The Mortgage Corner
This question is behind much of the stock and bond market gyrations. We are near full employment with a 5.0 percent unemployment rate, some 11 million jobs created since the end of the Great Recession, yet we still have record low interest rates. And inflation has barely budged, with GDP growth still struggling in the 2 percent range, and predicted to continue in that range by the Atlanta Federal Reserve Bank.
But beware of the Federal Reserve’s next FOMC meeting in the first week of November. Several Fed Governors now say that it’s time to begin to raise short term rates to dampen any incipient inflation tendencies.
So will such low rates continue? The simplest economic answer is there’s not much demand for money at the moment, in relation to the amount of money either in circulation or being saved by companies and individuals. This is evidenced by the record amount of cash or other readily sellable assets—some $4.5 trillion in such assets are being held by corporations both home and abroad—and the 5.7 percent personal savings rate, which is up from its historical low of 1.9 percent in 2005, per the graph below.
In other words, even though lots of money is being hoarded in both public and private sectors, many Fed Governors are saying it’s time to raise interest rates. The private sector is investing in new plants and equipment overseas, so it’s not boosting domestic GDP growth, whereas government spending has been shut down by a very conservative Congress.
Austerity policies have ruled, in other words, just as in Europe. The only difference and reason for US growth being faster than Europe’s, is the Fed’s QE purchase of bonds vs. the EU’s almost total refusal to consider it until lately. This has put enough U.S. money into circulation to create 2 percent GDP growth, whereas the EU has suffered 2 recessions since 2008, though EU growth has picked up of late.
It has kept our interest rates at these record lows, and been good for the real estate recovery, of course. But many Fed governors are beginning to make noises that interest rates could rise after their November FOMC meeting, which occurs at the same time as the Presidential election. We can only hope that it will be a onetime rate increase followed by enough time to examine the results.
The reason is housing affordability. First-time homebuyers comprise just 30-32 percent of buyers, down from 40 percent during more normal times. And the NAR’s housing affordability index has dropped 10 percent in just one year, which measures the amount of house someone with a median income can buy. This is mainly due to the fact that the NAR’s median single-family home price has risen 15 percent just this year.
So we need those low interest rates for the housing industry to continue to recover, though we know interest rates will probably rise into next year. But with conforming fixed rates 3.25 percent for a 1 point origination fee, it is still dirt cheap.
Harlan Green © 2016
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