The Federal Reserve announced today that it will keep interest rates the same for the second time since beginning its current rate hike cycle aimed at taming inflation last March. The Fed projected that rates will remain higher over the next two years than previously expected, providing some unwelcome news for investors who have been hoping for rates to come down sooner rather than later.
Since last March, the Federal reserve raised the federal funds rate 11 times in an effort to control inflation by slowing the economy, bringing it up from the near-zero levels they hovered at beginning in early 2020. The federal funds rate only technically determines the interest rate at which banks can lend to each other but heavily influences the borrowing costs across the economy. The rise in rates came as the Fed tried to tackle high inflation. The consumer price index (a key economic growth indicator) peaked at 9.1% last June but came in at a more modest 3.7% last month, still well above the Fed’s 2% long-term target. The central bank’s battle on inflation seems to be working but remains far from over.
The Federal Reserve has hinted on one more .25% interest rate hike this year peaking in the 5.50%-5.75% range before starting to lower rates. The updated projections see the Fed funds target rate coming down to 5.1% by the end of next year, and to 3.9% by the end of 2025.
According to analysts, the economic projections released today (Wednesday, September 20) indicate “the Fed is more confident that they can pull off a soft landing and that the economy can withstand higher rates for longer.
By: Matthew Graham
Fri, Mar 17 2023, 4:48 PM
There’s certainly a chicken/egg problem when it comes to interest rate news. Is it the Fed’s decisions that move rates? Or do market forces move rates, thus forcing the Fed to react?
The answer is somewhere in between. If inflation and economic growth were always positive, low, and stable, the Fed would never lift a finger, but they are compelled to act when stability is threatened.
Since March 2020, the Fed has acted quite a bit. They maintained rate-friendly policies for almost 2 years and then got precipitously unfriendly early in 2022. “Unfriendly,” in this case, refers to hiking the Fed Funds Rate and buying fewer bonds on the open market. The combined effect was one of the sharpest rate spikes in history.
Now after more than a year of unfriendliness, the Fed is finally thinking about leveling off and seeing how things play out without too many more rate hikes. They’ve already decreased the pace from 0.75% per meeting to 0.25%.
This isn’t a random decision on the part of the Fed. It comes in response to shifts in inflation data as well as other signs that their unfriendly policies are having an effect on the economy.
The latest sign is the banking drama that has been in the news this week. It began with Silicon Valley Bank last week but spiraled into a bigger problem with the closure of Signature bank over the weekend. Many people have never heard of these institutions, but they now represent the 2nd and 3rd largest bank failure in US history.
Many people have heard of Credit Suisse. While the European institution has been on shaky ground for months, markets nonetheless reacted to news that it too could get swept up in the recent drama. The stock price plummeted almost all week and other European banks moved lower in sympathy.
All of the above contributed to yet another week with an obvious “flight to safety” in the market. In not so many words, this involves selling riskier assets like stocks and buying bonds. When traders buy bonds, it pushes interest rates lower (represented by US 10yr Treasury yields in the chart below), all other things being equal.
Despite the apparent panic in financial markets, the Fed will almost certainly continue to hike rates when it meets next week. It will also almost certainly signal that additional rate hikes are possible, if not probable, and that they depend much more on the path of inflation than on a handful of mismanaged banks experiencing trouble coping with a tough rate environment.
When that happens, keep in mind that the market is less concerned with how the Fed changes rates at the current meeting and more interested in how the rate outlook evolves for the coming months. That outlook is driven by two things: the Fed’s stance on the economy and the economy itself.
By maintaining a tough stance on rates, the Fed makes it harder for the economy to experience strong growth. It also means inflation will have a harder time experiencing a resurgence. That adds up to downward pressure on rates in the longer term.
As for the current week, the drop in rates was driven not only by the flight to safety, but also the expectation that the Fed will be able to start cutting rates by the end of the year. This can be seen in the following chart with September’s Fed Funds Rate expectations falling below March.
Unfortunately for the mortgage market, a classic flight to safety tends to benefit Treasuries first and foremost, even though the 10yr Treasury is often used as a benchmark for mortgage rate movement. Mortgages definitely improved--just not as noticeably as Treasuries.
That's OK though. The most sustainable improvement in mortgage rates is the improvement that happens gradually. The housing market is already responding to the apparent ceiling in rates seen in the chart above. Ever since the highs in late 2022, housing metrics have slowly come off their lower levels, as seen in the latest construction and builder confidence data released this week.
Existing and New home sales will both be released next week for the month of February, but when it comes to market movement and the impact on rates, all eyes will be on Wednesday afternoon's Fed events.
Why events? It's not just the Fed's rate hike that happens on Wednesday. They'll also have quite a few updates to the verbiage of the policy announcement. Those words will help frame the policy path going forward. Markets will get even more clarity and insight from the updated forecasts for future rate hikes (or cuts?) submitted by each Fed member. Those forecasts will likely be at odds with market expectations and it will be interesting to see how the market reacts when confronted with that reality.
Last but not least, every Fed day concludes with a press conference from the Fed Chair. This one will be one of the most important and informative in recent memory as Powell will be forced to choose between policy goals and calming a potentially panicked market.
Inverted yield curve: How it predicts financial disaster
The inverted yield curve is the bellwether for an economic recession. Here’s how it occurs and what you should know and do about it.
Tony Tran
The inverted yield curve is a graph that shows that younger (shorter) treasury bond yields are yielding more interest than older (longer) ones.
And it’s terrifying for financial pundits all over the world. It’s a graph that could mean the difference between a thriving bull market or the downswing of a bear market. AND it’s been known to throw entire economies into a state of abject terror and chaos.
Want to see what it looks like? Okay. Don’t say I didn’t warn you …
While it might not seem like much at first glance, the inverted yield curve is actually the bellwether for an economic recession. You know, that thing that happened in 2008 that was kind of a huge deal?
Luckily, the inverted yield curve is a rare occurrence … BUT it’s useful to know what it means and how to spot one when it happens.
Why? Simple: You don’t want to get swept up in the herd mentality of one, and being able to recognize when it happens is the first step in preventing yourself from making bad decisions based on what everyone else is doing.
So let’s take a look at the inverted yield curve, how it happens, and what it means for you and your finances.
What is an inverted yield curve?
To understand what an inverted yield curve is, you must first understand one of the most basic financial asset classes out there: Bonds.
A bond is like an IOU given to you by a bank. When you lend the bank money, they’ll give you back that same amount at a later time along with a fixed amount of interest.
For example, if you bought a two-year bond for $100 with a 2% annual return on it, that means you’ll get $104.04 back after two years (this accounts for compounding).
Yes, that’s a low return rate. However, bonds have a number of benefits that justify the small rate of return:
They’re an extremely stable investment. This is especially true when it comes to government bonds. The only way you can lose your money with them is if the government defaulted on its loans — which the U.S. government has never done.
They’re guaranteed to have a return. This means that you’ll know exactly how much you’re getting on your ROI when you purchase a bond.
Longer investments yield higher returns. The longer you’re willing to wait on your bond typically means that you’re going to have higher return rates. I say typically because there are exceptions to this (Hint: It has to do with what we’re talking about right now).
And when people refer to inverted yield curves, they’re typically referring to the yields on U.S. Treasury bonds, or bonds guaranteed to investors by the U.S. government.
BONUS: If you want even more information on investment basics, check out Ramit’s video on the hierarchy of investments. Don’t be thrown off by the potato quality of the video — the advice is timeless.
A yield curve graph shows the returns of those bonds (i.e., the yield) based on maturity, or how old the bond is.
A typical one looks like this:
Notice how it curves? That’s why it’s called a yield curve. (Source: money-zine.com)
The above is a normal yield curve. It shows that older bonds have higher interest rates and will yield more than younger ones.
On the other hand, an “inverted” yield curve looks like this:
This occurs when the curve inverts or goes the other way. It shows that younger bonds (i.e., bonds that are two years or less) yield more in interest than older ones. This shows the lack of investor confidence in older bonds and is a good indicator that a recession is incoming (more on that soon).
You can find the daily fund rate straight from the U.S. Department of Treasury itself here and chart it out here (you’ll need Flash).
But a yield curve doesn’t invert on its own. Let’s take a look at a few elements that are needed for an inverted yield curve to occur.
How does an inverted yield curve happen?
Humans are more motivated by a fear of loss than anything else. This is a psychological phenomenon called “loss aversion.” When the possibility of loss comes up, we get scared. We remember the things we’ve lost more acutely than what we’ve gained (just ask any gambler). When we’re scared we tend to make weird decisions like selling off all of our investments due to a dip in the markets or splitting up the group in a haunted house so the murderer can pick you off one by one.
When it comes to a recession, many investors will start to invest in long-term U.S. Treasury bonds as it approaches — since they know that the interest rates on other assets like stocks will soon drop.
As more and more people begin to buy long-term bonds, however, the Federal Reserve responds by lowering the yield rates for those securities. And since people aren’t buying a lot of short-term U.S. Treasury bonds, the Fed will make those yields higher to attract investors. To recap:
Bonds are considered safe.
People who are not confident in the market will move more money into bonds.
With more people investing in bonds, their return rate goes down.
This is basic supply and demand. The less people want a bond, the more financial institutions like the Fed are going to make that bond appealing to investors.
A great example of a yield curve inverting occurred before the 2008 housing market crisis in December 2005 — almost three years before the crash. The Fed raised the federal fund rate to 4.25% due to a number of factors. Mainly, they were aware that there was a growing price bubble within certain assets like housing, and they were concerned that low interest rates were causing this.
So when the fund rate was raised to 4.25% in 2005, it caused the two-year U.S. Treasury bond to yield 4.4% while the longer term seven-year bond only yielded 4.39%. Soon the curve began to invert more and more as the recession began approaching and investors continued to invest more heavily into longer-term bonds.
Eventually, the United States found itself thrown into a recession after the housing market crash roughly two years later.
Note: The inverted yield curve wasn’t the cause of the recession but rather a symptom of it. Think of the inverted yield curve as a cough or fever in a greater sickness.
The last seven recessions the country has seen were preceded by an inverted yield curve — and many experts agree that another inversion of the yield curve could be on its way.
While the inverted yield curve is a great indication that there’s a recession and a subsequent bear market is on the way, what does that mean for you? What should a typical non–Wall Street, every-person do when you see a headline like this?
By Josh Cohen
In 2016 and 2017, the California state legislature passed a slew of reforms reducing regulations on accessory dwelling units (ADU) such as basement apartments, garage conversions and backyard cottages. The reforms address ADU parking requirements, the permitting process, design requirements, fees and more. The state sees ADUs as a small part of a broad effort to address its housing crisis as demand outpaces housing supply and housing costs rocket ever higher.
It’s too early to see the impacts of the ADU reforms on the ground, but there’s already been a massive uptick in ADU permit applications in many California cities. In December, researchers at University of California Berkley’s Terner Center for Housing Innovation released a report looking at ADU applications from 2015 through 2017 to understand how the regulatory changes are spurring ADU construction.
“I expected to see a jump, given the recent legislation, but I didn’t expect to see such a dramatic jump,” says report author David Garcia, Terner Center’s policy director. “California basically legalized ADUs throughout the state on January 1, 2017. It turned out, there was quite a pent-up demand from homeowners.”
Los Angeles saw the most dramatic jump, from 90 applications in 2015 and 80 in 2016 to a whopping 1,970 applications as of November 2017. Oakland, which had 33 and 99 applications in 2015 and 2016, jumped to 247 in 2017. Long Beach had zero applications in 2015 and just one in 2016. In 2017, it had 42. San Francisco has been experimenting with looser ADU regulations since 2013, but still saw applications increase from 384 in 2016 to 593 in 2017.
The legislation did several important things to encourage ADU construction. For one, it made ADUs legal in all California cities. It also established design standards that, when met, allow ADU development to receive “ministerial approval” instead of discretionary approval. In other words, ADU builders can apply for and receive construction permits over the counter at their city planning office, instead of seeking approval from a design commission or city council. When the proposed ADU is located within a half-mile of transit, is in a designated historic district, is attached to the existing unit and in several other instances, homeowners are not required to build an off-street parking space for the ADU. The 2016 legislation also creates a path for illegal ADUs to become official. In Los Angeles, for example, there may be as many as 50,000 unpermitted ADUs.
Garcia says it’s two reforms—easier permitting and reduced parking requirements—that have had the biggest impact on the increased ADU applications. Time is money in housing construction, and complicated permitting delays the process. Similarly, the parking requirement adds construction cost and complexity to projects. For would-be ADU builders, that can be a deal breaker, Garcia explains. “ADUs are not driven by big real estate companies. They’re driven by homeowners.”
Though ADUs are just a small part of the housing crisis solution, some housing advocates such as Stuart Cohen are excited to see an easier path to their construction. Cohen is executive director of TransForm, a nonprofit focused on transportation, housing and sustainability issue in California. He says, “I think they fit a very important niche [in the housing market]. ADUs are naturally on the lower end of the cost spectrum, so part of solving the affordability crisis is having more ADU construction.”
Still, Cohen says it’s important to remember, “there’s no substitute for having a massive infusion of funding and construction of dedicated affordable housing. ADUs are a great complement to, not a replacement for that funding.”
ADUs are rarely used as subsidized affordable housing. But because of their size, cost of construction and the fact that they’re usually built by individual homeowners instead of development companies, ADUs are often rented at below market rate. Another Terner Center report from 2017 found that 58 percent of ADU owners rent their units at below-market rates.
According to a recent New York Times report on California housing, more than half the land in both San Francisco and Los Angeles is filled by neighborhoods in which 90 percent of the housing is single family homes. Most California cities have similarly prevalent single-family zoning. ADUs could greatly increase the housing stock in those zones.
Though there are fewer barriers to ADU construction now, Garcia and Cohen still want to see future reforms. They say size and setback requirements for detached ADUs need to be clarified. Because the rules are still “fuzzy,” Cohen says it can still be difficult for builders to get that over-the-counter approval.
In some cities, detached ADUs are still subject to many of the same fees as a much larger, single family home, such as impact fees, utility fees and school district fees. Garcia says adjusting fees and building codes to account for the fact that ADUs are far smaller and often have fewer people living in them than typical single-family homes will further bolster the ADU boom.
Finally, Garcia wants to see a change to owner-occupancy rules. Currently, California requires homeowners to live on site in the main dwelling in order to build an ADU. He points out that there are many single-family homes on the rental market already on lots that could also house an ADU. But under current law they cannot.
According to the Terner Center report, it takes 18 months or less to take the majority of ADUs from design to completion. Though some cities such as San Francisco that loosened ADU regulations before the state are already seeing the uptick in finished ADUs, the wave of new units spurred on by the change in state law should begin midway through 2018.
For a cost and benefit analysis please contact narbik@benegroupinc.com
Freddie Mac announced today that, going forward, not every application for a purchase mortgage will necessarily trigger an appraisal. A new automated alternative to traditional appraisals, which the company introduced for refinances in June, will soon be available for purchase mortgages. It may save borrowers in some instances as much as $500, and reduce their wait to close a loan by seven to ten days.
Freddie Mac's automated collateral evaluation (ACE) uses a proprietary model to assesses the need for an appraisal by using data from multiple listing services, public records, and information on historical home values to determine collateral risks. Lenders must submit loan data through Freddie Mac's Loan Product Advisor to determine if a property is eligible for ACE. ACE will be available for qualified home purchases beginning on Sept. 1, 2017.
"By leveraging big data and advanced analytics, as well as 40+ years of historical data, we're cutting costs and speeding up the closing process for borrowers," said David Lowman, executive vice president of Freddie Mac's Single-Family Business. "At the same time, we're providing immediate collateral representation and warranty relief to lenders. This is just one example of how we are reimagining the mortgage process to create a better experience for consumers and lenders."
If ACE determines that the estimated value of the home provided by the lender is acceptable, the lender may receive immediate representation and warranty relief related to the value, condition and marketability of the property upon delivery of the loan to Freddie Mac.
"When we launched Loan Advisor Suite in July 2016, we set out to give our customers certainty, usability, reliability and efficiency," said Andy Higginbotham, senior vice president of strategic delivery and operations for Freddie Mac's Single-Family Business. "ACE is our most recent capability to deliver on that vision."
by: Jann Swanson
Aug 18 2017, 10:30AM
Mortgage rates fell yesterday in response to a tweet about president Trump disbanding his councils of CEOs. Twitter was in play again yesterday. This time around it was Gary Cohn, Trump's economic advisor. Rather, it was rumors of Cohn's departure that sent financial markets into a tail-spin. Terror attacks in Spain may have played a supporting role. The net effect was heavy losses for stocks and solid gains for bonds. Markets opened down this morning as well. When bonds improve, rates fall. The 10-Year Treasury Yield which is an important gauge for mortgage rates dropped this morning to 2.19%. This is only the second time since the elections we have experienced the 10-year Treasury bond drop below 2.2%. It also happened in June, 2017. It reached as high as 2.6% in mid-March 2017.
Mortgage rates dropped today after news broke (first rumors, then confirmation via Twitter) that President Trump was disbanding his councils of CEOs. The move apparently came in response to attrition among several CEOs following Trump's press conference on recent events in Charlottesville, VA. In not so many words, Trump disbanded the councils before any more CEOs had a chance to quit.
Political turmoil--especially that which appears "anti-business" in any way--always runs the risk of hurting stocks and helping bonds. That's exactly what happened today. "Helping bonds" in this context means higher demand for bonds among investors. Excess demand for bonds pushes rates lower.
The market reaction to the Trump news overshadowed what was set to be the day's big-ticket event up to that point--the release of the Minutes from the most recent Fed meeting. The Minutes ended up being fairly tame--especially for those who'd tuned in to most of the recent Fed speeches (which, over the past 3 weeks, have largely reiterated views stated in today's Minutes). In other words, the Fed Minutes were old news, and they did nothing to stop the positive moves in bonds.
Rates ended the day back at 2017's lows, but only after a throng of mid-day price improvements from mortgage lenders. The average lender is right in line with last week's best levels.
Mortgage rates continued higher today as markets reacted to news that North Korea would tactically abstain from launching a nuclear attack on Guam. Markets took solace in the absence of global nuclear war by buying stocks and selling bonds. Buying stocks and therefor selling pressure in bonds pushes rates higher. Strong economic data in the morning only added to bond market weakness by shifting investors towards the stock market.
Fortunately, movement in rates continues to be rather flat by historical standards. Most consumers would still be seeing the same rates quoted today that were available last Friday (which were the lowest since November 2016).
Using money to free-up time is linked to increased happiness, a study says.
In an experiment, individuals reported greater happiness if they used £30 ($40) to save time - such as by paying for chores to be done - rather than spending the money on material goods.
Psychologists say stress over lack of time causes lower well-being and contributes to anxiety and insomnia.
Yet, they say even the very wealthy are often reluctant to pay people to do the jobs they dislike.
"In a series of surveys we find that people who spend money to buy themselves more free time are happier - that is they have higher life satisfaction," said Dr Elizabeth Dunn, a psychologist professor at the University of British Columbia, Canada.
Rising incomes in many countries has led to a new phenomenon. From Germany to the US, people report "time famine", where they get stressed over the daily demands on their time.
Psychologists in the US, Canada and the Netherlands set out to test whether money can increase happiness levels by freeing up time.
More than 6,000 adults in the US, Canada, Denmark and the Netherlands, including 800 millionaires, were asked questions about how much money they spent on buying time.
The researchers found that fewer than a third of individuals spent money to buy themselves time each month.
Those who did reported greater life satisfaction than the others.
The researchers then devised a two-week experiment among 60 working adults in Vancouver, Canada.
On one weekend, participants were asked to spend £30 ($40) on a purchase that would save them time. They did things like buying lunches to be delivered to work, paying neighbourhood children to run errands for them, or paying for cleaning services.
On the other weekend, they were told to spend the windfall on material goods. Material purchases included wine, clothes and books.
The research, published in the journal, Proceedings of the National Academy of Sciences, found time saving compared with material purchases increased happiness by reducing feelings of time stress.
"Money can in fact buy time. And it buys time pretty effectively," said Prof Dunn, who worked with colleagues at Harvard Business School, Maastricht University and Vrije Universiteit Amsterdam.
"And so my take home message is, 'think about it, is there something you hate doing that fills you with dread and could you pay somebody else to do that for you?' If so, then science says that's a pretty good use of money.''
The psychologists say the study may help those who feel obliged to do a "second shift" of household chores when they come home from work.
"I think our work perhaps provides an escape route out of the second shift," Prof Dunn added.
Past research has found that people who prioritise time over money tend to be happier than people who prioritise money over time.
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According to Fannie Mae:
"Based on an analysis of recent loan casefiles submitted to DU, the new risk assessment is expected to increase the percentage of Approve/Eligible recommendations lenders receive, specifically those with debt-to-income ratios between 45% and 50%."
A Summary Of The Updates Include:
These changes (DU 10.1 which was released in July 2017) will allow more people to qualify for larger loan amounts while it makes the process a little easier.