Another one of those wonky Federal Reserve papers was released last week, which made the claim that government-backed mortgage insurance promoted a faster recovery post Great Recession.
I had to read it about four times to understand it, that’s a government working paper for you, but the takeaway is basically that areas of the country with lots of FHA loans fared better than areas with other types of loans, such as those backed by the GSEs, or worse, portfolio loans and private-label securities.
The researchers looked at things like unemployment rates, home sales, and home prices prior to and after the financial crisis and found that counties with a high concentration of FHA loans performed best.
For example, by 2008, unemployment rates increased 26% in counties that had a low FHA share in 2005, compared to just a four percent increase in counties where the FHA share was high.
A year later in 2009, the unemployment rate had risen by 106% and 58%, respectively, for those two groups.
Once the crisis ended, around the end of 2012, the unemployment rate remained 79% higher in the low FHA-share counties but only 49% higher in high FHA-share counties.
At the end of 2014, the unemployment rates were still 30% higher in the low-FHA share counties compared to 2005 levels, and just 19% higher in the high-FHA counties.
Areas with loans backed by Fannie Mae and Freddie Mac (GSEs) also did fairly well, with smaller declines in home sales and home prices during and after the housing crisis when compared to portfolio mortgages and private-label securities.
Things Can Get Ugly When Banks Do Whatever They Want
The researchers discovered that areas with lots of portfolio mortgages (those held by banks that set the underwriting criteria) and private-label securities (those sold on the secondary market to private investors) performed the worst.
Counties with lots of portfolio mortgages and PLS saw significant increases in unemployment, along with higher delinquency rates and foreclosure completions.
As of the end of 2008, unemployment rates had risen just seven percent in counties with a low PLS share in 2005, compared to a 25% increase in counties with high PLS shares.
A year later, the unemployment rate climbed 69% and 106%, respectively. At the end of 2012, it remained 45% higher in areas less dependent on PLS and 76% higher in areas heavily reliant on PLS.
If you’re wondering why the counties with heavy government mortgage participation did better, consider the fact that government underwriting guidelines are set at the national level and not subject to much change.
Conversely, banks that make their own mortgages with their own rules can change them at will as the market demands it. So if their max LTV was 90%, and they see a market for 100% cash out refinances, they may go for it (hint: they did go for it). The consequences can be particular nasty, though only after huge profits are taken.
This explains why the counties with a high FHA-share did better relative to the counties with loans underwritten by the likes of Countrywide and other antagonists.
It’s not to say that government mortgage lending doesn’t have its flaws…the FHA got into a lot of trouble when it allowed down payment assistance providers to run rampant. And there are still plenty of folks who believe their low down payment and low credit score combo equates to high risk.
They’ve since made it a little tougher to get a loan, though you can still put down just 3.5% on a home with a 580 credit score…that’s low.
The one flaw with this paper might be that the mortgages being written during the most recent crisis were truly awful and hopefully will never be replicated. Fat chance, right?
But maybe, just maybe, you can add high concentration of government mortgages to the list of places where you should buy a home (along with near a Starbucks, Trader Joe’s, Target, etc.).
Save more, spend smarter, and make your money go further
If you’ve paid off debt, congratulations! Paying down debt is the top goal for many Minters when they start monitoring their finances. Getting out of the red takes focus and discipline, and luckily, there are many free resources to help you. But what happens after you’ve paid off debt and freed yourself from that burden?
Check out these steps to ensure you stay on the right financial path even after your circumstances have changed for the better.
Understand Your Debt Triggers
Staying debt free can be as difficult as getting into debt. So before you make any changes to your financial behavior, it’s important to assess and understand how you fell into debt in the first place. The answer might be as easy as student loans; however, for most people the answer is not so obvious. First, take a moment to think about how you approach your finances and how people and experiences influence your attitude towards money. Then, identify the behaviors and choices that led to your prior financial situation. You’ll likely identify some patterns. A deeper understanding of how you think about money will help keep you out of debt.
Re-establish Your Budget
A monthly budget is now more important than ever. Having a plan for where to spend and save your new discretionary cash flow will help you from falling back into old habits – especially when newly available funds may tempt you into spending on unnecessary extravagances. You used to pay creditors first; now you can pay yourself first. Consider saving 20 percet of your disposable income. Even though you are no longer in debt, make saving non-negotiable.
Set New Goals
Once you establish your new commitment to saving, you must determine what you are you saving for! Here are the first two goals you should considering setting:
Emergency Fund: Most people don’t have an emergency fund, which can protect you in case of sudden unemployment, a medical emergency or other unexpected expenses. This fund should be the equivalent of 3 to 6 months of your net income, which gives you enough to live on without taking out loans. However, don’t discount the cost of risk. Make sure you can pay off your credit card bills so that you don’t pay unnecessary interest that could otherwise be going to your emergency fund.
Retirement Fund: When it comes to retirement, the sooner you start saving, the better. A good place to start is with your company’s 401(k) plan which is free money! In most cases, you can have deductions from your paycheck automated and put into your 401(k) account. This simplifies the process and many companies will even match your contributions to your 401(k) account.
If you are self-employed or a full-time parent, consider opening an IRA account. This can be done at a discount brokerage firm such as Charles Schwab. Discuss whether a Roth or Traditional IRA is best for you, then set up a monthly automatic draft payment system. Similar to the 401(k), automate your savings by specifying an amount to be automatically withdrawn from your checking account each month. Be aware that the government limits how much money you can put tax-free into retirement savings annually.
Once you hit the maximum, it is time to move on to your next savings goal: perhaps buying a home or a well deserved vacation.
What’s your life after debt story? Share with us at @mint on Twitter!
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“With the economy still looking strong, it increases the likelihood — but does not ensure — that the Fed could keep increasing rates,” Cohn said. “We’ll have to keep an eye out for the next round of CPI [Consumer Price Index] and jobs numbers, but for those looking for signs that the Fed would need … [Read more…]
While a heat wave broke records across much of the U.S. this past week, the housing market is still a lot colder than it was last April.
Some experts do hold hope for increased activity in the coming months, especially as mortgage rates dip for the fifth week in a row.
Don’t miss
“Incoming data suggest inflation remains well above the desired level but showing signs of deceleration,” says Sam Khater, Freddie Mac’s chief economist.
And according to recent data, the jobs market is staying strong — with 236,000 jobs added and the unemployment rate sliding down to 3.5% in March.
“These trends, coupled with tight labor markets, are creating increased optimism among prospective homebuyers as the housing market hits its peak in the spring and summer,” says Khater.
30-year fixed-rate mortgages
The average rate on a 30-year home loan declined slightly from 6.28% to 6.27% last week. A year ago at the same time, the average was 5%.
“With inflation moving closer to the Fed’s 2% target, mortgage rates are expected to decrease further in the coming months, likely below 6% by year’s end,” predicts Lawrence Yun, chief economist at the National Association of Realtors.
Lower rates will bring down monthly payments, opening doors to more potential buyers.
“If rates drop to 6%, 3.1 million more households will once again be able to afford to buy the median-priced home compared to the beginning of the year.”
15-year fixed-rate mortgages
The average rate on a 15-year home loan dropped from 5.64% to 5.54% last week. The same time a year ago, the 15-year fixed rate averaged 2.77%.
“With both homebuyers and potential sellers feeling rather dour about the real estate market … the number of homes sold will continue to be lower than one year ago for the next few months,” writes Danielle Hale, chief economist at Realtor.com.
This means fewer options for buyers to compare as well, although Hale notes there has been a slight improvement in sentiment as mortgage rates ease.
“If the current dip in mortgage rates can be sustained, that will keep buyers on the hunt and perhaps draw more homeowners into the market as sellers.”
Read more: Here’s how much money the average middle-class American household makes — how do you stack up?
A ceiling on the speed of recovery
While prices are still increasing and homes are spending less time on the market — which is typical for the spring season — these shifts aren’t occurring nearly as quickly as last year.
Hale says more homeowners are opting to “sit on the sidelines” rather than list their homes, while buyers stay hesitant as well, making it a “nobody’s market.” In fact, new listings are down a whopping 32% since last year.
The median listing price hit over $424,000 in March, but grew only 3.2% year-over-year, marking the smallest jump since May 2020, reports Realtor.com.
“While this week’s figures were likely extra low due to spring holidays falling earlier in 2023, the fact remains that lackluster participation from sellers may have put a ceiling on the speed of the inventory recovery,” says Hale.
“This means that buyers will continue to have to narrow their list of must-haves in order to find success in today’s housing market.”
Get off the sidelines
While prospective homebuyers may now be feeling stuck on the sidelines, real estate investors are still finding an upside — despite high inflation and uncertain economy.
That’s because, rocky conditions aside, prime commercial real estate has outperformed the S&P 500 over a 25-year period. And until recently, only the ultra rich with millions to invest were able to get in on that action. But new platforms have opened up opportunities like this to regular retail investors.
With a single investment, you can now own a piece of insititutional-quality properties leased by big brands like CVS, Kroger and Walmart — and collect stable grocery store-anchored income on a quarterly basis.
At a time when finding success in today’s housing market seems increasingly difficult, that might seem like an easy win.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
As economic clouds loom, mortgage lenders are making it harder for some borrowers to get some types of home loans. Along with that not-so-great news, however, comes a silver lining: There’s still plenty of opportunity for borrowers to qualify for mortgages.
Why mortgage lenders are extending less credit
Mortgage credit availability declined in April to its lowest level since January 2013, according to the Mortgage Bankers Association (MBA).
“The contraction was driven by reduced demand for loan programs such as certain adjustable-rate [mortgage] loans, cash-out and streamline refinances and those with lower credit score requirements,” says Joel Kan, MBA deputy chief economist.
Back in 2013, the U.S. housing market was emerging from the Great Recession, and lenders were still wary of handing out too many loans. They gradually loosened standards in the years that followed, then tightened up at the beginning of the pandemic. Notably, MBA’s index shows credit availability is even tighter now than it was during the uncertain time at the beginning of the pandemic.
There are a few reasons lenders have become less eager to extend credit:
The banking sector has hit a rough patch. Three of the largest bank failures in U.S. history took place this spring — Silicon Valley Bank and Signature Bank in March and First Republic Bank in May. None of the three were major players in the mortgage industry, but the headline-grabbing turmoil roiled lending markets all the same.
The economic outlook is uncertain. Hoping to cool inflation, the Federal Reserve has raised interest rates at 10 consecutive meetings. While the labor market’s still cruising along — employment growth surpassed expectations in April — the Fed’s tightening will eventually result in a slowdown. That typically means an increase in unemployment rates, and more defaults by borrowers, giving lenders reason to exercise caution.
The boom went bust. As mortgage rates plunged to all-time lows during the pandemic, Americans rushed to refinance and buy homes. When rates started rising in 2022, that activity slowed — and lenders that were hiring during the boom turned to layoffs during the bust. As a result, lenders now have less capacity to handle loan applications than before.
Niche loans are most affected
While this all sounds like a problem for mortgage borrowers, it’s possible many might not even notice the pullback.
An April survey by the Federal Reserve found the stricter standards don’t affect conventional conforming loans bought by Fannie Mae and Freddie Mac — the majority of mortgages originated in the U.S. — or loans issued through the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) programs.
Instead, lenders are holding back on niche products such as subprime mortgages, home equity lines of credit (HELOCs) and non-qualified, or “non-QM” jumbo mortgages.
What tighter mortgage credit means for you
Rest assured, you still can qualify for a mortgage if you meet the lender’s credit and other approval criteria, including having sufficient employment history and income.
If you’re looking for a loan type affected by tighter availability, however, there are a few ways to boost your chances of getting what you need:
Boost that credit score as high as you can. “People with lower credit scores are having a harder time today,” says Melissa Cohn, regional vice president of William Raveis Mortgage in Delray Beach, Florida. Your credit score remains the single most important factor in determining your mortgage rate. While 740 used to be the goal to strive for, new rules from Fannie Mae and Freddie Mac have made 780 the threshold at which borrowers get the best rates. You can still get a mortgage with a credit score in the 600s, but it’ll cost you more — or might be harder to find altogether.
Make as much of a down payment as possible. More cash down translates to a lower loan-to-value (LTV) ratio — and a lower LTV means more lenders willing to extend you credit. You can still qualify with 3 percent down for a conventional loan or 3.5 percent down for an FHA loan, but you’ll pay higher fees, and mortgage insurance, to compensate for your lower upfront investment.
Don’t stretch your budget too far. If the loan you want means your mortgage payment would eat up a significant chunk of your monthly budget, a lender might reject your application, even if all your other financials check out. That’s not to say you absolutely won’t qualify — but you’ll help your case by keeping the mortgage payment in the range of 30 percent of your income. Keep in mind, too: If you want an adjustable-rate loan, many lenders only qualify borrowers based on a higher payment, rather than the initial low payment.
Build up your cash reserves well in advance. Lenders are getting stricter about the sources of your down payment and cash reserves. If you expect to use a gift from family to buy a home, put the money in the bank now, says Cohn. That “seasoning” time will make your loans look better to lenders.
The rise of active listings in this spring housing market reminds me of a zombie slowly rising from its grave. Yes, we found the seasonal bottom for housing inventory on April 14, but this year’s rise in active listings has been tepid at best.
Here’s a quick rundown of the last week:
Total active listings grew 662 weekly, and new listing data is still trending at all-time lows.
Mortgage rates fell last week as we started the week at 6.65% and got as low as 6.49% to end the week at 6.55%.
Purchase application data rose 5% weekly as the streak of lower rates impacting the weekly data continues.
Weekly housing inventory
Well, the best thing I can say for spring 2023 inventory is that we found the seasonal bottom a few weeks ago. On the positive side, we’re at least seeing inventory rise — some had feared that because new listing data was trending at all-time lows, we wouldn’t see a spring increase in the active listings at all. This doesn’t appear to be the case for 2023.
However, new listing data is very seasonal and we have less than two months left before it starts declining again. I had hoped we would see more active listings before that period, but unfortunately that’s not the case. In fact, this data line has been absolutely crazy.
How crazy?
Last year, from April 22 to April 29, total single-family inventory grew by 16,311 in that one week. This year, from the seasonal bottom on April 14 to now — a whole month — total active inventory has only grown by 14,913.
Weekly inventory change (May 5-12): Inventory rose from 419,725 to 420,381
Same week last year (May 6-13): Inventory rose from 300,481 to 312,857
The inventory bottom for 2022 was 240,194
The peak for 2023 so far is 472,680
For context, active listings for this week in 2015 were 1,108,932
According to Altos Research, new listing data rose weekly but is still trending at all-time lows this year. When you consider that a home seller is a natural homebuyer as well, you can see why the housing market broke after mortgage rates went on a roller coaster last year. Mortgage rates went above 6.25%, then declined back to 5% then spiked back to 7.37%. We have not been able to recover from that mortgage rate spike and it has bled into 2023 as well.
Last year, new listing data, while trending at all-time lows, was at least rising year over year. That is no longer the case after the second half of 2022.
New listing weekly data for this week in May over the past three years:
2023: 62,382
2022: 73,515
2021: 71,191
New listing data from previous years for the same week, to give you some historical perspective:
2017: 90,112
2016: 82,621
2015: 98,436
The NAR data goes back decades and it illustrates just how hard it’s been to get the total active listings back to the historical range of 2 million to 2.5 million. The next existing home sales report comes out this week and we should see an increase in active listings, which have been stuck at 980,000 active listings over the last three months.
NAR: Monthly active listings
NAR: Total active listing data going back to 1982
I often get asked about the big difference between NAR and Altos Research inventory data. This link explains the difference. Overall, inventory data tends to move together, even if different sources are working with other numbers and have a different methodology.
The 10-year yield and mortgage rates
For 2023, one of the most important economic storylines has been the 10-year yield refusing to break below the critical levels I have talked about for months — the level between 3.37%-3.42%. I believed this level was going to be so hard to break under that I named it the Gandalf line in the sand. No matter how crazy things have gotten in 2023, the 10-year yield only broke it once, at the height of the banking crisis. That didn’t last long as we headed right back higher.
As you can see in the chart below, that line in the sand has been tested many times.
When I talk about mortgage rates, it’s really about where I feel the 10-year yield will go for the year. In my 2023 forecast, I said that if the economy stays firm, the 10-year yield range should be between 3.21% and 4.25%, equating to 5.75% to 7.25% mortgage rates.
Now if the economy gets weaker, meaning the labor market sees a noticeable rise in jobless claims, then the 10-year yield should break under 3.21%, going all the way to 2.72%. This will take mortgage rates under 6%, and if the spreads return to normal, this can get us below 5% mortgage rates again. Yes, I said below 5% again.
Can you imagine the housing market at that point? We would have much more stability.
However, for that to happen, jobless claims would need to rise to 323,000 on the four-week moving average. We did have a big jump in jobless claims last week. However, this data line can have some odd quirks week to week, so focus more on the trend and the four-week moving average rather than one week’s data.
From the St. Louis Fed: “Initial claims for unemployment insurance benefits increased by 22,000 in the week ended May 6, to 264,000. The four-week moving average also rose to 245,250.”
Last week, mortgage rates didn’t move much, but as the year goes on, we will be tracking more and more economic data to get clues on the economic cycle and where mortgage rates will be heading.
Purchase application data
The dynamics of the U.S. housing market changed starting Nov. 9, 2022, when the purchase application data began to react more positively as mortgage rates fell. Since that time, making some holiday adjustments to the data, we have had 17 positive weekly prints versus seven negative prints. Year to date, we have had 10 positive prints versus seven negative prints.
Last week, the weekly data showed a positive 5% print, while the year-over-year data shows a 32% year-over-year decline.
I view this data line as just a stabilization of the housing demand data, coming off a waterfall dive in 2022. However, this stabilization is critical because of what it has done: It has changed the housing dynamics.
When housing demand collapsed last year, the low inventory didn’t provide a big shield against pricing getting much weaker. Pricing in the second half of the year was going negative month to month, of course, from an overheating start in 2022. Starting from Nov. 9, the entire housing dynamics changed from demand collapsing to demand stabilizing.
This explains pricing getting firmer in 2023 due to the low inventory environment. Purchase apps look out 30-90 days before they hit the sales data, so we don’t have the sharp recovery data we saw during the COVID-19 recovery. However, we do have a good stabilization story here today.
I traditionally weigh this data line after the second week of January to the first week of May, and now that we are in the second week of May, I would say the 2023 purchase apps data is slightly positive, with stabilization for sure, just not a booming mortgage demand market with mortgage rates still over 6%.
The week ahead: Big housing data coming up
We have a jam-packed week with economic data, especially for housing. We have the builder’s confidence data, housing starts and existing home sales. Monday, we also have the New York Fed quarterly credit and debt update. Those charts are my favorites as they show how credit stress in the U.S. today doesn’t look like anything we saw in the run-up in 2008.
Since the foreclosure process has started again, we should be working our way back up to pre-COVID-19 levels. However, 30, 60, and 90-day lates are near all-time lows, and it took many years to build up the credit stress we saw from 2005 to 2008, before the job-loss recession.
Retail sales come out on Tuesday, which can move the bond market depending on what the report shows. As the year progresses, all these reports will give us more clues to see where the economy is heading. That’s critical since economic data can move the bond market and what can move the 10-year lower or higher drives mortgage rates as well. If mortgage rates head lower, we could see inventory drawn down faster during the seasonal decline period of fall and winter.
A government debt default could send mortgage rates to highs not seen in over 20 years, a new Zillow analysis suggests.
The unprecedented scenario would send mortgage rates as high as 8.4% in September and the typical cost of a mortgage up 22%, the real estate platform’s analysis found. The Treasury Department has suggested the U.S. would fail to meet its debt obligations as soon as June 1, a situation which would significantly disrupt the housing market.
Mortgage rates could soar past 8% in the unlikely government default scenario, said Melissa Cohn, a regional vice president at William Raveis Mortgage, in an email to National Mortgage News. The rate for average 30-year fixed loans has hovered above 6% in the past six months, after momentarily rising above 7% last fall. The average hasn’t surpassed 8% since August 2000, according to data from the Federal Reserve.
“A government default would depress Treasury bond prices, causing bond yields to rise significantly,” she wrote.
The spread of 3-month Treasury yields over 1-month Treasury yields, a barometer of mortgage rates, reached 1.78 percentage points since April 21; the previous high was 0.79 points last October, Zillow said.
“The gap suggests that investors were requiring much higher interest rates on debt maturing this summer, compared to debt maturing in May, likely due to the risk of delayed or reduced repayment in the event that Treasury hits the X-date without Congressional action on the debt ceiling,” wrote Jeff Tucker, Zillow senior economist, in the company’s analysis.
One-month Treasury yields have since climbed to 5.5%, reflecting the looming X-Date, Zillow said.
If a divided Congress fails to raise the debt ceiling by the “X-Date,” or the day when the government runs out of money, home sales would also drop, Zillow said. Existing sales volume, the firm said, would fall 23% to a seasonally adjusted annualized rate of 3.3 million in September from April’s 4.3 million rate.
Specifically, 700,000 fewer homes would be sold between this July and December 2024 in the event of a default, or 12% of the 6 million sales projected in a market without a government default, according to Zillow. Home prices in the scenario meanwhile would remain insulated by low inventory and buyers remaining on the sidelines with elevated rates, dropping by just 1% through next February.
Zillow puts the average home price at $334,269, a 5% year-over-year gain. Property value growth exploded last summer but has since relaxed, rising at a decade-low pace as of March.
Prices, however, could be dampened by a wave of unemployment, as a federal debt default would put government employees out of work temporarily or permanently. Under the default scenario, Zillow projects unemployment peaking at 8.3% in October.
A government default would mar the country’s credit rating and affect the value of the U.S. dollar, along with disrupting the approximately 9 million Americans who rely on federal wages or funding. The U.S. has never defaulted on its debts.
While the scenario is worrisome, most people don’t expect it to happen, Cohn suggested.
“I don’t get a sense of great concern from people,” she wrote. “Everyone hopes this will not occur as the damage to the economy would be great.”
Government officials can’t predict exactly when inflation will go down, but representatives of the International Monetary Fund expect the U.S. inflation rate to reach its 2 percent target by the end of 2023.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Consumers around the world are currently grappling with rising costs, making many people wonder how long this high rate of inflation is going to last. Although the U.S. inflation rate has nearly quadrupled since 2020, inflation is even worse in other countries. In Israel, for example, the inflation rate has increased by 25 times in the last two years.
When inflation is high, consumers have less purchasing power, making it more difficult to afford housing, food, utilities and other necessities. Some consumers have even changed their spending habits to account for rising costs. So, how long will inflation last? No one knows for sure, but it’s possible to make an educated guess based on what the Federal Reserve is currently doing to reduce spending.
What is inflation, and how does it work?
The Federal Reserve defines inflation as an increase in the overall price level of an economy’s products and services. This refers to a general increase in prices, not an increase in a single product or service category. For example, it’s possible for the cost of dairy products to increase without the rate of inflation increasing.
When inflation is high, many consumers have less purchasing power. This is because their income doesn’t buy as many products and services as it did when inflation was low. Inflation also has a negative impact on banks that loan money at fixed interest rates. If a bank makes a loan at 6 percent interest, an inflation rate of 7 percent would reduce its real income, or the amount of money it earns after taking inflation into account.
In the United States, the Consumer Price Index (CPI) helps estimate inflation by tracking the average change of prices over time. This index doesn’t include the price of every good or service. Instead, it uses a market basket of goods and services typically purchased by consumers in urban and metropolitan areas. In July 2022, the U.S. Bureau of Labor Statistics reported that the CPI rose by 1.3 percent in June, bringing the total increase for the last 12 months to 9.1 percent.
Why is inflation so high right now?
Although many Americans are feeling the pinch of higher prices, inflation is a global problem. In response to the COVID-19 pandemic, government officials around the world implemented mandatory lockdowns to prevent the spread of the disease. With so many businesses closed, the demand for goods and services declined.
Once businesses started reopening, demand soared. With the unemployment rate falling to 3.5 percent in July 2022, job seekers have more bargaining power, driving up wages and giving many consumers more money to spend on goods and services. Consumers also saved more money than usual in 2021 due to concerns over how the ongoing pandemic would affect their finances.
Although demand has increased, many companies are unable to fill orders due to manufacturing and shipping backlogs associated with the pandemic. When demand exceeds supply, firms increase their prices, contributing to higher rates of inflation.
Finally, many consumers are spending more on services than goods, increasing demand in the service sector. As a result, it now costs more to rent an apartment, dine at a restaurant or hire someone to perform housekeeping or landscaping services.
The government’s response to inflation
The Federal Reserve is currently implementing contractionary monetary policy to reduce demand and give the economy a chance to cool off. This involves raising interest rates to decrease consumer spending and business-related investment spending.
The Biden-Harris administration is also focused on lowering costs for low-income and middle-class families. President Biden signed the Inflation Reduction Act of 2022 into law on August 16, 2022, and this act aims to reduce energy costs and make healthcare more affordable for Americans.
Because the current inflation rate is associated with high levels of demand, there isn’t much more the federal government can do to bring prices down. The plan is to continue raising rates until the inflation rate returns to 2 percent.
When will inflation go down?
Government officials can’t predict exactly when inflation will go down, but representatives of the International Monetary Fund expect the U.S. inflation rate to reach its 2 percent target by the end of 2023. To reach this target, analysts believe the Federal Reserve will need to raise rates by another 2 to 2.5 percent before then.
Are we in a recession?
Although government officials, consumers and business owners are concerned about the prospect of a recession, the United States hasn’t entered a true recession yet. A recession is characterized by rising levels of unemployment, lower retail sales and negative growth of the gross domestic product (GDP), among other factors.
In July 2022, the Bureau of Economic Analysis reported that the U.S. GDP declined by 1.6 percent in the first quarter of the year and 0.9 percent in the second quarter. Although GDP declined, retail sales increased by 1 percent between May and June 2022. The unemployment rate also fell from 5.4 percent in July 2021 to 3.5 percent in 2022. Therefore, the United States doesn’t yet meet all the criteria for an economic recession.
Where is inflation the worst in the United States?
In the United States, cities tend to have higher inflation rates than suburbs and rural areas, due in part to their higher housing costs. On July 13, 2022, Bloomberg reported that several American cities had crossed the 10 percent mark. Urban Alaska is at 12.4 percent, the Phoenix-Mesa-Scottsdale metro area in Arizona is at 12.3 percent and the Atlanta-Sandy Springs-Roswell metro area in Georgia is at 11.5 percent. Baltimore, Seattle, Houston and Miami also have inflation rates above 10 percent.
Inflation isn’t quite as bad in the New York-Newark-Jersey City metropolitan area, which had a 6.7 percent inflation rate in June 2022. Overall, inflation tends to be higher in the South and Midwest regions than it is in the Northeast region of the United States.
How will inflation affect my 2022 and 2023 taxes?
Take a look at the top ways your upcoming taxes might be affected by inflation.
Taxable income
Federal tax brackets are adjusted for inflation, which means you may drop to a lower tax bracket in 2022 even if your income doesn’t decrease. If high rates of inflation persist, you may get the same tax benefit when you file your 2023 return.
The standard deduction is also adjusted for inflation, so high inflation rates may help you reduce your taxable income even more than in previous years. In 2021, the standard deduction for a single filer was $12,550; for the 2022 tax year, it’s $12,950. If the economy doesn’t cool down quickly, the standard deduction may be even higher in 2023.
Health savings accounts
The annual HSA contribution limit is adjusted for inflation, so high rates of inflation allow you to put aside more money for medical expenses each year. The limits have already been increased for 2022, allowing individuals to contribute $3,650 per year and families to contribute $7,300 per year. In 2023, the limits will increase even more, to $3,850 for individuals and $7,750 for families.
HSA contributions are deducted on a pre-tax basis, so higher contribution limits may leave you with less taxable income, reducing your tax burden.
Retirement contributions
High levels of inflation can even help you save a little more money for your retirement. The contribution limits for 401(k) accounts and individual retirement arrangements (IRAs) are adjusted for inflation, so you can typically save more when inflation is high. For 2022, the 401(k) contribution limit is $20,500, an increase from the $19,500 limit for 2021. The IRA contribution limit didn’t increase for 2022, but it may go up in 2023 if the inflation rate continues to be high.
Although you can’t save more in your IRA this year, the income limit for 2022 was increased to keep up with inflation. As a result, you can now participate in a Roth IRA if your income doesn’t exceed $144,000 ($214,000 for married couples filing jointly).
Social Security
If you have combined income of more than $25,000 in a year as a single filer, your Social Security benefits are subject to federal income taxes; the limit increases to $32,000 for married couples filing jointly. Combined income includes half your Social Security benefits, your adjusted gross income and your tax-exempt interest income. These income limits aren’t adjusted for inflation, but Social Security benefits are.
For 2022, the federal government implemented a 5.9 percent cost-of-living increase for Social Security beneficiaries, and the 2023 adjustment could be as high as 10 percent, or even slightly more—we’ll know for sure in October 2022. This increase could push your combined income above the $25,000/$32,000 limit, making your Social Security benefits taxable for the first time.
Capital gains taxes
When you sell certain assets, you must pay capital gains tax on your profit. If you sell when inflation is high, you could end up with a profit on paper even if the sale results in a real loss. This typically happens when high rates of inflation erode your purchasing power over time.
If you made a $100,000 investment in 1980 and sold it for $200,000 today, it would look like you made a profit of $100,000. The truth is that $100,000 in 1980 dollars is equivalent to about $359,600 today. Although you made a profit on paper, you really lost a significant amount of purchasing power. Unless you qualified for some type of exemption, you’d have to pay capital gains tax since the purchase price of assets isn’t adjusted for inflation.
How can I save money while inflation is high?
You can’t control the national economy, but there are a few things you can do to strengthen your financial position while inflation is high.
Eat more meatless meals. Meat, poultry and eggs are among the food products with the highest price increases in 2022. To lessen the effects of rising costs on your budget, try adding a few meatless meals to your weekly menu.
Track your spending. If you don’t keep track of your spending, it’s easy to spend much more than you realize. Keep a record of how much you spend on necessities as well as extras like streaming subscriptions and movie tickets.
Start meal planning. If you spot a good deal at the grocery store, you can take advantage by planning several meals around that ingredient. For example, if a store is advertising chicken for $2.49 per pound, you may want to plan on eating chicken salad sandwiches for lunch each day that week.
Cancel unused subscriptions: In June 2022, Sarah O’Brien of CNBC reported that more than 40 percent of consumers were paying for at least one subscription they didn’t use. Unused subscriptions leave you with less money in your pocket, so canceling them can help you weather this period of high inflation.
Maintain a high credit score. When you have good credit, you typically qualify for lower interest rates and other favorable loan terms. If you have to borrow money while inflation is high, maintaining a healthy score can help you save money.
Keep the faith
Inflation makes it a little tougher to meet your financial goals, but that doesn’t mean you should give up on managing your finances responsibly. You can save money by tracking your spending, canceling unused subscriptions and planning your meals according to what foods are on sale each week.
Maintaining good credit can help you save money in the long run if you have to take out a loan or otherwise buy on credit. If your credit is lower than you’d like it to be, work with the credit repair consultants at Lexington Law to identify inaccurate negative items on your credit reports and make sure outdated information isn’t being held against you.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Brittany Sifontes
Attorney
Prior to joining Lexington, Brittany practiced a mix of criminal law and family law.
Brittany began her legal career at the Maricopa County Public Defender’s Office, and then moved into private practice. Brittany represented clients with charges ranging from drug sales, to sexual related offenses, to homicides. Brittany appeared in several hundred criminal court hearings, including felony and misdemeanor trials, evidentiary hearings, and pretrial hearings. In addition to criminal cases, Brittany also represented persons and families in a variety of family court matters including dissolution of marriage, legal separation, child support, paternity, parenting time, legal decision-making (formerly “custody”), spousal maintenance, modifications and enforcement of existing orders, relocation, and orders of protection. As a result, Brittany has extensive courtroom experience. Brittany attended the University of Colorado at Boulder for her undergraduate degree and attended Arizona Summit Law School for her law degree. At Arizona Summit Law school, Brittany graduated Summa Cum Laude and ranked 11th in her graduating class.
Save more, spend smarter, and make your money go further
As we ring in the New Year, financial resolutions top our to-do lists, from saving more to finding a new, better-paying job and getting out of debt once and for all.
As you map out your next money move, take heed of some of these top market and economic predictions for added guidance.
Higher Borrowing Costs
Looking to open a new credit card or apply for a mortgage this year? It may be wise to act sooner than later.
With the broader economy improving since the financial crisis (e.g. the national unemployment rate is hovering at 5%, down from nearly 10% in 2009), economists, including Janet Yellen, chairwoman of the Federal Reserve, believe it’s time for a tightening of monetary policy (translation: boost interest rates to curb inflation.)
Fortune Magazine’s “Crystal Ball,” says we can expect a three-quarter-point increase by next Thanksgiving to 1.25%.
When the Fed raises the overnight bank-lending rate (aka the Fed Funds rate) that typically has a domino effect on interest rates for other mainly short-term financial products like credit cards and car loans.
What this means for us? If you’re in the market to borrow money, I recommend reviewing your credit ahead of any applications to see what improvements (if any) are necessary. The higher your credit score, the better chances you have of achieving the lowest interest rates on the market.
If you’re seeking to refinance or buy a home this year, also aim to lock in a rate as soon as possible. While an increase in the Fed Funds rate isn’t necessarily a precursor to higher mortgage rates, we’re already seeing an uptick on 30-year home loans to above 4%. And Fannie Mae’s National Housing Survey shows that more than 50% of consumers think mortgage rates will continue to elevate over the next year.
Finally, for those of us with adjustable rate loans (e.g. some student loans and mortgages) we may want to pay off our debt more aggressively or refinance to a fixed-rate loan to put a lid on rising monthly payments down the road.
Less Sticker Shock in Housing
With home loan rates expected to track north, home values may see some cooling in 2017. That’s because when mortgage rates jump, demand for housing tends to slowdown, placing pressure on sale prices.
Not to mention, after riding a hot streak in recent years with prices across the country hitting near pre-recession levels, real estate experts at Zillow.com now predict a “normalizing” market with more moderate price growth of 3.6% across the country in 2017, compared to 4.8% last year.
Prepare for more affordability in areas that have experienced the steepest gains. In Los Angeles, for example, home prices have trended considerably higher in recent times (up 7.3% over the past year, alone). In 2017, though, the city can expect a tempering of home values to a growth of just 1.7%, according to real estate website Zillow.com.
As for rentals, after double-digit surges, rents in many large metro areas will also see slower growth in 2017, per Zillow. Rents across the country are expected to rise approximately 1.7 percent this year to about $1,429 per month, down from a 6% appreciation reported last year.
Partly to blame for the cool down in rent is a glut in inventory. Builders were very busy over the last few years, but the demand for new units in some hot neighborhoods like Brooklyn, N.Y. is failing short of supply.
As a result, some landlords at higher end luxury apartment buildings in that borough have been striking sweet deals with renters since last summer, The New York Times reports. For example, at 7 DeKalb, a new high rise in Brooklyn, “the landlord is offering two months of free rent with a 14-month lease, and use of the building’s fitness center and other amenities for a year without charge.”
That’s a good reminder to prospective renters everywhere that it can never hurt to negotiate, especially this year!
Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at [email protected] (please note “Mint Blog” in the subject line).
Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.
Save more, spend smarter, and make your money go further
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The numbers this week are unfortunate: inventory should be growing like it does at this time every year. But, the weekly inventory data can occasionally have big moves up or down that can deviate from the longer seasonal trend so I need to see a few more weeks of inventory declining before I make too much out of one week.
However, one thing is for sure, housing is not going to crash due to large-scale panic-selling — a scare tactic of late 2021 that didn’t work then or now. New listing data was trending at all-time lows in 2021 abd 2022 and now it’s creating a new all-time low trend in 2023.
Weekly inventory change (April 28-May 5): Inventory fell from 422,270 to 419,725
Same week last year (April 29-May 6): Inventory rose from 287,821 to 300,481
The bottom for 2022 was 240,194
The peak for 2023 so far is 472,680
For context, active listings for this week in 2015 were 1,081,085
Weekly housing inventory
According to Altos Research, new listing data declined weekly and is still trending at all-time lows in 2023. This data line can have some wild swings up and down, but for the most part, we do see the traditional seasonal increase in new listings data. We are roughly two months away from the seasonal decline in new listings.
Since the second half of 2022, after the big spike in mortgage rates, this data line hasn’t gotten much traction. Last year at this time, we saw some growth year over year, but this year it’s been different.
New listing weekly data over the past three years:
2023: 58,432
2022: 76,691
2021: 73,291
New listing data from previous years to give you some historical perspective.
2017 99,880
2016 88,105
2015 94,101
As you can see in the chart below, new listing data is very seasonal; we don’t have much time to get some more growth here.
The NAR data going back decades shows how difficult it has been to get back to anything normal on the active listing side since 2020. In 2007, when sales were down big, total active listings peaked at over 4million. We had high inventory levels while the unemployment rate was still excellent in 2007.
This proves that the mass supply growth we saw from 2005-2007 was due to credit stress, not because the economy was in a recession; the U.S. didn’t go into recession until 2008. Even though the labor market is currently showing signs of getting softer, there is no job-loss recession yet.
The total NAR inventory is still 980,000. As you can see in the chart below, there is a big difference between the current housing market and those looking for a repeat of 2008.
NAR total active listing data going back to 1982
People often ask me why there is such a difference between the NAR data versus the Altos Research inventory data. This link explains the difference and is worth a read.
While this was a disappointing week on the inventory growth side, I hope this is just a one-week blip. We can see what a difference a year makes in inventory data. For example, last year, from April 22-29, weekly active listings grew by 16,311. So far this year, after the seasonal bottom in inventory happened the week of April 14, the total growth in active listings since that week has been only 14,257.
Traditionally, we would see active listings starting to grow at the end of January. However, that growth has taken longer in 2023 than any other year in U.S. history and so far the active listing growth from April to May has been mild.
The 10-year yield and mortgage rates
Last week we had multiple land mines for the 10-year yield and mortgage rates to rise or fall with the Fed meeting and four labor market reports. Although the Fed raised the Federal funds rate, the bond market is sensing a slower labor market and mortgage rates fell.
Tracking the 10-year yield and mortgage rates are essential for housing inventory because when rates fall, buyer demand gets better, allowing more homes to be bought and getting a lid on inventory growth, which we have seen since 2012. The only two years we have seen the active inventory grow were 2014 and 2022 when softness in demand allowed inventory to grow.
The big difference between 2022 and 2014, as you can see in the chart below, is that the bottom in 2022 was an all-time record low; we can see year-over-year growth in total active listings. However, the increase in inventory this year from last still puts active listings near all-time lows.
NAR Total Active Listings
We have seen from 2022 that the monthly supply of NAR data has grown more visually in the data lines; this means homes are taking longer to sell than before. I wrote about this last week and talked about it in the HousingWire Daily podcast.
NAR Monthly Supply Data
Mortgage rates started last week at 6.73% and fell as the labor data and banking stress drove money to the bond market. We briefly broke under my key Gandalf line in the sand (between 3.37%-3.42%) intraday, only to close right at the line and rise by the end of the week. This line has been truly epic.
Mortgage rates fell to a low of 6.43% then ended the week at 6.5%. The spreads between the 10-year yield and 30-year mortgage rates have been terrible for a long time and have gotten worse during the banking stress. While credit is stlll flowing for conventional loans, mortgage pricing has been bad. Mortgage rates in a regular market should be 5.25% today but are at 6.5%. Can you imagine the housing market at 5.25% today when we found stabilization with rates ranging between 5.99%-7.10% this year?
In my 2023 forecast, I said that if the economy stays firm, the 10-year yield range should be between 3.21% and 4.25%, equating to 5.75% to 7.25% mortgage rates.If the economy gets weaker and we see a noticeable rise in jobless claims, the 10-year yield should go as low as 2.73%, translating to 5.25% mortgage rates.
Of course, the banking crisis has added a new variable to economics this year. However, even with that, the labor market, while getting softer, hasn’t broken yet. We have been in the forecasted range all year, even with all the drama from the banking crisis, which isn’t good news for the economy.
My line in the sand for the Fed pivot has always been 323,000 jobless claims on the four-week moving average. This has been my big economic data line for the cycle since I raised my sixth and final recession red flag on Aug. 5, 2022. While the labor market is getting less tight, it’s not broken yet.
From the Department of Labor: Initial claims for unemployment insurance benefits increased by 13,000 in the week ended April 29, to 242,000. The four-week moving average also rose by 3,500 to 239,250.
Purchase application data
Purchase application data has been the main stabilizing data line for the housing since Nov. 9, 2022, with 16 positive prints versus seven negative prints, after making some holiday adjustments. For 2023, we have had nine positive prints versus seven negative prints.
The MBA purchase application data line has been very rate-sensitive: when the 10-year yield and mortgage rates rise, it typically produces a negative weekly print, and when they both fall, we get a positive print. This past week we saw a 2% week-to-week decline in the data line.
The year-over-year decline in purchase application data was 32%; as I have noted, we are working from the mother of the all-time lowest bars in 2023. As we can see in the chart above, just having 16 positive prints since Nov. 9 has stabilized the data — it’s been hard to break lower than the levels we saw back in 1996.
The year-over-year comps will get noticeably easier as the year progresses, especially in the second half. This data line looks out 30-90 days for sales, and we are almost done with the seasonality. I always weigh this report from the second week of January to the first week of May. Next week for the tracker, I will report on how 2023 demand looks based on this index.
Traditionally, purchase application volumes always fall after May. Now, post-COVID-19, this index has had some abnormal late-in-year growth data. So, after May, I will address this issue with seasonality and whether we will see some growth later in the year, as we have seen in previous years.
The week ahead: It’s Inflation week!
All eyes are on the CPI report this week, coming on Wednesday, and we have the PPI inflation report on Thursday. The entire market knows the headline inflation growth rate peaked last year, so watch out for the core inflation data, excluding shelter inflation. Of course, core CPI is primarily driven by shelter inflation, and we all know by now that it will cool off, especially as the year progresses. However, the Fed and the markets focus on service inflation, excluding shelter.
I am keeping an eye on the car inflation data as that might be stubborn this week, keeping core inflation higher than it should be.
The bond market never bought into the 1970s inflation premise, so the 10-year yield is closer to 3% than 5%. Since the entire marketplace is keeping an eye out on credit getting tighter, I will be watching the Senior Loan Officer Opinion Survey on Bank Lending Practices on Monday. This will provide more clues into how fast credit is getting tighter in the U.S. economy, which is key at this expansion stage.
So, we will have some economic data to see if the 10-year yield can break lower and send mortgage rates lower as well. So far, the Gandalf line in the sand has held up against some brutal attacks this year, but we shall see if we can break under that line of 3.37% and head lower in yields. Why is that important? Because the 10-year yield and mortgage rates have always danced together, and if the 10-year yield heads lower, mortgage rates will follow it.