As you might expect with a white-hot market, buyer competition and escalation clauses are driving prices skyward. We blasted through the $300 per foot mark a couple weeks back, and look to be at $325 per sq foot in the next week or so. Thought: If the cost to build new is about $125 per sq foot…eventually we’re going to get to a point where even fewer people are going to want to sell. Instead of buying a move-up home, people will just tear down or renovate their current one – this will further decrease potential new inventory moving forward.
Combine that thought of building new for about $125 per sq foot with Fannie Mae’s new guidelines a few months back where proposed rental income can be used to offset a current mortgage (thus, allowing current homeowners to keep their homes and buy another one instead of being forced to sell it); and I don’t see any inventory relief coming to Seattle anytime soon. It’s beginning to look like a downward spiral for inventory…which should make builders happy, and the Seattle economy chugging along for quite some time.
Mortgage interest rates were the victim of some pretty good news last week on the two fronts that have been driving them lower since the start of 2016 – 1) Oil prices rose, and are trading at $36.98 per barrel as I write this; and 2) domestic economic news was positive in the face of global turmoil.
Oil prices continued rising last week despite an EIA reading of over 10m barrels added to inventories. The reason: US oil production is down (because so many oil rigs have had to shut down due to the low oil prices), and Venezuela may get shut out of the global oil market if they default on their debt…which it looks like they might. There were conspiracy theories that Saudi Arabia has been driving down oil prices to kill off some of the weaker producers so that the price of oil would stabilize and remain high in the long run. It looks like their hopes may be coming to fruition. The price of oil has become an important topic as of the last few months. The lower it goes, the more it hurts US companies and our economy. When the price of oil falls, fears arise, and investors park their money in the mortgage bond thus lowering mortgage interest rates. However, when the price of oil rises, economic fears lesson, and investors take their money out of the mortgage bond to invest is other higher risk/higher return assets. This, in turn raises mortgage interest rates.
On the jobs front last week, the Bureau of Labor Statistics reported that US Payrolls increased by 242,000. This was much higher than the forecast of 190,000. Not only that, but unemployment is at 4.9%; the labor force participation rate increased to 62.9% (highest level in just over a year); and the employment-to-population ratio increased to 59.8% (the highest since April 2009). This is great news for the US economy! And surprising as well – People’s worst fears over what the fallout would be by lower oil prices putting oil workers out of work, and the slowdown in China have at least been quelled for now by this outstanding employment report.
We’ll see what happens moving forward, but at least for now, sentiment is starting to change, and mortgage interest rates are starting to trend higher as a result.
Today's blog courtesy of Kyle Berquist, Guild Mortgage Company