amended further.
Under the new rules, smaller banks (those with less than $250 billion) won’t have to participate in yearly Federal Reserve “stress tests” that determine where they’re equipped to handle economic and market downturns. Those smaller banks say they would get relief from restrictive rules and that will encourage more lending
Critics argue though that this change would limit the government’s ability to determine whether discrimination is actually happening.
Critics are worried that loosening these restrictions could lead to a re-emergence of predatory lending behaviors that were prominent before the financial crisis — particularly because of the increased competition among home buyers in the housing market.
While it would be good in some ways, it appears that removing some of these regulations could cause problems. Finding balance between too many regulations and protecting consumers while not hurting the housing market is easier said than done.
The Shortage of Starter Homes
Starter homes have become scarcer, pricier, smaller, older, and more likely in need of some TLC than they were six years ago when Trulia began monitoring housing prices and inventory.
In this edition of Trulia’s Inventory and Price Watch we find that across the board homes are the least affordable than they have ever been since we started tracking inventory and prices in 2012. Starter homes, however, have borne the brunt of the rise in home prices and decreases in inventory. These homes have seen a 9.6% increase in prices since this time last year and starter inventory hit a new bottom this quarter.
Not only are starter home buyers facing some of the lowest inventory on record, but the homes available to them on the market are less appealing in terms of size and quality.
Trulia said that compared to 6 years ago:
- Starter home inventory is down 48.6%
- Starter home prices have increased 57.9%
- Starter homes are 2% smaller
- The share of fixer upper starter homes has increased 8.3%
Trulia is talking about the entire country but you will see similar conditions in many local markets. First time home buyers will find tight inventory and strong competition in today’s market!
I know that many people want their first home to perfect, but sometimes we must face the reality of what we can afford and the prices in our area. It may be only X more dollars a month but you MUST stick to your home buying budget!
Starter homes are meant to be affordable. Buying a home means understanding what you want, what you can afford, what you actually need and what is possible or realistic in your local market.
Architecture Billings Index Continue Increases
The American Institute of Architects (AIA) is reporting an increase in architecture firm billings for February from its Architecture Billings Index (ABI), with several key segments showing an encouraging outlook for 2018.
While the pace of growth in design activity slowed a bit in February for an ABI score of 52.0 (any score over 50 indicates billings growth), it still reflects a healthy business environment. In particular, firms with a multifamily residential or an institutional specialization continued to report extremely strong billings.
Kermit Baker, AIA Chief Economist, said:
We remain optimistic about the trends we’re seeing at architecture firms this year with the ABI continuing to show growth in February. We saw several major bright spots reflected in February’s data, as billings remained particularly strong at firms located in the West and Midwest.
Great news! While this indicator is focused on the commercial side of things, it does indicate a strengthening or growing economy.
Well that is it for today! Be sure to hit those share buttons and subscribe for email notifications of new posts!