Chicago's Mortgage Choice - August 22, 2017 Real Estate Report - Saber Rattling

Last week we spoke about the Dog Days of Summer when things are expected to be quiet. On the other hand, we also indicated that the world does not take vacation in August and unexpected events can have a greater affect upon the markets when so many are on vacation. And so it is with regard to the North Korean situation. Thankfully, thus far this is not an event, but a heightened course of saber rattling threatening all sorts of things. Of course, we were all hopeful there would be no event, and that the sabers would quiet down. But we have seen more volatility in the markets as a result of all of the noise. And the events in Europe late last week just added to the consternation. Even so, the drop in stocks has been miniscule as compared to the rally we have witnessed over the past nine months. Even without these events, one would be quite surprised if there are not more mini-corrections in store for the markets because of how far they have moved to the upside. Another area affected by the noise is interest rates. It is hard to tell whether the recent moderate drop in long-term rates is due to a flight to safety in anticipation of a possible crisis, or a reaction to the news that the economy continues to grow along with reports that are showing inflation continues to be contained. With the markets, we never know why they move, and in this case the easing of long-term rates could be a result of several factors. The move could also be quite temporary. Thus, if you are house or car shopping, you may only have a small window of opportunity. Keith Stewart 773-529-7000

Chicago's Mortgage Choice - August 8, 2017 Real Estate Report - The Economic Expansion Continues

The long road back from the Great Recession began in mid-2009 and July marks the 96th month of recovery. This makes it the third longest expansion on record, and if we continue at the present pace, this recovery will become the second longest expansion in history in the middle of next year. There are two reasons for the length of this recovery. First, the Great Recession was a very deep recession, thus we had a very long road back. Second, the recovery has been slow and steady. Even though our growth has not been strong, we have stayed out of a recession partly because the economy has not overheated. If the economic expansion did heat up, then interest rates would be much higher and this could endanger the recovery. We have enjoyed very low interest rates for the past decade and this year is no exception. Nowhere is the length of the recovery more evident than the jobs market. The economy lost close to nine million jobs in a very short period of time. In the decade that has followed, we have added approximately 17 million jobs. While these are really strong numbers, we have only added eight million jobs net of the recession, and this averages out to less than one million per year over the past decade. This helps us put July's job numbers in perspective. We added just over 200,000 jobs for the month with an unemployment rate of 4.3%, both solid numbers. We still have some work to do in creating better paying jobs and taking care of those who have left the workforce but did not retire. However, we have come a long, long way. Keith Stewart 773-529-7000

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

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

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

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

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