Finance

Good Time for Investors as Mortgage Rates Falling

Appfolio, May 20, 2014

On Friday, May 16 the economic numbers turned Goldilocks-style “not to cold and not too hot”, and property managers need to be on top of these developments.

First of all, the interest rate on the benchmark 10-year U.S. Treasury bond dropped to 2.5% from 2.7% in just one week’s time. That’s a 7.4% plunge, and the big story here is that mortgage rates will drop too.

That’s because interest rates on mortgages are tied directly to the 10-year bond. So look for at least a 20 basis point drop soon, and maybe as much as a quarter of a percent.

Average U.S. rates on fixed mortgages declined this week for the third straight week. The lowered rates could give a boost to the spring home-buying season, which is off to a slow start.

Mortgage buyer Freddie Mac said May 15 that the average rate for a 30-year loan dropped to 4.20 percent from 4.21 percent last week. The average for the 15-year mortgage fell to 3.29 % from 3.32%.

Mortgage rates have risen nearly a full percentage point since hitting record lows about a year ago. By May 23 I anticipate the 30-year mortgage to be at 4.0% and the 15-year to be slightly above 3%.

This should help existing home sales and take some pressure off the rental market that has overheated in many regions. It should also help your clients to get better rates to buy more rental properties.

Meantime, U.S. consumer sentiment fell in May amid concerns over income growth. The Thomson Reuters/University of Michigan’s preliminary reading for May on consumer sentiment was 81.8, down from 84.1 the month before. Economists expected the index to have improved.

The sentiment news coincided with a report from The New York Fed. The Quarterly Report on Household Debt and Credit for the first quarter of 2014, showed a $129 billion increase in overall household debt from the previous period.

Delinquency rates continued to improve, with the overall ninety-plus day delinquency rate falling to 4.8 percent, the lowest it has been since mid-2008. By the end of the first quarter, U.S. households were $11.65 trillion in debt. The fastest growing debt category: student loans, which top $1 trillion.

Pew Research reported recently that four in ten U.S. households (37%) led by an adult younger than 40 have student debt. Households with student loan debt have a median net worth of $8,700 compared to $64,700 for households without student debt.

On a positive note, U.S. housing starts increased to a seasonally adjusted annual rate of 1.072 million in April vs. the average economist’s expectation of 980,000. Building permits rose to an annual rate of 1.08 million vs. the consensus target of 1.01 million.

“Today’s report on US housing starts should help to assuage FOMC [Federal Reserve] concerns that housing activity was flattening out as opposed to gradually recovering after successive adverse shocks from higher mortgage rates last year,” said Michael Gapen, Barclays Capital’s chief U.S. economist.

The bottom line for those in the property management and residential rental industry is that the economy has cooled for now. Most residents carry a load of debt (thus the need for careful credit screening) but interest rates are falling again.

The months ahead may see an increase in vacancies as people relocate during the summer, but there will also be a robust number of prospective residents looking for well-maintained units to rent.