House Prices Grow by 5% Over 12 Month Period

7.27.2016 | House Prices Grow by 5% – Rusty Tweed team

House Prices Grow by 5% - Rusty Tweed team

House Prices Spike of 5.2% Over 12 Month Period

TheS&P CoreLogic Case-Shiller survey looks at U.S. house prices in 20 metropolitan areas nationwide. As a result, its home price indices are the leading measures of U.S. residential real estate nationally and in these 20 cities.

It reveals a 5.2% spike of house prices countrywide over a 12 month period. After seasonal adjustment, house prices nationwide dropped by 0.1% in May.

Portland saw the fastest growth in its house prices at 12.5% over the 12 month period, while New York and D.C. are among the weakest areas of the country. Eight cities had more rapid annual price appreciation in May than in April.

Shifting Regional Patterns in House Price Increases

Regional patterns are shifting, according to David Blitzer, managing director of the index committee at S&P Dow Jones Indices. Areas that were previously strong such as Los Angeles, San Diego and San Francisco are seeing more modest rises of 5.4%, 6.4% and 6.5% respectively. Meanwhile, prices in the Pacific Northwest boom. Seattle also saw a significant growth of 10.7% over the 12 month period. New York’s change across the same period was only 2% and Washington D.C. was not far in front with 2.4%.

The 20-city composite is up 40.4% from its lowest point in 2012. It is down 8.8% from its peak in 2006.

House Prices are Historically High Compared to Inflation

In the 12 months ending May, consumer prices increased by only 1%. The disproportionate growth of U.S. home prices to inflation is worth following closely. If the economy doesn’t improve at the same rate as house prices, prices will inevitably begin to decelerate, if not fall.

Robert Brusca, chief economist of FAO Economics, recently pointed out that the trend in house prices has been decelerating despite mortgage rates remaining at record lows. He says house prices look overvalued, therefore “it’s a great time to sell your house”. Brusca pointed out that in the Conference Board consumer confidence report published last Tuesday, expectations for interest rates and inflation declined.

Expectations for higher interest rates in 12 months’ time fell to a three-year low of 51.7% in July from 59.4% in June. The expectation for inflation in 12 months dropped to 4.7%, the lowest rate in more than nine years.

References for House Prices Grow by 5%  – Rusty Tweed team:

CDs and Rates

Certificates of Deposit and Interest Rates

7.22.16 | CDs and Rates – Rusty Tweed team

CDs and Rates - Rusty Tweed team

1 Year CD

A one year CD gave you an interest rate of 1.53% 5 years ago. Current interest rates for a one year CD sit at 1.10%.

5 Year CD

A five year CD provided an interest rate of 2.63% 5 years ago. Current interest rates for a five year CD sit at 1.53%.

 Why do CD Rates Change?

 Interest rates can vary due to inflation, supply and demand and the federal funds rate. Rates rise when there is an increase in the demand for credit and fall when there is a decrease in demand. In a similar way, a rise in the supply of credit leads to reduced rates, while a drop increases them.

When inflation is higher, interest rates also rise. Lenders offer higher rates to make up for the falling purchasing power of the dollar.

The Federal Reserve Bank affects interest rates as well. Banks receive more money they can use for lending when the government purchases more U.S. securities, and accordingly lower interest rates. When the government sells securities, interest rates go up. 

How the Fed Affects CD Rates

Last year, Ben Bernanke wrote that the rates set by the central bank follow the economy. This leads to low rates on certificates of deposit.

 “While the Fed doesn’t set market interest rates such as Treasury bond rates and mortgage rates, it influences them through two key interest rates — the Fed discount rate and the federal funds rate,” says Robert Johnson, CFA, president of The American College of Financial Services in Bryn Mawr, Pennsylvania, and co-author of the book “Invest with the Fed.”

“Changes in the discount rate are considered a reliable signal of the Fed’s long-term policy intentions, or stance. Changes in the target fed funds rate are considered a shorter-term gauge of the stringency of Fed policy,” he says.

When the target federal funds rate increases, tighter monetary policy leads to higher rates for borrowing and economic growth is squeezed. As the fed funds rate goes up, so do CD rates.

“CD rates are highly correlated to Fed policy actions, following the fed funds rate extremely closely. Banks peg CD rates off of the federal funds rate,” Johnson says.

Watch the federal funds rate carefully to see if rates increase later this year. In the meantime, you may want to consider keeping your

 CDs and Rates - Rusty Tweed team


 CDs and Rates - Rusty Tweed team

References for CDs and Rates – Rusty Tweed team:

Understand the Fed & Interest Rates

7.19.2016 | The Fed & Interest Rates – Rusty Tweed team

Why Does the Federal Reserve System Set Interest Rates?

In the same way that consumers and governments owe money to others, businesses also use debt to finance day-to-day expenses and long-term investments. Interest rates play a critical role in the success or failure of businesses. When interest rates increase, companies have less money to hand for more productive uses like investing and hiring. If there is a sudden increase, businesses may fail. For this reason, in countries like the U.S. that use a centralized banking model, the market and its laws of supply and demand do not randomly set interest rates. 

The Fed & Interest Rates - Rusty Tweed team

How Does the Federal Reserve Set Interest Rates?

The Federal Reserve System uses a variety of tools to set interest rates in order to control the country’s money supply and maintain economic stability. When inflation is rising, the Fed seeks to contract the money supply to cut it off. When the economy is struggling and unemployment is increasing, the Fed increases the supply of money. It does this to encourage companies to invest and consumers to spend.

Since retail banks tend to be the first financial institutions to expose money to the economy, they are the main instruments used by the central bank to manipulate the money supply. By adjusting the interest rates it lends to or borrows from the retail banks, the Fed can regulate the supply of money to the end user (individuals and companies).

Is the Fed Likely to Raise Interest Rates this Year?

According to CNBC, the Fed could surprise markets with at least one raise later this year. Fed funds futures anticipate a 40% chance of a rate hike this year. However, while economists agree that the Fed is taking the summer off, they do not otherwise agree on the timing. Rick Rieder, chief investment officer of global fixed income at BlackRock, believes, “the Fed would like to get a rate hike in and the question is are you going to get the opportunity to do it [balancing complex international and domestic issues], but I think the dynamics made it significantly more difficult.”

Reid predicts that if the Fed does increase interest rates this year, it will do it in December. He anticipates rates increasing then rather than during its September meeting, if Europe settles down and China looks more stable. 

References for The Fed & Interest Rates – Rusty Tweed team:

The Function of the Federal Reserve

7.18.2016 | The Function of the Federal Reserve – Rusty Tweed team

The Federal Reserve System, often referred to just as “the Fed”, is the central bank of the United States.

The Function of the Federal Reserve - Rusty Tweed team

What does the Fed do? Roger Lowenstein in his 2011 book, America’s Bank, describes the goal of the central bank as being “to keep the Monopoly game of our economy going so there’s enough money that people can invest and create companies and jobs and so on, and other people can get those jobs, but not so much money that the money becomes meaningless or worthless, something like paper confetti.” 

What does “the Fed” Do?

Today, the tools of the Federal Reserve fall into four main areas:

  • Executions of the U.S.’s monetary policy through influence over monetary supply and credit conditions with the  objective of full employment and stable pricing.
  • Supervision and regulation of banks and other critical financial institutions to protect the nation’s banking and financial system.
  • Maintenance of the financial system’s stability and therefore the containment of systemic risk that may occur in financial markets.
  • The provision of specific financial services to the U.S. government, U.S. financial institutions, and foreign official institutions.

The Federal Reserve is also a lender of last resort, as became evident in the 2008 financial crisis.

The Governance Structure of the Federal Reserve

The Board of Governors provides leadership for the System from Washington D.C.

The Board of Governors, also known as the Federal Reserve Board, is the national component of the Federal Reserve System. The board comprises of the seven governors, appointed by the president and confirmed by the Senate. To ensure stability and continuity, Governors serve 14-year, staggered terms. However, the chairman and vice-chairman serve four-year terms and may face reappointment subject to term limitations.

The Federal Open Market Committee (FMOC) meets eight times a year to determine the near-term direction of monetary policy and interest rates. The FOMC consists of seven governors of the Federal Reserve Board and five Federal Reserve Bank presidents.

Each Regional Reserve Bank has a board of 9 members. They implement monetary policy set by the Federal Reserve, thus take responsibility for member banks and commercial banks in their district.

References for The Function of the Federal Reserve – Rusty Tweed team:

America’s Bank, Roger Lowenstein