How America’s Current Deficit May Impact Interest Rates

At the end of this spring, the average US rate for a 30-year fixed mortgage fell to 3.23%, the lowest ever recorded by Freddie Mac in a series that goes back to 1971. At the beginning of June, the rate had climbed to just 3.61%.
The question now is: How long will these historic lows exist?
The Drivers Of Interest Rates
It all depends on the inflation rate, or the main driver of interest rates. As in the case of the 30-year mortgage rate, the US economy is experiencing the lowest inflation period in decades.
Source: U.S. Bureau of Labor Statistics, Board of Governors of the Federal Reserve System, FRED
Inflation is the increase in the prices of goods and services over time, and is primarily driven by four factors:
  • A Growing Economy
A strong and expanding economy usually means that people can get better jobs, make more money, and thus spend more. 
  • Expected/Built-In Inflation
Rising prices cause consumers to expect inflation. Consumers may choose to spend more now, instead of in the future to avoid higher costs. Expected or built-in inflation boosts economic growth even more.
  • Discretionary Fiscal Policy
Inflation is impacted when the government spends more or taxes less. The 2017 Tax Cuts and Jobs Act and the most recent stimulus bills in response to the pandemic are prime examples.
  • Excess of Money Supply
The money supply increases through either expansionary fiscal policy or expansionary monetary policy. The money supply not only includes cash, but also debt such as credit, loans, and mortgages.
The Influence Of Policy & Supply
While COVID-19 has hit the brakes on the US economy and pushed the unemployment rate to its highest level (13.3%) since the Great Depression and the annual inflation rate down to just 0.1% (May 2020), fiscal and monetary policy present a growing concern and could push interest rates higher.
Forced to stimulate the economy, the government’s 2020 budget deficit is projected to reach $3.8 trillion (another historical record), pushing the national debt to a level higher than the record set just after World War II.
COVID-19 has also exposed the vulnerabilities of complex global supply chains. This has been particularly true in the healthcare sector, where the scramble for protective equipment has laid bare the inherent risks of inventory and single-sourcing models driven exclusively by cost control.
The impact of China’s lockdown and its dominance in key areas of manufacturing have further highlighted the problem with modern supply chains. When Chinese factories closed, manufacturers struggled to pivot due to a lack of flexibility in their supplier base. One likely consequence is that global firms will diversify their supply chains in the future, instead of relying only on China.
Future Projections
We may also see a decentralization of manufacturing capacity, with companies looking to bring production home. While these moves will help correct some of the vulnerabilities of global supply chains, should US manufacturers bring some of their production home, the country’s higher labor costs will mean higher inflation which will increase interest rates.
Adding to these concerns is a renewed push to privatize Freddie Mac and Fannie Mae; the government-sponsored agencies created to provide liquidity to the mortgage market. While the proposal still has a long way to go, if successful, it would result in higher loan fees and higher interest rates.
Can We Help?
With current rates at historical lows and an uncertain future ahead, it may be the best moment for you to refinance or purchase a new home.
Julie and her team are ready to help. With two decades of experience, expert market insight, and access to a qualified network of mortgage lenders, our team will ensure the success of your next move.
Please contact Julie at 650.799.8888 or to schedule a free consultation.

A Primer On Home Evaluation Tools

Advances in information technology, artificial intelligence, and algorithms have given rise to a number of online home valuation tools. Most major online real estate databases have some tool or another, but they all seem to give varying estimates of the same property. This raises quite a few questions from many of our sellers, including “How do they work? Are their estimates accurate? Is there a better alternative?”


How Do They Work?

Every tool has its own algorithm and criteria by which it filters its estimate. For example, Zestimates®, the assessment tools used by leading real estate marketplace Zillow, are perhaps some of the most useful starting points to help you obtain an independent, unbiased assessment of what your home might be worth in today’s market.

Zillow cranks out Zestimate home valuations for close to 100 million homes across the country. Its platform utilizes millions of statistical and machine-learning models, reviewing hundreds of data points for each individual home. To calculate one Zestimate, Zillow uses a sophisticated algorithm, incorporating data from county and tax assessor records with direct feeds from hundreds of multiple listing services and brokerages. The Zestimate also factors in features unique to the home, like:

Square footage, geographic location/proximity, and the number of bathrooms and bedrooms.
Selling-points like hardwood floors, granite countertops, or a landscaped backyard.
On-market data, including listing price, description, comparable homes nearby, and the days they’ve been on the market.
Off-market data, including tax assessments, prior sales, and other publicly available records.



Are Their Estimates Accurate?

The Zestimate’s accuracy is computed by comparing the final sales price to the estimate published by Zillow on or just prior to the sale date. It also depends on the location and availability of data in an area. Some areas have more detailed home information available; others do not. The more data available, the more accurate the Zestimate value will be. For San Francisco, for example, Zillow has valuation data for over eight thousand homes, 86% of which fell within 10% of the final selling price.

Besides providing a relatively accurate valuation, some online services allow homeowners to update their home’s facts and features and modify results. Reporting all updates to your local tax assessor is also recommended. Bear in mind though: home improvements can increase your property taxes. Reporting them to your tax assessor only makes sense when you are ready to sell, and only if the upgrades are significant enough to raise your home’s value and/or offset the increase in property taxes.

Is There A Better Alternative?

Zillow’s valuation tool, as well as the others out there, are only that – a tool. They are not a firm appraisal nor a method to arrive at a set price. For that, further research is required in the form of a Comparative Market Analysis (CMA).

A CMA is an evaluation of a home’s value based on similar, recently sold homes (called comparables or “comps”) in the same neighborhood. The similarity is key since it gets you closest to an apples-to-apples comparison. Comparable homes should be in the same or similar neighborhood, have the similar square footage, number of bedrooms, bathrooms, features, and upgrades.

Many home sellers make the mistake of looking only at the property prices listed by online tools and assume those are realistic comps. However, those numbers may be inflated based on the sellers’ hopes of what they’ll rather get in reality. A CMA looks only at recent sales, thus painting a much more factual and realistic portrait of what your selling expectations should be.

Can We Help?
As a sign of our dedication to giving you the best possible value, our team compiles a comprehensive CMA of each listing client they represent. This provides you with the in-depth data you need to make informed real estate decisions.

For more information on how we can best help you with your home-selling goals, please contact Julie at 650.799.8888 or to schedule a free consultation.

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