It Really Does Mean Something

It Really Does Mean Something

For the past few years since the recession ended and the stimulus plans were put in place, every meeting of the Federal Reserve Board has meant very little to the financial markets. The Fed had basically shot every bullet in their gun by forcing interest rates down to unheard of levels. Typically the Fed focused upon only short-term interest rates by lowering discount and federal funds rates. But the severity of the recession and tenuous recovery called for unprecedented medicine in the form of purchases of hundreds of billions of dollars of Treasuries and Mortgage-Backed Securities. These purchases were designed to not only keep long-term rates low but also help shore up a residential finance market.

Every meeting of the Fed since that time has created no suspense whatsoever. Running out of things to say, the Fed reached into their bag of rhetoric and made statements such as — we will keep rates low at least until 2014, which was quite a statement back in 2012. This week’s meeting of the Federal Reserve Board tells us that recently the ho-hum part of Fed watching is over. Long-term interest rates have risen significantly this year, mostly on speculation that the Fed will taper off purchases of long-term interest rate securities in the face of a recovering economy. However, while the economic numbers have been better this year, employment growth is still not strong enough to keep pace with population growth and the over-all expansion of the economy is still tepid at best. So what is the Fed to do with the economy still not strong but the markets feeling like the time is right for rates to get back near “normal”? That is where the suspense comes in. Only a strong statement from the Fed can influence the markets in this environment.

More than half of all homes sold last year and in 2013, so far, have been purchased without financing, according to economists at Goldman Sachs Group. Prior to the housing crash, about 20 percent of all homes sold were purchased without financing. All-cash sales have more than doubled over the last seven years. “The surprisingly large cash-share of purchases helps to explain why home sales have jumped over the past two years despite more muted increases in broad measures of new residential loan activity, such as the MBA’s application index,” The Wall Street Journal reports. The large share of cash buys are most likely from investors, foreign buyers, and wealthy home owners, the report notes. The Goldman report estimated that around 44 cents of every one dollar of homes sold presently are being financed. Prior to the housing crisis, that stood at 67 cents of every dollar. The Goldman Sachs analysts used data from the National Association of Realtors®, Census Bureau, Mortgage Bankers Association, and Lender Processing Services to arrive at their calculations. Source: Wall Street Journal

Clear Capital has released its Home Data Index (HDI) Market Report with data through August 2013 finding that national annual home price growth picked up to 10.2 percent in August. In mid-2006, the height of the bubble was the last time double digit yearly price growth was reported. However, current yearly gains are different in many ways from the peak. Additionally, the low tier price segment of the housing market saw quarterly gains of two percent, the lowest since April 2012, indicating the sector that kick started the recovery is already on a path of moderation. From its peak rate of growth in April 2013, rates of growth for the low tier segment, or home sale values in the bottom 25th percentile, have fallen from 4.1 percent to two percent. Regional and metro trends echoed those at the national level, where quarterly and yearly rates of home price growth mostly expanded. Top performing major metro markets saw average quarterly growth of 3.4 percent. Annualized, the 14.3 percent represents a 7.7 percentage point drop over the current average yearly gains of 22 percent. This current rate of growth marks yet another sign moderation will likely unfold in the near future as the strongest markets position for a cooling. “With the continued strengthening of home price trends in August, the need for perspective on market activity is even more important,” said Dr. Alex Villacorta, vice president of research and analytics at Clear Capital. “National yearly gains surpassed 10 percent for the first reported time since the peak of the market in mid-2006. Certainly these trends are exciting, particularly against the backdrop of the seemingly endless housing market woes following 2006. It’s been a long, hard road and it’s difficult not to celebrate double-digit price growth.” Source: NMP Daily

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Articles and commentary are provided for general information only and should not be relied on as legal or financial advice. Opinions expressed herein do not necessarily reflect the opinions of Franklin American Mortgage Company.

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