Tuesday, July 18, 2017

Chicago's Mortgage Choice - July 18, 2017 Real Estate Report - The Brexit Adjustment

Sometimes it is hard to explain why certain things happen in the markets. Much of the time the markets seem to have a mind of their own, and market analysts are reaching for explanations as to what happened after the markets moved in one direction or another. Of course, usually there are several factors affecting the markets at once and it is typically impossible to determine which is the dominant factor. For example, let's discuss the recent movement in interest rates. The Federal Reserve Board has raised rates three times in the past six months or so. To the public, this would indicate higher rates to borrow money to purchase homes or cars. But as we have indicated previously, the Fed controls short-term rates and they have an indirect influence on long-term rates. Indeed, the Fed has raised short-term rates by 1.0% overall, but as of a few weeks ago, long-term rates for home loans had barely moved half of that amount. One reason long-term rates have not moved is the fact that the economy is not overheating and there is no sign of inflation. Job growth continues to be solid, but the economy grew by less than 2.0% in the first quarter. Then why did long-term rates start rising more recently? Remember Brexit and how the markets were worried that slow growth in Europe would affect our economy? Well, apparently Europe has shaken off the Brexit worries and growth is stronger than expected overseas. Like here, there are no signs of the European economies overheating. Thus, while rates remain low, the fact that Europe appears to be awakening from their slumber has put some pressure on the bond markets, and thus our long-term rates. Keith Stewart 773-529-7000

Tuesday, July 11, 2017

Chicago's Mortgage Choice - July 11, 2017 Real Estate Report - Jobs and The Cost of Housing

Last week we counted our blessings with regard to the shape of the economy. This week we will talk about the release of the June jobs numbers which give us another reading regarding the health of the economy. Overall this reading was stronger than forecasts. Thus far this year, job growth has been solid, with just over one million jobs created in the first half of the year. This compares to 2.2 million jobs created in 2016, which puts the economy on track to match last year's numbers. Despite strong jobs growth for the month, the unemployment rate rose to 4.4% last month, but that is not necessarily a bad thing, as it typically means that more long-term unemployed are re-entering the workforce. Just as important as the jobs created, wages increased by 0.2% last month and 2.5% over the last year, which was slightly lower than economists expected. Higher wages are important, because they positively influence consumer spending for big ticket items. For example, if wages do not go up as fast as the cost of housing, this provides a burden on renters and discourages home buying as well. Recently, home price data for April, as measured by the S&P CoreLogic Case-Shiller National Home Price Index, showed another record high -- the fifth consecutive month of new peaks. Does that mean that housing will become unaffordable? We caution you against reaching that conclusion. The First American Real Home Price Index currently shows that housing prices are still around 33% below their peak. To calculate the "real" cost of housing under the Real Home Price Index, incomes and mortgage rates are used to inflate or deflate house prices which are unadjusted for inflation in order to better reflect consumers' purchasing power and capture the true cost of housing. It should be noted that lower interest rates do not directly benefit renters. The message? As long as rates stay low, housing is still more affordable today than it was when peak prices were achieved a decade ago. Keith Stewart 773-529-7000

Tuesday, June 27, 2017

Chicago's Mortgage Choice - June 27, 2017 Real Estate Report - Half-Way There

We are approaching the half-way point of 2017. We can make an observation that it has been a very strange year. And we are not just talking about the political turmoil. For example, despite the fact that the Federal Reserve Board has raised short-term interest rates for the third consecutive quarter, we still do not have a fix on how strong the economy is right now. In their statement accompanying the increase two weeks ago, the Fed expressed optimism that the economy was getting stronger. Yet, every economic report released that week was disappointing, including readings on retail sales and industrial production. Even though just about everyone was expecting rates on home loans to rise significantly this year, this uncertainty is one reason that mortgage rates are lower than the analysts expected. One would hope that the upcoming June jobs report would lend some certainty to the equation, but thus far this year, we have even seen ambiguity within the employment sector. The unemployment rate is dropping, but the pace of jobs added has not accelerated from last year. Despite this uncertainty, the stock market has remained strong this year as the post-election rally has continued. Does this mean that the markets are optimistic that it is only a matter of time before the economy shows signs that it is picking up? Or is this rally merely a reaction to improved corporate profits? We feel that the picture will become clearer over the next several weeks, as we see additional jobs reports and a reading on the growth of the economy for the second quarter. For now, the lower long-term rates should be helping the economy in conjunction with higher stock prices. Keith Stewart 773-529-7000

Tuesday, June 20, 2017

Chicago's Mortgage Choice - June 20, 2017 Real Estate Report - The Deed is Done

The Federal Reserve Board's Open Market Committee met last week to consider raising short-term interest rates. As we approached the meeting, the consensus was that the Fed would move their Discount and Federal Funds Rate higher by one-quarter of one percent. The weaker than expected jobs report put a bit of doubt in some analysts' minds; however, most were still expecting the increase to be approved. Thus, no increase would have been somewhat of a surprise and an increase of more than one-quarter of a percent would have been a major surprise. Therefore, the fact that the Fed moved by one-quarter of one percent was seen as somewhat of a non-event. Just as importantly, their statement released at the conclusion of the meeting provided us clues as to what the members thought of the state of the economy. The statement lauded the progress of the economy and downgraded their forecast for inflation. They continue to espouse a gradual rise in rates and, in the fourth quarter, the Fed expects to start selling off some of the assets they have amassed in the past to help the economy. Anytime we are focused upon actions by the Federal Reserve Board, we have to remind our readers which interest rates the Fed controls directly. The Federal Funds Rate and the Discount Rate are rates the Fed charges member banks and member banks charge each other for overnight funds to balance their sheets. Thus, when we indicated that these are short-term rates, they are very short term. In reaction, other short-term rates such as three- and six-month T-Bills are affected most directly. On the other side of the coin, long-term rates, such as home loans, can move in tandem or have a different reaction, especially if the markets feel that the Fed is staying ahead of any threat of inflation. Thus, an increase in interest rates for home loans are not guaranteed to follow suit, though certainly the Fed's action last week does pose that possibility. Keith Stewart 773-529-7000

Tuesday, June 6, 2017

Chicago's Mortgage Choice - June 6, 2017 Real Estate Report - Cat and Mouse Game

For many years during and after the recession, the monthly jobs report was important to gauge the strength of the recovery. However, during the past two years, the release of the report has taken on a new meaning. Now we are not only measuring the strength of the economy, but also tying that information directly to actions by the Federal Reserve Board's Open Market Committee. If we added 250,000 jobs in a particular month five years ago, that was good news. But we did not have to worry about the Fed raising interest rates as a result of that information. Today, a strong report can lead us to direct action by the Fed. And so it is with the report which came out on Friday. The increase of jobs of 138,000 and the revision of last month's data was seen as weakness. However, the unemployment rate moved to 4.1%, another post-recession low, and monthly wage growth came in at forecast. The question at this point is -- are we approaching full employment, which means we are also experiencing a shortage of labor? This information, taken together with the previous month's report, tells us that there is still a decent chance that the Fed will act when they meet next week, but slightly less of a chance than before the report was released. The meeting will also be accompanied by the release of economic projections which will give us a gauge of where the Fed thinks that the economy is heading in the next several months. Keep in mind that the Fed will be considering other information which measure the strength of the economy. For example, on Tuesday last week, measures of personal income and spending for April came in with moderate strength following weak readings in March. Until the Fed meets next week, we can't say exactly how they will react, but certainly the data we saw last week give us some important clues. Keith Stewart 773-529-7000

Tuesday, May 30, 2017

Chicago's Mortgage Choice - May 30, 2017 Real Estate Report - Summer is Here

It is hard to believe that we have already celebrated Memorial Day in 2017. Doesn't it seem that this year is going particularly fast? On Memorial Day, we remembered those who died in service to our country, a tradition that goes back as far as the Civil War and was originally known as Decoration Day. While there are ceremonies and parades going on across our country, the average American is also participating in Memorial Day picnics because good weather has finally arrived throughout the country. Yes, the timing of Memorial Day is also the unofficial start of the summer. The kids are heading into their last weeks of school, vacations are starting and many people are moving because of the homes they have purchased during the spring homebuying season. This means that Americans are also meeting their new neighbors and becoming part of different communities -- a very joyous occasion. While we all enjoy the picnics and new homes, we should not forget the meaning of Memorial Day and its roots which came from a time when our Nation was literally torn apart. We mention this because today again our country is divided, and while differences of opinions are part of what makes our Democracy great, we hope that our divides heal over time because the more energy we expend focused upon conflicts, the less we can focus upon progress. Speaking of progress, we may take off for Memorial Day weekend, but the economy does not. We have another reading on our employment situation coming up this week -- always an interesting time for the markets. Keith Stewart 773-529-7000

Tuesday, May 2, 2017

Chicago's Mortgage Choice - May 2, 2017 Real Estate Report - Which Report Was Right?

This week we will get evidence of which jobs report was an accurate depiction of the current employment picture. The January and February jobs report showed major increases of over 200,000 jobs. The March jobs report showed a relatively modest increase of just under 100,000 jobs. The average for the past 12 months has been about 180,000 jobs per month and, therefore, the quarterly numbers were right on target in this regard. The question is, will we return to the strong numbers of January and February, stay with the lower figure for March, or move back to the norm? If you are confused as to where the true numbers lie, imagine what the Federal Reserve Board must be thinking when they meet this week. They don't get the benefit of April's numbers because they meet before the employment report is released. And yet they must decide whether to raise rates again at this meeting. Most are predicting that the Fed will hold steady at this week's meeting. Until last week, the stock market had cooled significantly since their last meeting, international tensions are higher and the inflation data released recently was decidedly tame. Of course, we can't predict their decision, but the evidence supports this hunch. As we have pointed out in the past, the Fed controls short-term rates and if the Fed acts when the markets are not expecting it, volatility in the bond and stock markets can follow. It will be an interesting week. Keith Stewart 773-529-7000