For 2016 experts predict rents will rise faster than inflation, increasing around 3%-5% on a national level.
“We are already in a rental affordability crisis, and 2016 won’t let up,” said Svenja Gudell, chief economist at Zillow.
In the years following the financial crisis, vacancy rates have plummeted as demand for renting rose, sending rents soaring.
While new construction will bring new rental units on the market, it isn’t likely to keep up with growing demand. Vacancy rates are so low in many places that it’ll take at least a year for supply to catch up to demand, according to research from Yardi Matrix. Plus, new inventory tends to be high-end, which won’t be much help with rental affordability.
Experts generally recommend keeping your housing costs around 30% of your monthly income. But the number of “cost-burdened” tenants — those who spend more than 30% of their income on rent — rose to 21.3 million people last year, according to Harvard’s Joint Center for Housing Studies.
Of those, more than 26% are “severely cost burdened” and spend more than half of their income to cover rent.
Here’s the problem: rents are increasing much faster than wages. Inflation-adjusted rents increased 7% from 2001-2014 while household incomes dropped 9%, the report showed. At the same time, rising demand for rental units has pushed the national vacancy rate to a 30-year low, driving prices even higher.
“These trends have led to record numbers of renters paying excessive amounts of income for housing, with little prospect for meaningful improvement,” the report said. The median rent for a new apartment climbed to $1,372 last year, a 26% increase from 2012.
What Happened to Rates Last Week?
Mortgage backed securities (FNMA 3.50 MBS) gained +67 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to improve from the prior week. 30 year fixed rates fell to their lowest levels of 2016 so far.
The Award for the biggest market moving event goes to Japan. The Bank of Japan shocked the financial markets with an unexpected cut to negative interest rates for the first time ever. It dropped their rate down to -0.1% on excess reserves that financial institutions park at their bank. This is designed to force banks to put that money back to work but instead the banks are taking their cash and putting into U.S. bonds which pay a low yield but provide safety. Hey, a low yield is better than a negative one. This caused a big spike in demand for our mortgage backed securities which caused their prices to rise which means that interest rates decreased.
The Talking Fed: Left their key interest rate Unchanged.
Here are some points of interest from their policy statement
No longer viewing risk as “balanced” between upside and downside which is a significant change in their language.
Labor market has improved but economic growth slowed
Expectations that Inflation will march upward to 2% are reduced.
Said slow and steady pace of future rate hikes
The market is viewing this as telegraphing no rate hike in March and this is generally good for back end pricing but this is basically what was expected and it was not a shock to the system.
We got our first glimpse at the 4th QTR GDP (0.7% vs est of 0.8%) and it was pretty much what the market expected given the recent round of negative manufacturing reports, etc. This is not the final number, it will be revised a couple more times. The business side was the biggest drag as our very strong dollar is simply crushing exports. PCE on a QonQ basis hit 1.2%…a far cry from the Fed’s 2% threshold.
The Chicago PMI for January was a huge beat, coming in at 55.6 vs est of 45.0. Any reading above 50 is expansionary, so a reading past 55 is very strong. But what is really interesting is that this “business barometer” had been trending below 50 which is usually a precursor to a manufacturing recession.
What to Watch Out For This Week:
The above are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages. I will be watching these reports closely for you and let you know if there are any big surprises.
It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets. Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon.
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