Interest Rates

Since our last newsletter we’ve received some very significant news as our Federal Reserve Chair, Janet Yellen, has stated that interest rates will likely rise in the coming months. Of course we’ve heard this before… but this is consistent with her message that rates would increase “sometime in 2015”, albeit this would be at the central bank’s last policy meeting of the year on December 15th. So it appears the proverbial can has now arrived at the end of the road! The topic of increasing rates is a very complicated one as it affects the framework of the entire economy, especially the real estate market. As interest rates rise the “affordability” of purchasing a home declines. This is because the purchase of a new home can usually be simplified into two major costs:

• market value of the property

• cost of financing (debt)

Most of the population has a fixed monthly amount they can spend on housing. So when interest rates rise, the monthly mortgage payments on a new or variable loan increases, meaning you can now only afford to take out a smaller loan amount (which for most means purchasing a less expensive home). However, in an economy with healthy underlying fundamentals this should not actually be a problem as individuals are now better off (with greater purchasing power) than they were in the recent past. There has been much debate over whether the country can handle this rate increase as some argue the economy is still in a fragile state (keep in mind rates are expected to rise to a level well below historic averages).

Since many have been arguing on both sides as to whether the economy is healthy enough to warrant an increase in interest rates, I’ve decided that instead of giving you an opinion, I’d prefer to deliver some facts. You’re welcome to attach any caveats to this data that you’d like to. You can qualify some or all of it and even speculate as to when any of these trends may end. I’d like to leave that completely up to you.

Fact 1: The US job market is showing signs of being the healthiest it’s been in a long time. The US economy added more than two million net new jobs. This included the best 90 gain of jobs since 1997 and we are on pace to match 2005 hiring. In addition, 2014 was also one of the strongest months for job creation in nearly two decades. During the year, the cost of living has only risen 1.7% while wage growth has surpassed it, rising by 2.5% (this means real wage increases).

Fact 2: Consumer confidence has amassed to its highest level since before the Great Recession. Consumers are also now saying that their “present condition” is the best it’s been since January 2008.

Fact 3: To back up the increase in confidence, 96% of Americans with 401k savings accounts are now actively participating in their plans with an average savings rate of 12%. Among employees that have been contributing for more than ten years, the average balance is $251,600, up 12% from the end of 2014. The average balance among all 401k accounts recently reached levels exceeding $100,000 which has doubled since the end of 2008.

Fact 4: All of this translates into an all-time high for US household net worth which is at an incredible $81.5 trillion (this includes all stocks, bonds, properties and business values, minus any debts or liabilities).

So now time for what really matters here at Loan Ranger Capital. How does this translate into real estate? Loan demand continues to grow at a healthy pace in 2015 for both commercial and residential. This is due to an increased willingness to lend by banks coupled with consumer confidence. Strong fundamentals and demand for housing have caused single-family housing starts to jump 6.5% above their forecast, to an annual pace of 1,026,000 (near the historic average for starts). There’s also more on the way as single-family home building permits rose 5%.

Given the information age we live in, you can see there is a large amount of data to support the health of the overall economy, including the real estate market. Thank you all for reading and hope everyone enjoys the upcoming Thanksgiving holiday!

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