Three Positive Signs For Housing Accompany Lukewarm Fed Report

By Ryan Dosen

 

Federal Reserve Chairwoman Janet Yellen gave her semi-annual testimony earlier this week before the Senate Banking, Housing and Urban Affairs Committee. The tone of Yellen’s talk could be described as guardedly optimistic.

The Fed Chair said that the financial markets remained in reasonable health, but that “too many Americans remain unemployed, inflation remains below our longer-run objective, and not all of the necessary financial reform initiatives have been completed.”

Against this hard-to-read backdrop of larger economic news, several pieces of good news for the housing market surfaced this week.

 

The Fed to Keep Interest Rates Low

While taking note of several positives from the economy, the Chair reiterated the need for continued Fed assistance and the maintenance of near-zero short term interest rates to help ensure the economy and job growth continue to improve.

A recent House bill has been introduced that would require the Fed to adopt a mathematical model by which its interest rate decisions would have to be based. When pressed about the issue, Yellen was uncomfortable with committing to tie her own hands to a formula. She stated that “[i]t would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule…. It is utterly necessary for us to provide more monetary-policy accommodation than those simple rules would have suggested.”

The good news for the real estate market is that the Fed wants to keep rates down for a while longer. If the Fed keeps short-term rates low for the time being, that should keep home mortgage rates down as well, allowing home buyers more freedom in the real estate market.

 

Household Debt Drops

The Fed measures two ratios that are helpful in determining how well Americans are managing their debt: the Household Debt Service Ratio (DSR) and the Financial Obligations Ratio (FOR).

The DSR is the ratio of total required household debt payments to total disposable income.  According to the Fed, “the DSR is divided into two parts. The Mortgage DSR is total quarterly required mortgage payments divided by total quarterly disposable personal income. The Consumer DSR is total quarterly scheduled consumer debt payments divided by total quarterly disposable personal income. The Mortgage DSR and the Consumer DSR sum to the DSR.”

The Financial Obligations Ratio is an estimate of the ratio of debt payments to disposable income.  The FOR is broader than the DSR and also includes rent payments on tenant-occupied property, auto lease payments, homeowners’ insurance, and property tax payments.

FOR and DSR peaked in 2007, at the height of the real estate bubble, at about 18% and 13%, respectively. Those numbers are now down near their lows from almost 30 years ago, at around 15.5% and 10%, respectively.

This all means that Americans have really made great strides in getting their debt levels under control. With debt levels dropping and more homes coming out from under water every day, we look to see more and more people getting off the fence and making that next home purchase.

 

“Big Short” Guru Paulson Sees Homes as “Best” Investment

Hedge fund manager John Paulson turned himself into a billionaire by making sophisticated bets against mortgage-backed securities and subprime mortgages before the recent real estate collapse. Paulson was made famous in Michael Lewis’ bestseller “The Big Short,” which detailed how people going bad on subprime loans caused his credit default swap investments to net him personally over $4 billion.

Paulson continues to do very well for himself. He heads Paulson & Co., a New York-based investment management firm, and Forbes estimates his net worth now at $13.5 billion.

Paulson spoke about the housing market earlier this week on CNBC. The man who made billions by once being a real estate pessimist now says that buying a house is “the best deal investment you can make.” Paulson says that “today, financing costs are extraordinarily low … [and] the cost of owning is somewhat less than the cost of renting. And if you rent, the rent goes up every year. But if you buy a 30-year mortgage, the cost is fixed. So, I think [buying a house] is still a very attractive investment.”

 

An Improving Situation

Our economy continues to improve and Mother Yellen isn’t taking any chances. She’s committed to staying the course until the economy is back where we want it. Staying the course means keeping rates down and keeping homes affordable. Staying the course is good news for the real estate market; but, the good news is only truly good if people take advantage of the friendly rate conditions.

 

About Ryan Dosen

Ryan Dosen manages The Wayne Megill Real Estate Team of Keller Williams Brandywine Valley in West Chester, PA. For buyer or seller representation, or for more perspective on the local and national real estate market, please email rdosen@megillhomes.com and visit The Wayne Megill Team blog at http://www.PAHomesAndRealEstate.com.