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July 22nd, 2014

Do You Remember Inflation?

While some may consider this a sarcastic question...we have not had really high inflation in the United States for some time. For example, in the past twenty years the retail inflation rate has averaged approximately 2.25% with an even lower number for the past decade. Two points about this. First, even low inflation rates can cause increases in the cost of living. For example, a 2.25% inflation rate over 20 years will increase the cost of living over 50%. Secondly, though low inflation rates can create issues in the long run, those who are older remember a U.S. inflation rate of near 10% per year from the period of 1973 to 1982. That was real "old fashion" inflation.

So if raging inflation has not been a problem for ten years, why bring it up now? Because the real reason we have had really, really low interest rates for the past ten years is the lack of inflation we have experienced. And if we really want to know when rates are going to go up significantly, we need to watch the data on inflation more closely. The reason rates trend up when we get good economic news is the fact that the markets feel that the Federal Reserve Board will raise short-term rates in response to the threat of inflation.

There are actually two stages here. The Fed has kept short-term rates near zero in response to our deep financial crisis and lackluster recovery. So the first move is to move rates to a low inflation normal. The second move is the one we should worry about in the long-term. That is a move to head off inflationary expectations if the economy heats up. We expect the first move and should worry about the second move. For right now the sale on money to finance cars, houses and investments continues. If we keep creating jobs, we should keep a wary eye on the inflation number because we know the Fed is doing just that when they meet next week.

The Markets

  • Rates drifted down slightly across the board in the past week.
  • Freddie Mac announced that for the week ending July 17, 30-year fixed rates decreased slightly to 4.13% from 4.15% the week before.
  • The average for 15-year loans ticked down to 3.23%.
  • Adjustables were also stable but lower in the past week with the average for one-year adjustables falling slightly to 2.39% and five-year adjustables decreasing marginally to 2.97%.
  • A year ago 30-year fixed rates were at 4.37%.
  • Attributed to Frank Nothaft, vice president and chief economist, Freddie Mac --"Rates were little changed amid a week of light economic reports. Of the few releases, industrial production rose by 0.2 percent in June, below the market consensus forecast. Also, the producer price index for final demand rose 0.4 percent in June, rebounding from a 0.2 percent decline the prior month." 

Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

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Real Estate News

Breaking News. The residential originations markets don't seem to have been in full bloom this spring. Originations in the second quarter came to $264 billion, FBR Capital estimated, based on mortgage-backed securities issuance data from the trade publication Inside Mortgage Finance for June. Yet the analysts believe there is a continued risk that the U.S. housing market sees originations of less than $1 trillion this year, below industry expectations of around $1.1 trillion to $1.2 trillion. The implication for second-quarter results for banks is that investors shouldn't expect much relief when it comes to residential origination revenue. And more capacity may need to come out of the industry, meaning cost cutting on this side of banks' business may be far from done. For banks, the slump in origination revenue, which was prompted by a sharp drop-off in refinancings as longer-term interest rates rose last year, will take some time to resolve itself. Home purchases still aren't sufficiently strong to make up for lost refinancing activity. Offsetting this shortfall is important given continued pressure on net-interest margins and what was likely a weak second quarter for capital-markets activity. To engender a true recovery in residential originations, FBR said, "Banks will need to go down the credit spectrum and lend to lower-FICO borrowers." And it is a course that would likely alarm investors, given the debacle when the last housing bubble burst. Lower revenue is, after all, still better than big losses on bad loans. Source: The Wall Street Journal

After decades of factory shutdowns and population loss, the city of Dayton, Ohio, has found a fix for its housing market hard-hit by foreclosures -- immigration. The rust-belt city of 140,000 has been encouraging immigrants to move there since 2011, after its population hit a 90-year low, by offering to help with resettlement and starting businesses. Dayton’s foreign population grew and so did its housing sales, rising last year at almost twice the national rate. As the housing recovery nationwide sputters, the story of Dayton reveals a reason why: the U.S. market is missing the sales jolt provided by immigration. Last year, the number of immigrants granted U.S. residency -- typically a requirement to get a home loan -- hit a nine-year low, according to government data. Immigrants, deterred by a weak American labor market since 2008, aren’t likely to get encouragement from Congress, where support for a reform bill has mostly evaporated. “Immigrants have a drive to become homeowners that surpasses even native-born people, and that gives them a magnified impact on home sales,” said Chris Herbert, research director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts. “No one knows how many immigrants will be arriving in the next few years because it depends on what the economy does and what Washington does.” Near the end of the housing boom in 2006, about 1.26 million immigrants attained permanent U.S. status, the most since 1991, according to government data. That number declined to 1.05 million in 2007 as the financial crisis began to unfold and tumbled to 991,000 last year. The decline in newcomers has been a drag on the nation’s real estate recovery because they typically account for 10 percent of all home sales and 15 percent of first-time purchases, Herbert said. The drop is also hurting homebuilders by worsening a shortage of construction workers, said Lawrence Yun, the chief economist for the National Association of Realtors. “More people moving to the U.S. means more housing demand, so any change in immigration patterns is going to have an effect on the housing market,” said Yun. “It’s also a critical part of the homebuilding market, because when you look at any construction site, you see a disproportionate amount of immigrants working there.” Source: Bloomberg

Foreclosure starts rose for the first time in eight months in May, but there is still reason to be optimistic about the United States housing market, according to the latest Mortgage Monitor Report of the latest available data released by Black Knight Financial Services. The report indicated that foreclosure starts nationwide rose by 9.5 percent. The rise in May reverses the eight month trend of continuing decline in starts. However, the outlook for the housing market is still trending upward compared to years past and Black Knight cautioned against reading too much into the backwards step. "While foreclosure starts did rise over 9 percent in May, it's important to remember the historical trend is still one of improvement," said Kostya Gradushy, Black Knight's manager of Loan Data and Customer Analytics. "On a year-over-year basis, January through May foreclosure starts were still down 32 percent, and we are still looking at the lowest level of foreclosure starts in seven years." "Additionally, over half of these starts are repeat foreclosures, rather than new entries into the pipeline.  That is, these are loans that had been in foreclosure, shifted back to either current or delinquent status by way of modification, repayment plan or some action by the borrower, but have now fallen into foreclosure once again." Almost 80 percent of starts nationwide came from loans originating in 2008 or earlier. Although foreclosure starts were up in May there were positive notes to take from the report. The total U.S. foreclosure pre-sale inventory rate actually dropped 5.62 percent in the month. Foreclosure inventory is down 37.23 percent year-over-year, signaling that Americans are more likely to be able to pay their home loans now than they have been at any point since the financial crisis began. Likewise, the overall loan delinquency rate (the number of loans 30 or more days past due, but not in foreclosure) is down 7.55 percent from this point last year and stayed static in May at 5.62 percent.  Source: HousingWire

Consumer & Realtor Corner

This news is designed to help you by providing information that will be helpful to provide to your previous clients and other segments of your sphere. Feel free to forward these to your database, post on blogs, websites and more.

Tips For Improving Your Credit Score

While you may or may not be interested in refinancing or even entering home ownership, tips to improve one’s credit score are helpful across the board. An improved credit score does offer more leverage in any type of lending and is important for other aspects of living such as insurance, renting and even finding a job. But do not despair if your credit is low, there are ways to repair your credit and improve your score. Here are three very important ones...

  • Check Your Credit Report Annually. Your credit report contains the data used to calculate your score and it may contain errors. In particular, check to make sure that there are no late payments incorrectly listed for any of your accounts and that the amounts owed for each of your open accounts is correct.  If there are errors, you can dispute them with the credit bureau.
  • Set up Payment Reminders. Making your credit payments on time is one of the biggest contributing factors to your credit score. If you don't use an automated payment method, many banks offer payment reminders through their online banking portals that can send you an email or text message reminding you when a payment is due.
  • Reduce the Amount of Debt You Owe. This is easier said than done, but reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score. The first thing you need to do is stop using your credit cards. You'll never qualify for a home loan if you can't manage short term credit cards.

Sources: HousingWire, Fair Isaac & Freddie Mac