Lee Morof's Real Estate Blog

The minutes of the Fed’s Federal Open Market Committee (FOMC) indicate that Fed policymakers aren’t concerned about low inflation rates as an obstacle to raising the target federal funds rate.

The national inflation rate was 1.50 percent for the 13 months ending in October. The inflation rate as reported in the Consumer Price Index (CPI) dropped to 1.25 percent in November.

The Core Consumer Price Index, which excludes food and energy sectors, showed an inflation rate of 1.75 percent. The Fed has repeatedly cited a target of 2.00 percent inflation, but inflation rates have remained consistently lower.

Recent freefall in fuel prices is keeping inflation below the Fed’s target range, although long-term indicators for inflation remained stable.

Fed Says Economy Increasing at “Moderate Pace”

Committee members noted that economic conditions improved at a moderate pace during the fourth quarter and that labor conditions also showed additional improvement. Non-farm payroll reports expanded in October and November and exceeded third quarter growth rates.

The national unemployment rate edged down to 5.80 percent in October and held steady in November. FOMC members established a national unemployment rate of 6.50 percent as a target rate for removing accommodative measures such as its asset purchase program that concluded in October.

Labor force participation rose, while the number of those under-employed in part time jobs declined.

Private sector hiring and quits increased, although job openings remained elevated in November and maintained levels seen in September and October. Stronger labor markets typically support housing markets as more families can afford to buy homes when hiring and employment rates are stable.

Housing Markets Remain Slow; May Inspire Would-be Buyers

The FOMC minutes noted that committee members viewed housing markets as housing starts and building permits saw slight increases. Construction of single-family homes increased while multi-family construction decreased. Ongoing shortages of rentals are seen as a factor driving renters into the housing market.

Sales of new and existing homes rose “modestly” in October. Slowing home sales will likely drive prices down as inventories of available homes increase. Mortgage rates are expected to rise, but analysts don’t expect mortgage rates to rise much beyond five percent, which remains historically low.

In spite of low mortgage rates, the Fed characterized mortgage refinance activity as “subdued” and said tight mortgage credit conditions continue to inhibit mortgage approvals for all but those with “pristine” credit.

Surveys of economic and financial analysts indicated that the Fed may raise its target federal funds rate mid-year instead of initial projections for raising the rate in late 2015. The target federal funds rate is currently 0.00 to 0.25 percent.

Last week’s economic reports related to housing and mortgages were few, but construction spending, the Fed’s Beige Book report, non-farm payrolls and the national unemployment report indicated trends for the end of the year.

Construction Spending Increases

U.S. construction spending rose by 1.10 percent in October according to the Commerce Department. This reading translates to a seasonally-adjusted annual rate of $971 billion. Analysts had expected an increase of 0.70 percent based on September’s original reading of -0.40 percent, but September’s reading was revised to -0.10 percent on Tuesday. Private spending on residential projects increased 1.30 percent.

Federal Reserve Beige Book Indicates Economic Improvement, or Not

Oil prices were cited by participants in the Federal Reserve’s survey of regional business leaders; Texas and the Gulf coast areas noted that falling oil prices were a threat to those economies, while other participants said that lower prices at the gas pump were putting more cash in consumers’ pockets. The report noted upward pressure on both minimum wages and higher wages for skilled workers. Wages have remained mostly flat while consumer costs have increased; higher wages can provide more discretionary income for consumers and may build confidence for would-be home buyers that have been waiting for more positive economic trends.

Freddie Mac: Mortgage Rates Down

Freddie Mac’s weekly survey of average mortgage rates brought good news for home buyers and homeowners seeking to refinance their mortgages. The average rate for a 30-year fixed rate mortgage fell from 3.97 percent to 3.89 percent. The average rate for a 15-year fixed rate mortgage fell to 3.10 percent from last week’s reading of 3.17 percent and the average rate for a 5/1 adjustable rate mortgage dropped to 2.94 percent from last week’s reading of 3.01 percent. Average discount points were unchanged for all loan types at 0.50 percent.

Labor Data Mixed, Unemployment Rate Unchanged

Weekly jobless claims beat expectations by 1000 fewer jobless claims with a reading of 297,000 new claims against expectations of 298,000 new claims. The prior week’s reading was higher at 314,000 new jobless claims. The Commerce Department also released Non-Farm Payrolls figures for November with 321,000 jobs added against expectations of 235,000 jobs added and October’s reading of 243,000 jobs added. Holiday hiring and climate related slowdowns are expected to impact year-end labor statistics. Analysts prefer to look at trends occurring over several months to determine labor trends.

What’s Ahead

Next week’s scheduled economic news includes reports on November retail sales and consumer sentiment in addition to Freddie Mac’s mortgage rates survey and the Commerce Departments weekly jobless claims report.

Last week’s housing-related economic news was slim, likely due to the Labor Day holiday Monday. On Tuesday, the U.S. Commerce Department reported that construction spending for July increased by 1.80 percent as compared to June’s revised reading of 1.0 percent and expectations of a 1.0 percent increase for July.

The Federal Reserve released its Beige Book report Wednesday; the collection of anecdotes from business contacts within the 12 Federal Reserve districts indicated that the general economy was strengthening as well as labor markets. The Fed noted a shortage of skilled workers. New construction and home sales grew modestly, but the Fed reported that fewer than half of the districts reported growth in real estate activity.

This information appears to be consistent with recent media reports of falling home sales, mortgage originations and demand for homes. Analysts say that mortgage lenders remain wary of loosening mortgage credit standards without protection from having to repurchase faulty mortgages from Fannie Mae and Freddie Mac.

Mortgage Rates Saw Little Change

Freddie Mac reported that average mortgage rates and discount points saw little change last week. The average rates for a 30-year mortgage and a 5/1 adjustable rate mortgage were unchanged at 4.10 percent and 2.97 percent respectively. Discount points were also unchanged at 0.40 percent. The average rate for a 15-year fixed rate mortgage fell by one basis point to 3.24 percent with discount points also lower at 0.50 percent.

Non-Farm Payrolls Add 142,000 Jobs, Unemployment Rate Unchanged 

The Bureau of Labor Statistics Reported that 142,000 new jobs were added in August. Analysts had expected 228,000 new jobs added, but many analysts said that the abrupt decline in jobs added was a fluke. A couple of short-term incidents impacted retail and automotive sectors as a supermarket chain cut hours and fewer July layoffs in the automotive sector led to fewer workers called back in August. The unemployment rate remained at 6.10 percent.

Weekly jobless claims rose to 302,000 against expectations of 300,000 new jobless claims and 298,000 new jobless claims in the prior week.

What’s Ahead

This week’s scheduled economic news is also light on housing and mortgage reports. Retail spending, consumer credit, and federal budget data are some of the reports set for release.