Bowling Green Buzz

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June 20, 2016

Is the Fed News Actually Good News?

Fed meeting

You probably know what the Federal Reserve Bank decided at its June meeting. Despite being billed as a month of possible interest-rate hikes, we head into the true summer months without said hikes.

Some welcome this news. If you’re in the market for a home and were worried about getting a mortgage at near-rock bottom rates, you’re probably relieved. Though rates have been inching up, there’s no fell swoop by the Fed that’s going to alter any trends.

But aside from being able to stop worrying whether the payment on your new house is going to go up by $30 a month or so, have you given much thought to the Fed’s move (or, actually, lack thereof)?

I can’t see how everyone could possibly see it as all good. I’m no economist, so take this all with a grain of salt, but all would not appear well.

First, it shows that the Fed is at least a little bit concerned about the health of the economy. If it were growing at pace they were comfortable with, rates would rise. It really is that simple. The decision to keep the Federal Funds rate unchanged is a signal that the economy is not growing as they think it should be. And that, given the fairly recent recession from which we’re still recovering, should be at least a little concerning.

More concerning, however was the timing of the non-move. It came right on the heels of a jobs report that was disappointing. As in, 100,00 fewer people were in jobs than had been anticipated. This might sound like a near-miss of a projection, but the fact is that the economy hums along best when people are working. If you’re in the business of judging an economy’s health, and not as many people are working as you thought there’d be, it’s a bit worrisome.

But there lies more beyond just the somewhat troubling reasons for why rates aren’t rising. There should be concern for what it means when they don’t.

I’ve said it before, and I will say it over and over again: Banks lend money when it is profitable for them to lend money. Everybody moans and groans over “tight” lending or whatever else you want to call it, but do they realize that at least some of that can be attributed to the lack of profitability the lending game is currently affording banks? The whole risk-reward equation is well-known. Do we expect banks to take risks when there is little reward?

On top of the lack of opportunity for banks to make money on the money they lend, there’s also the problem of cash reserves. They are required to have a certain amount of cash on hand, yet low interest rates provide no incentive – and maybe even a disincentive – for depositors to keep money in banks. When you’re earning about a penny a month on every $200 you keep in the bank, you’re going to start looking elsewhere. There are plenty of low-risk investment options that will fetch 10 times what banks pay in interest.

Which means that banks are likely not getting the types of deposits they are accustomed to. If there are other alternatives, why let your money sit at your local bank for half-a-percent of interest? Despite this presumed drop in deposits, banks still must have X amount of cash on hand.

And if banks have to have X amount of money on hand, and they can make very little money when they lend that money, what are they going to do?

Think of it this way: You have 10 bucks in your pocket, which your mom gave you for an emergency but might want back. She says you must keep at least nine of it in your pocket at all times. Someone, a total stranger, wants to borrow one dollar. For loaning him that dollar, he will pay you back $1.04. Do you risk flirting with that nine-dollar minimum your mom has instituted for the gain of a mere four pennies? This is the question every bank faces, thousands of time a day, every day.

I get that the Fed is worried about lowering consumer spending and therefore slowing the economic growth. But meaningful consumer spending is still, for better or for worse, still largely based on available credit. And if the banks aren’t making any money on money they make available as credit, then there simply isn’t as much money available as credit.

For sure, the low-interest rate climate was necessary to keep the economy afloat. To grow it, however, there comes a point when this ultra-cheap money flow has to ebb.

That we can’t clearly see an end it sight should worry us.

 

Posted in Home Ownership
June 14, 2016

Don’t Make this Big Selling Mistake

3 choices

I’m not usually one to rant. Nor am I one to criticize others. But I’m seeing something in real estate now that I thought was kind of past us, now that the housing industry is back on mostly solid footing. And it bothers me.

Let me paint a scenario for you:

Mr. and Mrs. Sellers want to put their home on the market. They’ve been wanting to move for a while, but they’ve been waiting for home values to rise to the point they will sell it for a little over what they own on it. They owe about $200,000.

Not having a relationship with any real estate agent, they decide they’re going to shop around for a listing agent. They schedule three listing appointments.

The first agent tells them he’d list their home for $189,000. The second agent tells them she’d list their home for $194,000. The third one tells them they should list it for $209,000. Mr. and Mrs. Sellers, thrilled to hear that they can clear that $200,000 line they need to, sign a listing agreement with the third agent.

Guess what happens? A price drop. Then another. Three months go by. Four months. Another price drop. And now buyers who were kind of interested in the home but didn’t like the original price tag see that it’s dropped three times and is sitting on the market. Something must be wrong with the house, they think, and they are no longer interested.

You probably hear all the time that pricing a home right in the first place is probably the most important thing you can do as a seller. Therefore, the biggest mistake you can make is to pick the agent who has told you what you wanted to hear on price.

If homes near you are selling for $190,000, you’re probably not getting $209,000 for yours. Some agent will come along and tell you that you can, because some agents know that by telling you what you want to hear, they can get your signature on that listing agreement. They don’t care how many price drops it requires or that it’s now going to take twice as long to sell; by telling you what you wanted to hear, they have landed a listing they wouldn’t have otherwise gotten.

It happened more during the real estate down years, which was really unfortunate because of how many underwater homeowners were given false hope by desperate listing agents. You might think that all the homes you saw languishing forever on the market were in that situation because of the real estate downturn – victims of circumstance – but, honestly, the homes that were priced right sold even during the worst of the slump.

What’s happening now is a little different. It’s not so much that some agents are telling sellers they can get enough to break even, but more that now that we’re in an appreciating market, they’re pushing their greed buttons. And they’re very easy to push.

Everyone thinks their home is special. Everyone wants to hear that their $200,000 home in an entire neighborhood of $200,000 homes is actually worth $225,000. In this case, a listing agent comes around and tells them just that, and Mr. and Mrs. Seller say, “Finally, an agent who also sees our home for the special snowflake it really is.”

Ego and greed blind Mr. and Mrs. Seller in this case, and a market with rising home values makes a less-than-scrupulous agent more believable.

Not any less ethically reprehensible, but more believable.

If you’re thinking of selling, don’t make this mistake. Get opinions and market analyses from experienced agents who know your neighborhood. Go online and look up comparable recent sales yourself, so that you don’t go into listing presentations uneducated. Don’t let ego or greed or desperation lead you to make a mistake that winds up costing you time and money in the long run.

Remember, the best way to sell your house for top dollar and quickly is to price it correctly in the first place.

And hearing what you want to hear isn’t going to change it.

 

Posted in Real Estate
June 6, 2016

Let's Play the Blame Game

Titanic sinking

Throughout history, there have been tragic accidents. The Hindenburg. The Titanic. The Challenger space shuttle. I wasn’t around for all of them, but I wonder if I had been would I have heard the same kind of noise that surrounds accidents today.

If the Titanic would have sunk today, can you imagine all the armchair experts who would analyze the accident? It was the captain’s fault. It was the navigator’s fault. The ship builder should have done this or the fabricating workers should have done that.

Sometimes, though, accidents are just accidents. Sometimes, there are icebergs out there and we just don’t see them in time. So why is it that when tragedy strikes, the first reaction of the masses seems to be: “Who can we blame?”

I’m writing about this for a couple of reasons. If you were involved in real estate around 2007, you know all too well about the blame game. The economy collapsed as a result of several housing-related factors, and all anyone seemed to want to do was point fingers.

High homeownership rates were to blame. Wall Street was at fault. Politicians screwed it all up. Investors were greedy, banks crooked. Speculator trying to make a quick buck doomed us.

It was all a little counterproductive. While I agree that looking back through the rubble to find out what went wrong is helpful to prevent it from happening again, that doesn’t have to involve finger-pointing. At some point, you have to move forward no matter whose fault it is. But it seems our society is fixated on fault. We love to play the blame game.

I mention this now because of the Cincinnati Zoo incident over Memorial Day weekend. A toddler got inside a gorilla enclosure, and the animal got a hold of him. With the youngster facing danger potentially worse than just injury, the zoo’s staff shot the gorilla dead.

And the internet went bonkers. It was the kid’s fault a gorilla was dead. It was the gorilla’s fault a child was injured. It was the zoo’s fault, the gorilla’s trainer’s fault. The internet is good at outrage, and this was that outrage at its best. “Just give us someone to blame,” the online community shouts, “And we’ll do the rest.”

But sometimes, accidents are just accidents. Any parent can tell you that if you look away for a second, a kid can be gone. And holding a curious 4-year-old at fault for doing curious 4-year-old things is a bit harsh. So is blaming a 400-pound gorilla for doing 400-pound gorilla things. And the zoo? Well, the enclosure must be at least somewhat secure because this was the first time that’s happened despite hundreds of thousands of visitors over the years.

Sometimes, accidents are just accidents.

It’s tragic, of course. A child is hurt. His parents are probably besides themselves with guilt and worry. A beautiful animal is dead. Picking one or the other to feel worse for is not only difficult but pointless. Why must there be a pecking order to which to attach our grief or sympathy? Does it matter who is to “blame?”

More importantly, do you only feel better about tragedy when there is someone or something tangible to blame it on?

What I wonder is if it have been like that in 1912. Would there have been internet outrage had Twitter or Facebook existed then? Would there have been internet lynch mobs, ready to hunt down the ship’s designer or the company that built it? Would people call for the bombing of all icebergs?

I have a feeling that blame is not the normal human reaction to tragedy. I have a feeling that our litigious society has trained us to immediately want to affix blame when something bad happens, and the internet has given millions of blame-gamers the voice to do it. If you think of it in those terms – of our reacting to tragedy in a way that goes counter to human nature – how we are now handling tragedy hasn’t evolved; it’s devolved. For all the advancements in technology, we are marching backwards in time when it comes to the emotional development of our species. 

And I’m not sure if it’s man or machine we should blame for that.

Posted in Life, Real Estate
May 30, 2016

This Shouldn’t Be a Mystery

 

According to a new research project, Millennials – young adults aged 18 to 35 – are now more likely to live with their parents than with a partner. It’s the first time in 130 years that this has been true.

It’s the kind of revelation pundits will want to dissect to death. Why does this generation want to live in their parents’ basement? Why are they delaying household formation? Why aren’t they buying homes?

But it shouldn’t be a mystery. The answer is simple: They can’t afford it.

We hear all the time that college costs continue to skyrocket and that student loan debt is at an all-time high. Meanwhile, rental rates have risen over the past decade like no other time in history. At the same time, wages have stagnated, with typical household incomes actually regressing recently when inflation is taken into account.

So as much as we are curious about what’s bouncing around in the minds of these young adults – the media like to assess their “attitude” toward this or that – what they’re thinking doesn’t matter as much as what they’re experiencing. And what they’re experiencing is being broke.

I don’t have real, actual statistics, but let’s say the average college graduate’s starting annual salary is $50,000. That works out to about $4,167 per month before taxes, probably about $2,900 a month in take-home pay.

This month, the national median rent for a one-bedroom apartment was $1,140. The average student loan payment is $242. Add in a, say, $300 car payment, a $100 phone/internet bill, insurance, food, groceries and so forth, and you can see how difficult it would be to put a substantial amount of money in savings for a down payment on a home.

But living with parents can save that college graduate, at the very least, that $1,140 rent each month. I’d guess that some of those other costs would be lower, too, like internet and groceries, but for now let’s just say it’s the rent they save. That’s $13,680 per year. A 22-year-old can live with Mom and Dad for three years and have over $41,000 in the bank by the time they’re 25.

I actually believe that we’re seeing the time in history when it’s probably the most difficult to break out of the lifetime renter ranks. Incomes are going down, rents are going up and it’s not as easy to borrow money to own a home. If a recent college graduate starts down that rental path immediately, he or she could be stuck on it for a long, long time.

And that means that anyone who truly aspires to owning their own home someday might be best served by sucking it up and living with their parents for a bit. For those who aren’t earning on the higher end of the starting salary scale, or who have loads of student loan debt – I’ve heard of $1,000-a-month payments – it might even be absolutely necessary.

If you live in a market such as San Francisco or Washington D.C., where, sure, your salary might be double that $50,000, but the average rent is $4,000, three-and-half times the national average, you might not have much of a choice.

And all the statistics, surveys and studies seem to say that these young adults DO eventually want to own their own home. They typically see it as a good investment, but in most areas of the country, they list affordability as the No. 1 reason they don’t own a home.

So I wish we’d stop over-analyzing it, trying to unlock some kind of insight into the Millennial mind. It’s not that they’re this anti-establishment, buck-the-homeownership-trend group of hipsters who want to live downtown and take the subway or walk to work. They aren’t, as many fear, the first generation who frowns on homeownership because they came of age during a recession brought on mostly by a real estate downturn.

They don’t hate the idea of buying a home. They don’t want to live with their parents.

They just can’t afford not to right now. 

Posted in Home Ownership
May 23, 2016

Buying Sentiment Hits All-Time Low

Buyer's market

When you hear the terms “seller’s market” or “buyer’s market,” certain ideas pop into your head. Your first reaction in a seller’s market is probably not to buy, and vice versa. This is somewhat of a misconception, but that’s another topic for another day.

Today’s topic is Fannie Mae’s Home Purchase Sentiment Index, a survey device designed to put numbers on people’s ideas about buying homes. Fannie started it back in 2012. Just recently, the HPSI hit an all-time low for the number of people in America who believe it’s a good time to buy a home.

This probably shouldn’t be all that surprising. Home buyers in many areas of the country are probably frustrated. Potential buyers for months have had to deal with a limited number of homes for sale, many of them competing with others for properties in multiple-bid situations. And all the while, home prices continue to escalate quickly. 

And now it’s spring, when home sales take off each year. So on top of all the frustration for buyers in many of the country’s biggest markets, now there are seasonal frenzies to deal with, too.

Not surprisingly, of course, people do believe it’s a great time to sell a home. According to Fannie, selling sentiment approached its all-time survey high in March, with the net percentage of those who say it is a good time to sell rising 16 percentage points to 15 percent.

But despite the relative highs and lows, the fact remains that 30 percent of Americans think it’s a good time to buy and only 15 percent think it’s a good time to sell. You don’t have to be a mathematician to see that’s double.

There are several reasons for this. The biggest is that since the end of the recession, selling a home has not been a fun think to think about. If you bought a home prior to 2007, you at some point likely suffered a loss – at least on paper – in value. And let me tell you, people who buy $200,000 homes don’t like the idea of selling them for $150,000.

But now that home prices have recovered, people again have equity in their homes. And prices have risen very far, very fast in some markets, which means sellers are selling into the upswing. That feels a lot better than selling after a major market correction. 

It’s also getting to be a better time to sell a home simply because there are more buyers out there. The notion of homeownership as something to be shunned has dissipated somewhat. Qualifying for a mortgage is getting easier. People are less worried about their job security. Interest rates are low.

The combination of all these things has led to an increase in the number of buyers that, despite homeowners’ return to equity positions, has far outpaced the growth in the number of sellers. So while they’ve come around relatively slowly, sellers ARE coming around.

There should be a point of closer equilibrium sometime in the near future. Increasing interest rates should constrict the number of buyers. Fewer underwater homes will likely increase the number of sellers. As these things even out, so too will the percentages of Americans who think it’s a good time to do this or that.

So when you read things such as “home-buying sentiment is at an all-time low” take it with several grains of salt. We’re talking about an index that’s only been around for four years. So that “all-time” low is only over the last four years. I have shoes that are older.

It’s also worth pointing out that despite that all-time low, nearly 1 in 3 Americans still believe it’s a good time to buy. That’s the number that, to me, is encouraging for homeownership rates despite what have become seller’s markets in many areas of the country.

What’s not quite as encouraging is that despite the huge increase, a large majority still don’t believe it’s a good time to sell a home. Unless and until this changes – especially in markets that desperately need inventory – nobody’s sentiments are going to be as good as they could be.

Posted in Real Estate
May 16, 2016

It’s Who You Are, Not What You Have

If you’ve ever talked to a long-time renter and asked them why they don’t just buy a home, you might get one or more of several pretty standard answers.

“They want to much for a down payment.”

“It’s too hard to quality for a loan.”

“Prices are too high.”

They’re all reasons that take accountability off of them. It’s “down payments are too much,” instead of “I can’t save enough for a down payment.” It’s that qualifying for a loan is hard, not that their credit is poor and they won’t fix it. They say prices are too high instead of recognizing that they might not seem that way if they were willing or able to improve their income situations.

This is not a real estate-only thing. It’s common in all walks of life. People want to shift the responsibility off of themselves and onto something they can’t control. They like to blame their lack of resources for their station in life.

And don’t get me wrong, many people definitely are lacking resources. But others don’t let that stop them. It’s made me realize that where you end up in life, success-wise, has very little to do with what you have and just about everything to do with who you are.

By who you are, I don’t mean being famous or anything. I mean what qualities you possess, what drive you have. What motivates you.

See, I believe there are some folks who might have NO money saved up for a down payment but if they’re determined to buy a home will sacrifice, persevere, remained disciplined and eventually have a down payment. It’s in their DNA to work for what they want, whether it’s an extra job or just being more diligent with their spending. That goal of a down payment is reached because of who they are.

The same type of person fixes their credit score rather than letting it continue to prevent them from having what they want. Tough times can happen to anyone, but it takes tough people to get through them, to do what must be done to escape difficulties. That toughness is part of who someone is.

A lot of people face obstacles in life, some pretty major. Like the inner-city kid who gets a college scholarship and becomes a CEO. Or the war veteran who runs marathons on a prosthetic leg. Those are the types of people who, no matter their circumstances, are going to be successful. Not because of what they have – they’re working at what most would perceive as major disadvantages – but because of who they are.

People who “have what it takes,” as the saying goes, rarely have outside advantages or actual, physical tools that give them some kind of edge. Think about it: When a 17-year-old “has what it takes” to get into Harvard, the rich parents help afford it, but the phrase means the kid is smart enough, hard-working enough and whatever else qualifies one for admission to an Ivy League school. That accomplishment is about who the kid is, not what he has.

It’s the same for an older adult who puts together a successful career or builds the kind wealth others are envious of. Some people will like to say that getting the right job, earning promotions, and thereby becoming success stories in their professions are because of having the right education or knowing the right people.

Those are the same kind of people that say down payments are too high, rather than acknowledging that they can’t save for one. Down payments and credit scores are things you have. Doing what must be done, accepting responsibility and taking ownership of them – that’s who you are.

It’s true that there’s only so much in life that you can control. I’d argue that it’s a greater percentage than many people realize, but no matter. Unsuccessful people focus on the things they can’t control, because it absolves them of responsibility. Even worse, they invent things that are beyond their control, just to be able to take less ownership of their failures.

Successful people do the opposite. They take control of what they can. They don’t focus on what they can’t. They don’t dwell on what they don’t have.

They rely on who they are. 

Posted in Life, Real Estate
May 9, 2016

The No. 1 Reason for Moving Is…

I know, that headline is pretty suspenseful, right? Does it have you guessing at what the top reason people give when asked why they sell a house? It shouldn’t be that hard; it’s not a trick question. Sometimes, the most obvious answer is the right one.

In this case, the right answer is: “The home is too small.”

And that’s been the right answer since 2005, when the National Association of Realtors in its annual survey of home buyers and sellers began asking sellers their primary reason for selling. Year in and year out, the largest percentage of sellers were those moving to a bigger house.

What’s interesting, however, is that this number is dropping. Apparently, there aren’t as many “too small” homes as there used to be.

In 2005, the percentage of sellers who listed “home is too small” as their reason for moving was 22 percent. That fell to 17 percent in the financial-crisis year of 2008 but climbed back up to 21 percent in 2010. That might suggest that in a recession, people don’t feel as strongly about needing a bigger house. But last year, more than half a decade post-recession, only 16 percent of sellers said they needed to sell because their home was too small.

What does that mean? I’m not sure. Hey, I just said it was interesting; I didn’t say I could explain it.

The best guess is that one of the reasons first-time homebuyers aren’t buying as many homes as usual is also affecting the number of sellers to move to bigger homes. If people are waiting longer to start families, as the statistics show, they are probably also waiting longer to move into a bigger home. The popular trend of living in downtown or urban areas, which tend to have smaller homes than suburbs, also likely has something to do with it.

It could also be that the recession taught people that excess can be a bad thing. Maybe they learned that they don’t have to have that 4,000-square-foot house to be happy.

What’s strange is that there’s not really a category that has replaced “too small” as the huge reason for selling. Job relocation, which has historically been second, behind “too small,” actually fell further from 2005 until last year than “too small did.” In 2005, the percentage of sellers who listed that as their primary reason was 21 percent. Ten years later, it was just 14 percent.

So in 2005, close to half of all sellers (43 percent) sold either because their house was too small or because they were moving for a job. Last year, only 30 percent of all sellers did so for those reasons.

As far as reasons that have increased in percentage, “want to move closer to friends or family” has made the biggest gain. That reason was given by just 9 percent of sellers in 2005 but 13 percent last year.

Among the other reasons that gained ground were: Moving due to retirement (up from 3 percent to 7 percent); Upkeep of home is too difficult due to health or financial reasons (4 percent to 6 percent); and Home is too large (8 percent to 9 percent). This would suggest that the aging Baby Boomer generation – large in numbers – has affected home sales trends. It’s not surprising.

If you think about it, the statistics kind of tell the story of the country’s current demographic trends. There’s a large number of people at or nearing retirement age. The other large generation is made up of people who have delayed household formation – the “Millennials” – which means fewer growing families. Now that the recession is over, people are less likely to move in order to get a job. And I wonder if the growing number of people who sell to move closer to friends and family are those who left because of a job and are now moving back home.

What I don’t really wonder is whether the No.1 reason will ever change. People have historically sold homes to move into larger homes. Many households do this multiple times, and going the other direction – downsizing – is most often done only once. I guarantee you, me and every other person knows someone who at some time or other moved because they needed or wanted a bigger house.

That reason is likely to stay at No. 1.

Posted in Real Estate
May 2, 2016

Let’s Monday-Morning Quarterback the Fed Meeting

Fed meeting

I’m no economist, as you probably know. I don’t hold any advanced degrees in economics, nor am I able to quote economic theory at length. I am only a casual observer of economic trends, a follower of news. As such, I’d hardly be one who’s qualified to “Monday-morning quarterback” a meeting of the Federal Reserve.

But I’m going to do it anyway.

Let the record show – meeting talk – that going into the Fed meeting, I did not believe that interest rates would be hiked. As a casual observer, I do know that some other, less-casual observers of such things believed a hike was imminent. Job growth has been solid, and there are predictions out there that inflation is approaching the levels the Fed is hoping it reaches soon. 

According to the Fed’s statement, the job growth part of it is true. But it’s obvious that the committee does not feel that price growth is on target, and even without price growth, consumer spending has slowed. That is not a combination they want to see. From the statement: 

“… labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high.”

This is the reason rates are unchanged. Another way of putting it is: “More people have jobs, they’re getting paid more, they feel more comfortable about spending money and yet they’re not spending money.”

What this has led to is an economy that is not growing anywhere near the pace the Fed thinks it should be. According to analysts – you know, people who ARE qualified to talk about such things – gross domestic product (GDP) is expected to post only a 0.7-percent gain in for the first quarter. Now, it’s fair to argue that the first quarter is often volatile, hard to gauge, because there are always some seasonal issues.

Still, the Fed specifically mentioned in its statement that businesses’ fixed investments as well as overall exports have been “soft.” These are things that are directly related to GDP and bolster the argument that the Fed is nervous about the slow rate of the economy’s growth.

As far as the predictions that inflation is approaching or will soon approach the Fed’s 2-percent target? Well, the Fed itself doesn’t seem very sure of that, despite analysts’ guesses that it’s risen to about 1.7 percent. There’s no reason to raise interest rates if there’s no inflation, and the Fed seems to offer this explicit reminder that it wants to see 2-percent inflation. Again, from the Fed’s statement:

“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal.”

What the Fed is NOT saying is anything about international developments. There is some global volatility right now with both China and Europe, which is probably why investors and businesses are showing signs of concern. Aside from mentioning the above intention to take into account “readings on financial and international developments,” it says nothing about potential global pressures. To at least one (very) amateur observer, this means the focus is at home, that nothing abroad is concerning enough for them to rule out a rate hike.

It’s nearly impossible now to take true measure of inflation, the indicators are so convoluted, which price gains count and which don’t. But the Fed seems always focused on reality when it comes to consumers – “What real things are real families spending real money on?” – and with recent upticks in energy prices, which were dismal in the first quarter – there could be movement in the right direction for the committee.

That leads at least one (very) amateur Monday-morning quarterback to predict that long-term rates will rise in June, provided job numbers stay strong and no financial crisis in China or fragmenting of the European Union happens overseas.

But remember, I’m definitely no economist, so take that with a grain of salt.

Posted in Real Estate
April 25, 2016

Why Mortgage Rates Are Still Falling

Falling mortgage rates

Maybe I’ve written too many times already about why mortgage rates haven’t risen in the wake of the Federal Reserve’s December meeting, at which the federal funds rate was finally raised from zero. It’s been explained before why long-term rates, including those attached to mortgages, didn’t spike.

Most people paying attention would tell you that it would be a gradual rise, not a spike at all. You probably heard that it’d be the last quarter of the year, maybe, before consumer rates bore a discernible reflection of the Fed’s increase. But what perhaps no one fully expected has actually come to pass:

Already-flat rates actually went lower. They’ve ticked up slightly in recent days but have been mostly in a downward trend since January.

At the time the Fed announced its hike – the interest rate at which banks are charged to borrow money – mortgage rates were just shy of 4 percent for a 30-year, fixed-rate mortgage. That rate as I write this is at 3.44 percent and last week was even lower, near three-year lows, in fact. This was probably unexpected by most.

So why have rates actually fallen – and mostly continue to trend that way – after the Fed’s move? There are a few things that would explain it. The simplest way would be a reminder that the Federal Reserve does not directly control mortgage rates. Sure, it can manipulate what banks are charged to borrow the money they pass on to consumer borrowers, but ultimately it’s those banks that decide what to charge those consumers. And just like in any other business that must set prices, the market often dictates where those prices land. And the market right now is saying enough to keep prices low.

One of the more interesting things lately has been Treasury yields that haven’t as directly influenced mortgage rates as you might expect. Treasury notes, bills and bonds, you might remember, are the alternative to mortgage securities in terms of fixed-income investments. So when T-Bills – the safest of these investments because of government guarantees – rise, banks typically bump rates up.

However, when mortgage rates recently dipped to their near three-year low, it coincided with a rise in Treasury yields. In fact, when Treasury bond yields rose by three basis points, mortgage rates actually dipped a bit in the same week. “Weird,” an observer might say to himself or herself about that. But “weird” isn’t an explanation.

So what is the explanation? Well, I’m no economist or econ professor, but the bottom line is that banks were all but given the green light to charge higher rates but didn’t, which means they know something or think they know something. That something, it would certainly appear, is the shape of the overall economy.

The stock market, as you are probably aware, has recovered from a fairly good slump. Typically, when stocks are robust, interest rates are not. Risk-friendlier times for investors tend not to favor the lower-risk, lower-reward investments, such as mortgage securities.

But the story of this real estate recovery and how it fits into the overall economy isn’t as much about the investor as it is about the American consumer. It’s no secret that household incomes are not rising with inflation; if anything, they’re falling. And housing prices continue to rise, very rapidly in many markets.

Which means, basically, that if banks don’t want to see the purchase end of their mortgage business dry up, they need to do their part to keep home purchases affordable. That means lower rates. It’s also probably not a coincidence that the latest drop in rates coincided with a long-overdue rise in fuel prices. As I said, the eye is very much on the average consumer and his or her expenses.

Unfortunately, what it also tells us is that despite the occasional spurts, the country’s overall economic growth is still pretty weak. Job numbers aren’t as great as you might expect (or as some would have you believe), and there is enough concern over economic benchmarks like that to make lenders wary of higher rates.

It feels like one of those “wait and see” times in the economy – like things could start humming along better or start slowing down. And banks, like others, are waiting and seeing before raising mortgage rates.

And that wait-and-see period has been going on for longer than expected, which is why rates are quicker to fall than rise.

April 18, 2016

Avoiding the Curse of Special

Do you know why people gain and lose weight? It really boils down to a simple equation, described most simply as “calories in vs. calories out.”

If you eat more calories than your body uses, you will gain weight. If you eat less than it uses up, you will lose weight. To affect weight gain or loss, you either move more to increase calories out, or you eat less to decrease the calories in. It’s the same for everybody.

What’s not the same for everybody is the number of calories needed to neither gain nor lose weight – the break-even point, if you will. It changes according to age, height, weight, gender, etc. and can also be different for people with otherwise identical stats. Think of it this way: Not every single 2015 Honda Accord on the planet, with the same exact engine and body weight and everything, is going get the exact same gas mileage. Around the same, sure, but not the exact same.

It’s the same way with our bodies, and the differences in how many calories determines the mileage each of us gets varies. You might hear a really lean person say “I have a fast metabolism.” That person might be right.

But studies show that even those who have a “faster metabolism” use, at a maximum, perhaps 100 calories more per day than a person with a slower metabolism. In other words, an overweight person who’s jealous of someone with a “fast metabolism” can skip a piece of bread, a banana or an egg a day and be exactly even with someone with a “fast metabolism.”

Yet a skinny guy who can’t build himself up will use his “fast metabolism” as an excuse. A person who’s pudgier than they’d like might say their “slow metabolism” is the culprit. They’ll both argue that no matter how much or how little they eat, they can’t put on or lose weight.

Science says this is impossible. But for some reason, these people believe they are the 1 in a million who defy science. They’re the special ones to whom the laws of biology don’t apply. You see people with similar perspectives in all walks of life.

Your entire neighborhood has houses that sell for $200,000, but that one neighbor insists his is worth $250,000. It’s a two-hour drive every time you visit your parents, but your spouse insists you can make it there in an hour-and-a-half if he or she drives. Everyone else at work is contributing to some sort of retirement savings by age 30, but Larry reminds everyone that he won’t have to start until he’s 40.

Larry knows he’s special. He’s different. He’s that 1 in a million. That fourth out of five dentists – the one who doesn’t recommend sugarless gum. You have to hand it to these people; they have true confidence in their ability to defy all odds.

The thing is, odds are odds for a reason. Being the exception, by definition, is far less likely than being the rule. For some people, it seems so hard to accept. But being this way, seeing yourself as special, for whom the rules don’t apply, can be a curse.

If this is you, I hate to break it to you. You’re not as special as you think. Your house is not magically worth more, no matter how well you’ve kept it up. You can drive to your mother-in-law’s in 90 minutes only if you drive 110 mph the entire way. You need as much time to save the same amount of money as everyone else. If you use more calories than you consume, you will lose weight.

You don’t defy the law of physics. You don’t operate outside of human biology or economic theory. You’re not that special snowflake.

Hopefully, this isn’t too hard for you to hear. I’m sorry to burst your bubble, but it’s better to face the truth than continue with this farce of believing you’re the 1 in a million, the one to whom forces of nature don’t apply.

Now, this is not to say you can’t do extraordinary things. You can. But doing extraordinary things are what makes extraordinary people. You’re not extraordinary because science doesn’t apply to you, or the basic principles of economics don’t affect your finances.

You’re extraordinary because DESPITE being dealt a similar basic hand as everyone else, you’ve wound up in an extraordinary place.

Don’t let the curse of special stop you from seeing that.

Posted in Life