WHEN BONDS GO DOWN, MORTGAGE RATES GO UP
The average 30-year fixed mortgage rate in the United States has surged to 7.48%. Concurrently, the 10-Year Yield has reached 4.30%, marking its highest point since December 2007. This development has led to a notable shift in the housing market's affordability landscape. The current housing market affordability index now stands 10% below the lows witnessed in 2006. This situation underscores the fact that we are navigating the least affordable housing market in the history of the United States. Remarkably, even a 30% reduction in home prices would not suffice to restore affordability to pre-pandemic levels.
The Housing Affordability Index is a metric calculated by various organizations, including real estate associations, government agencies, and research institutions. Generally, this index is computed by comparing the median home price or rent with the median household income. A higher index value indicates better housing affordability, signifying that housing costs represent a smaller fraction of household income.
For instance, a value of 100 on the index signifies that housing costs consume precisely 30% of the median household income, often considered a standard benchmark for affordability. A value above 100 signifies enhanced affordability, while a value below 100 indicates diminished affordability.
In the present context, housing affordability in the United States is less favorable than it was during the peak of the previous housing bubble. To afford a median-priced home, the median American household would need to allocate a staggering 43% of their income. The median sales price of homes across the US now stands at a significant 560% of the median annual income.
While home loan approvals hinge on gross income, individuals' everyday lives revolve around net income. The challenges become apparent when considering household debt, which has exceeded $17 trillion, coupled with auto loans surpassing $1.6 trillion, and credit card interest rates averaging above 22%. With fluctuations in food and gas prices, and the predicament of minimum credit card debt payments, planning for homeownership becomes increasingly arduous. In 2021, spurred by $4 trillion in stimulus aid, savings in the US reached a remarkable $2.1 trillion. However, from 2022 onwards, average monthly household savings have dwindled by $100 billion per month. This depletion trend has led to the utilization of $1.9 trillion in savings, leaving a mere $190 billion untouched. Simultaneously, debt levels continue to rise while savings accounts diminish.
MARKET MOVING NEWS FOR THE WEEK OF 08/21/2023 – 08/25/2023
Fed Chair Jerome Powell is scheduled to address the public once more this upcoming Friday following the conclusion of the Jackson Hole Symposium. This annual event, organized by the Federal Reserve Bank of Kansas City, serves as a pivotal platform for central bank leaders across the globe to convene and deliberate on matters pertaining to the global economy. The insights shared by these influential figures can exert significant influence on the trajectory of global markets.
It's imperative to stay prepared and attentive to this development. I will personally be closely monitoring the situation. Our optimism centers on the prospect that the Federal Reserve will instill a sense of confidence by indicating the conclusion of rate hikes, while also hinting at the initiation of rate cuts in the second quarter of the upcoming year.
RECESSION INDICATORS
According to Fed Chair Jerome Powell, a recession is not anticipated for 2023. Notably, Goldman Sachs has also indicated a reduced probability of a recession within the next 12 months, now standing at 20%.
Jan Hatzius, the head of Goldman Sachs Research and the firm's chief economist, highlights the robustness of U.S. economic activity in their report. Data signals that the GDP is on track to exhibit a 2.3% increase in the second quarter. Additionally, there is a significant resurgence in consumer sentiment from previously subdued levels, and unemployment receded to 3.56% in June. Moreover, initial jobless claims are reversing the recent slight uptick.
While there's an expectation of somewhat decelerated growth in the forthcoming quarters, primarily due to slower growth in disposable income, especially after accounting for the resumption of student debt payments, as well as a drag from reduced bank lending, multiple positive indicators persist. These include the relaxation of financial conditions, a housing market rebound, and sustained growth in factory construction. As such, the U.S. economy is poised to continue expanding, albeit at a pace slightly below the trend.
Source: Goldman Sachs
Mortgage rates can be influenced by a multitude of factors, encompassing shifts in the overall economy and monetary policies. During a recession, the relationship between mortgage rates and economic conditions becomes more intricate.
Typically, during a recession or economic downturn, central banks adopt measures to invigorate the economy. One commonly used tool is the reduction of the key interest rate, known as the "federal funds rate" in the U.S.
When this rate is lowered by the central bank, it can result in reduced borrowing costs for financial institutions. This reduction can subsequently be extended to consumers in the form of lower interest rates for various loan types, including mortgages.
In theory, during a recession, central banks may lower interest rates to stimulate borrowing and spending, potentially leading to lower mortgage rates. In the event of rate drops, bond prices would ascend, consequently causing mortgage rates to decline.
However, there are a few factors that can complicate this relationship:
Risk Perception: During a recession, economic uncertainty tends to increase. Lenders might perceive higher risks in lending, which could lead to a tightening of credit standards. This might counteract some of the potential benefits of lower central bank interest rates.
Liquidity and Market Conditions: In times of economic stress, financial markets can become less stable. This can impact the availability of credit and the willingness of investors to buy mortgage-backed securities, which can influence mortgage rates.
Demand for Mortgages: During a recession, demand for mortgages might decrease. People become more cautious about taking on new debt, which could offset some of the downward pressure on rates. I would argue that demand would increase in our current state of affairs. Many buyers are waiting for rates to drop.
Unemployment: Recessions often lead to job losses and higher unemployment rates. Lenders might be more cautious about extending credit to individuals with uncertain employment prospects, potentially affecting mortgage availability and rates.
With the job market as strong as it is today, you can see why risks of a recession have decreased. A “soft landing” is more likely than it was when rate hikes began.
The Conference Board reported that Leading Economic Indicators (LEI) fell 0.4% in July, which is the sixteenth consecutive month of declines. The LEI tracks where the economy is heading. It “continues to suggest that economic activity is likely to decelerate and descend into mild contraction in the months ahead.”
— Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators
AM I REALLY READY TO PURCHASE A HOME?
Homeownership offers a multitude of advantages that extend well beyond financial aspects. These benefits encompass factors such as convenience, stability, safety, security, and the creation of a strong foundation for families.
The importance of these advantages is especially pronounced as the United States experiences the emergence of approximately 2.1 million new households. Interestingly, this growth surpasses the number of homes constructed this year, which is fewer than 1.4 million.
Demand for housing continues to outpace supply.
For individuals who hold apprehensions about the value of their investment, it's essential to recognize that home prices are expected to ascend not only in the current year but also in the years ahead. Nevertheless, the pivotal consideration lies in identifying what holds personal significance for you in the present moment. What factors are most significant to you?
The optimal timing for buying a home is when you’re buying within your means.
To gauge your preparedness, you might find it beneficial to construct a chart. Examine your net income and compare it against your outgoing expenses. This introspective assessment could unveil instances where money is being expended unnecessarily. How much additional savings could you allocate? It's certainly worth pondering how a mortgage budget increase of $800 could potentially yield a transformative impact on your quality of life. If within your means, pursuing the necessary steps to secure approval and initiate a home purchase today holds merit.
Keep in mind that while financial factors are significant, the decision to acquire a home encompasses an array of considerations that are deeply personal and can profoundly impact your long-term well-being.
Here are 12 points to consider when planning:
1. Stability: Homeownership provides a sense of stability and permanence. You have a place to call your own and a physical space where you can build your life and create memories.
2. Roots and Community: Owning a home allows you to establish roots in a neighborhood and become part of a community. You can develop relationships with neighbors, participate in local events, and contribute to the overall sense of belonging.
3. Customization and Personalization: Homeowners have the freedom to customize their living space according to their preferences and needs. You can paint the walls, renovate rooms, and create a home environment that truly reflects your personality.
4. Sense of Accomplishment: Achieving homeownership is a significant accomplishment and a milestone in many people's lives. It can boost self-esteem and provide a sense of pride in ownership.
5. Creative Expression: Homeownership allows for creative expression in interior design, landscaping, and outdoor spaces. You can create a living space that aligns with your artistic and creative vision.
6. Privacy: Homeownership offers greater privacy compared to renting. You have control over your living space and are not subject to the restrictions that often come with rental agreements.
7. Emotional Attachment: Homeownership can foster emotional attachment to your property. Over time, you may develop a deep connection to your home and the memories associated with it.
8. Family Stability: A stable home environment can provide a sense of security for your family. Children may benefit from growing up in a consistent and nurturing environment.
9. Sense of Belonging: Owning a home can foster a sense of belonging to a particular neighborhood or community. You become invested in the well-being of the area and may actively contribute to its betterment.
10. Long-Term Planning: Homeownership encourages long-term planning and a sense of responsibility. It often requires thinking about the future and making decisions that benefit you and your family over time.
11. Pride of Ownership: The concept of owning a piece of property can instill a strong sense of pride. It's a tangible asset that represents your hard work and dedication.
12. Legacy: Homeownership allows you to leave a legacy for your loved ones. Your home could potentially be passed down to future generations, creating a lasting impact.
WHAT'S NEXT THIS WEEK?
Last week witnessed a continuation of the upward trajectory in mortgage rates, reaching the highest levels for the year. Interestingly, this increase occurred in the absence of indicators suggesting a weakening economy or a softening job market. While discussions of a potential recession that could have led to a decline in mortgage rates have faded, conversations regarding a soft landing scenario have taken its place. This term signifies a scenario where cooling inflation coincides with the maintenance of a robust labor market and economy.
The present outlook points to the possibility of rates continuing to rise, with potential improvement relying on forthcoming labor and inflation reports next month. The current week commenced with rates already surpassing those of the previous week, attributed to the ascent in bond yields and the consequent decline in mortgage bonds.
In terms of factors influencing these rates during this week:
- The Federal Reserve's Stance: The movement of mortgage rates toward lower levels might necessitate the anticipation of future Federal Reserve rate cuts to gain momentum. Interestingly, the market might even factor in the likelihood of another Fed rate hike before the year concludes, which could place additional upward pressure on mortgage rates.
- Jackson Hole Symposium Impact: The forthcoming speech by Fed Chair Powell on Friday morning during the Jackson Hole Symposium, where he will address the economic outlook, could potentially influence mortgage rates based on the content of his speech.
