The Federal Reserve expects the U.S. economy to grow at a pace of 2.6 to 3.0% in 2015, a “moderate pace” of expansion. The Fed also projects that the unemployment rate will drop to 5.2 to 5.3% in 2015, calling the growth of employment “solid.”

With the U.S. economy seemingly humming along – and with the future looking better and better – the urgent question for the housing industry goes something like this: “will the Fed support an increase in interest rates by raising the federal funds rate off its lowest level for the first time since 2008?”

First, some background.

The Federal Reserve aids the economy with “monetary policy.” One tool that the Fed uses to apply pressure is the “federal funds rate”, which is the interest rate that banks are charged to lend money to one another. In theory, a higher federal funds rate would make banks more reluctant to lend, while a lower interest rate encourages lending.

The Fed has held the federal funds rate at its lowest range since 2008, between 0.00% and 0.25%, in an effort to spur economic growth. This “accommodative monetary policy” is one reason why mortgage rates have dipped to their record low.

The federal funds rate trickles down to consumers, and effects the rate at which we all pay to borrow. Theoretically, a lower federal funds gives banks the ability to lend more money. With more money “supply”, the cost of lending drops.

The Fed can also influence “inflation” using the federal funds rate, and has targeted 2.0% as the healthy target. Even with the accommodative policy, the pace of inflation has been stubbornly resistant to an increase.

All of this is to say: to get a hint about when the Fed will raise the federal funds rate (and interest rates), take a look at inflation. Plummeting oil prices have caused the Fed to downgrade its inflation expectation to a range of 1.0% to 1.6% in 2015, a drop from 1.6% to 1.9% just three months earlier.

With inflation below 2.0%, the Fed says that it will continue to hold the federal funds rate at its lowest level “to support continued progress toward maximum employment and price stability.”

In its meeting statement, the Fed offered vague guidance about how long its stance could last, “It likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time… especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.”

In other words, we are not in danger of an imminent rise. But there will be a time (2016?) when the Fed increases the funds rate, and mortgage rates will move up off such a historically low level.

Mortgage Rates

Last week, mortgage rates responded to the Fed’s meeting announcement with a mid-week dip. To begin the Christmas week, rates are slightly higher. Still, over the long term, mortgage rates are right around an 18-month low. With  uncertainty surrounding  slowing global economies, geopolitical turmoil, and (now) falling oil prices, we would expect some measure of stability when it comes to low rates in the near future.

Still, we have seen unexpected jumps in the past. Now is an excellent time to lock. Give us a call at 805.543.LOAN to lock in a low mortgage rate and benefit from the savings offered.

Last week, we wrote about the demographics shift that could precipitate a period of healthy demand for real estate. The 20-24 and 25-29 age cohorts are now the largest in the United States. As these “millenials” graduate, advance in work, and start families, they will need housing, and the existing supply may not be able to cover demand. Will we see a construction boom? Could this boom be a significant U.S. economic driver?

This week, we bring this theme a little closer to home. Like the rest of the country, the San Luis Obispo County real estate market rose during the bubble years (+96% prices: 2001-2006), dipped mightily (-37% prices: 2007-2011), and then recovered energetically (+30% prices: 2011-2014).

Rising prices indicate a gratifyingly robust housing sector, but the diminished affordability hurts the very same young workers that we hope will drive the economy.

The median price for a single-family residential home in San Luis Obispo County was $480,000 through October, a rise of about 30% over 36 months.  In 2011, 39% of sold properties were “distressed” (foreclosure or short sale), but today that portion is just 6%. Through October of 2014, foreclosure properties were priced 35% lower than “normal” properties on average. Such deals are now much more difficult to find, and when something affordable does enter the market, multiple buyers queue to snap it up.

Zillow put together a fascinating graphic to visualize real estate market affordability for young first-time buyers. Zillow took the median income for ages 23- to 34, and assumed a 30-year fixed mortgage and a down payment of 5% (younger buyers often have less savings and so require a lower down payment.). How much of their income would this median, young first-timer need to pay to obtain an “affordable” home (defined as the lower 33% of for-sale homes)?

No surprise: it is less affordable for first-time buyers to purchase a home. On the national level, Zillow estimates that first-timers should expect to pay 17.4% of their income per monthly mortgage payment. The typical buyer could expect to pay 15.3% (“typical” is defined as a buyer with median income who purchases a median priced home with a standard 20% down payment).

Zillow’s nifty tool lets us take a look at the San Luis Obispo-Paso Robles area affordability as well. The picture is about as grim as you might expect. The first-time buyer with a (local) median income for ages 23-34 would need to commit 54.9% of income to get a mortgage, compared to 39.5% for repeat buyers. These numbers disqualify many people right off the bat.

So how do we make room for this young workforce in our growing economy?

New Developments

More housing supply should help. We have profiled local efforts to expand access to affordable workforce housing. A recent decision by the San Luis Obispo City Council appears to have cleared the way for a housing development out by the SLO airport. The good news is that everybody from local businesses, to developers, to government officials have identified a problem and are working to find solutions.

Mortgage Lending

Lending plays a significant part of the “affordability” conversation as well. Broadly speaking, mortgage lenders are relaxing their qualification standards, which will give more people the ability to afford a home loan.

One notable example: Fannie Mae recently reduced their down payment requirement for a conventional 30-year loan from 5% to 3%.

“The number one hurdle to homeownership is down payment: it takes folks a long time to save $100,000,” commented Central Coast Lending owner Jason Grote. “This program lowers that bar, making home ownership more attainable for more working class folks.”

Other low down payment programs exist (USDA, FHA), but USDA is restricted by geography and income, and the FHA loan builds in an expensive fee structure.

Education will also play an important roll. Potential buyers need to know their options. A recent report by NeighborWorks, a  nonprofit community development corporation, estimated that 70% of U.S. adults aren’t aware that down payment assistance is available. Programs like the Mortgage Credit Certificate (MCC), the CCL Workforce Housing loan (CCLWorks), and the California Homebuyers’ Down Payment Assistance Program (CHDAP) all offer price cuts and/or down payment assistance for first-time, middle-income home buyers.

For a more in-depth look about how first-time Central Coast buyers can better afford homeownership, read our guide here.

At Central Coast Lending, we have had great success qualifying all types of people. Our unique banker / broker hybrid model gives us flexibility to find the right loans for all types of financial situations. Give us a call at 805.543.LOAN for a completely free, honest, and confidential assessment of your finances, and find out what you can afford!

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Vine Street Lights this Saturday

U.S. payrolls added 321,000 employees in November, and 2014 has now seen the most jobs in any single year since 1999. The results came pleasantly above the analyst expectation between 140,000 and 275,000. The unemployment rate of 5.8% remained unchanged.

Even as the United States has turned in positive job numbers for an entire year, it is still common to hear that the economy hasn’t totally recovered, or isn’t running as fast as it could be. The oft-cited “Hamilton Project” estimates that the economy is still missing 4.9 million jobs from peak pre-recession employment. Given the previous 12-month average pace of growth (228,000), it would take until February of 2018 to close the gap.

Another statistic you might hear: a smaller portion of the population is employed. The employment-population ratio was 59.2% in November. The workforce participation rate was unchanged at 62.8%, which is just 0.1% higher than the lowest level since 1978 (set in September 2014).

Bill McBride creator the well-respected economics blog Calculated Risk thinks that the reason for the shift is structural, rather than cyclical (in other words: the “jobs gap” discussion misses the point). The U.S. economy has changed.

In a recent post about labor force participation, McBride writes, “The bottom line is that the participation rate was declining for prime working age workers before the recession, there are several reasons for this decline (not just “economic weakness”) and many estimates of “missing workers” are probably way too high.”

The reasons?

The post is worth a read. Demographics are changing. For one, a large population has recently moved within range of “retirement” age. Another significant population, aged between 16 and 24, are staying in school longer. Digging deeper, McBride points out that another trend is the decline in the participation rate for prime working age men (25 to 54). McBride lists speculation for these reasons here.

His primary factor is “cultural change”:

As a larger percentage of women entered the work force, this allowed men some more options, such as: a) take some time off between jobs, b) go back to school to improve skills or be able to change careers, c) be a “Mr. Mom”.

Moving forward, McBride offers a dose of optimism with your morning coffee (especially for the housing market).

The percent of Americans who own their home fell to 64.4% in the third quarter of 2014, which is the lowest level since 1995. This is partially due to the large young population, who are staying in school longer and then renting homes (especially as they waited for the economy to improve). Indeed, the largest age cohort in the United States is now between 20 and 24, and as they age, graduate, marry, grow families, and move up in the workforce, they will need housing… which is good for the economy.

Writes McBride:

Demographics and household formation suggests [housing] starts will increase to around 1.5 million over the next few years… residential investment are housing starts are usually the best leading indicator for the economy, so this suggests the economy will continue to grow over the next couple of years.

Is it that simple? Last week in our post, we included a thought from Central Coast Lending co-owner Daniel Podesto:

Things are pretty solid,” said Dan Podesto, co-owner of Central Coast Lending. “But there is a lack of a driver. For the longest time it was the dot-coms, and then it was technology. There is a sense that we are waiting for the next big thing.

Is it simple enough to say that the “next big thing” will be our young “growing up”?

Recall that student debt is a major concern. Over the past 10 years, student debt has jumped from $0.38 trillion to 1.13 trillion. Wage growth, meanwhile, has been notoriously slow for recent graduates. To pay off their rising debts, students will need solid, well-paying jobs. Will these exist?

On the bright side, as McBride points out “these young workers are educated and tech savvy”, so maybe they will be able to drive the economy, push wage growth, and reaccelerate the housing market. The speculation is very interesting, to say the least.

Mortgage Rates

Not much movement to report so far this week. The 10-year Treasury yield ticked up to 2.31% on Friday after the jobs report, up from 2.22% to begin the week. The yield dipped to 2.26% this Monday. Recall that the 10-year yield offers a quick shorthand correlation for the anticipating mortgage rate movement. Falling oil prices seem to be something of a concern (although lower prices will mean more consumer spending money during the holiday season).

Appreciate our market overviews? Email Rylan@CentralCoastLending.com to sign up for our twice-per-month email newsletter. For the Mortgage Rates only portion, include the text “Rate Update.”

Happy holidays! Did you join the queues for Black Friday? Perhaps you did not: a survey released by Prosper Insights & Analytics for the National Retail Federal projects that sales were down 11 percent this weekend over the previous year.

We have seen push back against this conclusion. Today’s consumers are savvier with their purchases, using internet connectivity to price compare or bypass the in-person experience altogether. Target, as an example, said that digital sales on Thanksgiving rose 40% over the previous year.

Most likely, the survey’s results reflect the diffusion of demand throughout the entire holiday season. First we had Black Friday, and then Black Friday began at midnight, and then stores added “early bird” specials on Thanksgiving Thursday, and then Cyber Monday offered online sales. All the while, we have been given the tools to compare prices and seek out discounts. Put another way: consumers may feel less pressure to do their in-person shopping at the behest of the companies (Black Friday), and instead pursue deals on their own terms, throughout the holiday season, both digitally and in person.

U.S. economic data points to a strong season for retail. Falling gas prices have freed up disposable income. Payrolls are on pace to add the most jobs since 1999. Stock indexes like the S&P 500 and the Dow Jones Industrial Average continue to set record high levels. The U.S. economy grew more than expected during the third quarter, and the most recent upward revision put GDP at 3.9%.

We will wait for more retail data before drawing any conclusions.

Housing Update

Here are a few recent pieces of data about the housing market:

• Distressed saturation has dropped to 16.8% of listings across the nation.
• Real estate investor activity is down.
• Mortgage activity is running at its lowest level in 13 years.
• First-time buyer activity remains historically low, at 29% compared to a healthy expectation of 40%.

Dr. Alex Villacorta vice president of research and analytics at Clear Capitol, had a telling quote in a recent HousingWire.com article, “Think of home price growth since the housing collapse as a bouncing ball, where each successive bounce causes some energy to be lost and eventually movement stalls.”

The visualization is a good one; the housing market has bounced back and forth to find its medium. After an intense flurry of active demand, Villacorta suggests that we could be nearing a stalling point.

Even as the market shows signs of slowing, help may be on the horizon. Fannie Mae and Freddie Mac have released clarification on new mortgage guidelines that will penalize lenders for their mistakes. As they can lend with more confidence, it is expected that lenders will begin to slacken their qualification standards, thus granting more people access to affordable mortgage financing.

Another thing to consider: these analysts talk about the “normal” housing market, but we have just gone through about 10 years of abnormality. First, fast, easy credit skewed the demand curve and allowed more people to qualify for home purchase. Then, the housing crash occurred, credit dried up, and folks lost their homes. Distressed sales flooded the market and home prices sank. During the recovery, low home prices and the lowest mortgage rates in history helped expand affordability, and sparked a period of intense demand. Today, with homes priced appropriately and mortgage rates slightly higher, we are finally in a position to reestablish some sort of new “normal.” 

Mortgage Rate Update

The 30-year fixed rate has taken a friendly Thanksgiving dip. From the beginning of November, the 30-year fixed rate is over one point lower in cost.

We wrote this in last week’s Mortgage Rate Report to explain the downward trend (subscribe for the bimonthly update by emailing Rylan@CentralCoastLending.com the text “Rate Subscribe”):

Even with the positive news, there is still a large amount of uncertainty floating around, and as we know, uncertainty and volatility are good for mortgage rates. The world’s leading economies – Japan, China, and the Eurozone – have all shown signs of slowdown (and Japan is in an outright recession). Even here at home, where the news is generally good, there is some amount of concern.

“Things are pretty solid,” said Dan Podesto, co-owner of Central Coast Lending. “But there is a lack of a driver. For the longest time it was the dot-coms, and then it was technology. There is a sense that we are waiting for the next big thing.”

With uncertainty around the world, a cautious feeling at home (despite positive data), and low inflation, mortgage rates are given the perfect environment to drop.

Take advantage of the low rates! Give us a call at 805.543.LOAN for free, in-depth analysis of your unique financial situation, and learn how you can benefit from mortgage financing.