|
|
July 2007 Entries
Daily Real Estate News | July 9, 2007
Florida: The End of a Slump?
Florida real estate started to slow in 2005, ahead of many other parts of the country. And now some real estate practitioners say the state is still ahead of the curve, leading a resurgence in sales.
Ann Rogers, who owns three Pinellas County Keller Williams franchises, says the housing inventory isn’t growing because homes are selling at about the same pace that sellers are putting them on the market.
Developer Brandon Pastilong has already sold four of the eight townhomes he’s building in a remote part of St. Petersburg. They are priced at $300,000 to $350,000.
"We feel the market doesn't have much lower to go," says Verne Packer, who is building a 30-unit condo complex. Packer is trying to time the market, relying on a construction technique that allows him to put up a home in less than a week. He doesn't have final pricing on his development, but he says the 2,100 to 2,600-square-foot hurricane-resistant homes will sell for about $400,000.
Source: The St. Petersburg Times, Paul Swider (07/08/07)
Daily Real Estate News | July 13, 2007
Mortgage Rates Climb This Week
Freddie Mac reports an increase in the 30-year fixed mortgage rate to 6.73 percent this week, up from 6.63 percent a week ago. Chief Economist Frank Nothaft expects the benchmark to remain at or near this level for the remainder of the year.
The 15-year mortgage rate edged up at 6.39 percent from 6.3 percent over the same time span, and the five-year adjustable mortgage rate climbed to 6.35 percent from 6.29 percent.
Meanwhile, interest on one-year ARMs held steady at 5.71 percent. Nothaft attributes the jump in borrowing costs to a positive June jobs report and a jump in consumer credit in May.
Source: The Wall Street Journal (07/13/07)
Daily Real Estate News | July 11, 2007
Sales of High-End Homes Are Booming
Sales of high-end homes are doing better than the rest of the market in many areas, according to DataQuick Information Systems, which tracks home prices.
In Boston, for instance, the number of homes selling for at least $1 million fell to 619 in the first five months of 2006, but jumped to 711 in the first five months of this year, about equal to sales during the same period of 2005, which was a boom year.
The same situation is true for New York City; San Jose, Calif.; Seattle; Denver; and Houston. Meanwhile, in San Francisco, Los Angeles, Phoenix, and Miami, high-end sales are down but not by nearly as much as sales in other price segments.
There appears to be three main causes of the split in the market. First, affluent families continue to do better financially than others, thanks to healthy income gains and a rising stock market. The upper end of the market has also been helped by an influx of well-off foreign investors whose buying power has grown with the recent decline of the dollar.
Finally, both the recent rise in interest rates and the problems in the mortgage market have had a much bigger effect on low-income and middle-class buyers than affluent ones. It's become harder to get a subprime mortgage, while the uptick in interest rates this year has added about $100 to the monthly payment on an average 30-year fixed-rate mortgage.
Source: The New York Times, David Leonhardt (07/11/07)
Daily Real Estate News | July 13, 2007
House OK's Expanding Low-Income Housing Aid Program
The House voted this week to overhaul the Section 8 voucher program, the federal government’s largest effort to fund housing for low-income families.
The legislation seeks to make the aid program available to more families and make it easier for first-time home buyers to use the program. It also creates incentives for seeking education and employment.
Under the program, eligible tenants pay 30 percent of their income toward their rent, with the federal government paying the remainder.
Section 8 provides housing assistance for 2 million low-income families. It costs about $16 billion a year — about 60 percent of the budget of the Department of Housing and Urban Development.
The bill next goes to the Senate where it’s likely to encounter resistance. The main dispute is over how the proposed new formula allocates funds. The White House supports the status quo, while the new bill allocates money based on previous year’s spending.
Supporters say the new plan will eliminate a backlog that prevents many families from getting housing. The opposition, however, says the new plan wastes money.
Source: The Associated Press, Jim Abrams (07/12/07)
Daily Real Estate News | July 11, 2007
10 Best Places for Starting a Small Business
Florida is the best state to grow a small business, according to a new study by Bizjournals, the Web site of American City Business Journals Inc.
Bizjournals used a 12-part formula to rate the vitality of small-businesses in the nation's 75 largest metropolitan areas. These 75 markets, taken as a group, had 179 million residents as of mid-2005, accounting for 60 percent of the nation's total population. They also included 4.5 million small businesses, a number that rose by 7 percent between 2000 and 2005.
The study's objective was to identify those metro areas that are most conducive to the creation and development of small businesses. The highest scores went to areas that have prosperous economies, are expanding rapidly, and are densely packed with small businesses.
The top 10 are:
- Orlando
- Sarasota-Bradenton, Fla.
- Miami-Fort Lauderdale, Fla.
- Las Vegas
- Jacksonville, Fla.
- Raleigh, N.C.
- Washington, D.C.
- Salt Lake City, Utah
- Oxnard-Thousand Oaks, Calif.
- Minneapolis-St. Paul
For a more complete results, see how all 75 markets ranked for small business growth.
Source: BizJournals, G. Scott Thomas (07/10/07)
What to look for in a Financial Planner:
- Someone who has been providing advisory services for compensation for at least 5 years.
- Someone who is a member of the Financial Planning Association.
- Someone who is well regarded by others in the field.
- Someone who has a clean regulatory record.
- Someone who handles at least $20 million in assets for clients.
- Someone who has at least 100 clients.
- Someone who has worked often with people similar to you.
- Someone who routinely provides recommendations in the same areas that are of concern to you.
- Someone who takes the time to learn of your needs before offering recommendations to you.
- Someone who considers the tax implications of their strategies before recommending them to you.
- Someone who will review your status in all major areas of personal finance, including investments, insurance, taxes, real estate & mortgages, college and retirement issues, employer-provided benefit plans, and estate planning, and offer you recommendations as warranted.
- Someone who never disparages others in the field. The best in the field are true financial planning professionals. But too many so-called "planners" and "advisors" consider others to be competitors instead of colleagues. Be wary of those who spend much of their time explaining why they are better than others, or why others are not good. True professionals will explain why their advice differs from that offered by others, but most often, the conversation will be "good vs. better" instead of "good vs. bad." (There are, after all, many ways to achieve financial success, not just one.) Of course, professionals, if needed, will warn you against those who are widely regarded as crooks or incompetents. But if your advisor has a posture that everyone else is a crook or incompetent, you’ll probably be better off working with someone else.
Title Companies and Title Insurance
Before signing on the various dotted lines, it's important to confirm that the seller truly owns the property and isn't overlooking problems, such as outstanding mortgage payments or debts.
A buyer can find out critical information about a piece of property by getting a preliminary title report (also referred to as a title search). Title companies research these reports using public records, and guarantee the findings by selling title insurance.
The preliminary title report, which takes several days to complete, establishes who legally owns the property. The report indicates if the seller is the only person authorized to sell the property, and includes a list of previous owners as well as purchase and sale dates. It also lists any liens against the property.
Sellers usually pay for the report because they are responsible for guaranteeing a clear title. The seller's real estate agent or attorney often orders the report after opening escrow.
Types of Title Insurance
Title insurance, issued by the title company and often required by lenders, guarantees the house is free of liens. There are two types of title insurance:
- A lender's policy protects the lender against loss due to unknown title defects, and guarantees that the lender has a valid first lien against the property.
- An owner's policy protects the buyer from unpredictable factors, ranging from human error to forged documents, that might emerge after a sale is complete. This type of title insurance has no annual premiums. The buyer pays when the policy is issued. In some states a seller purchases title insurance to guarantee that the buyer is receiving a clear title. In others, the buyer pays for the policy to protect the lender. Only an owner's policy will protect the owner from personal loss, such as legal expenses for a dispute after the sale.
The cost of title insurance depends on the findings of the title report, but since costs vary from county to county, comparison shopping is a good idea.
Once buyers have reviewed the title report, the buyer should discuss the findings with the seller, real estate agent and others involved in the sale. A buyer may demand that the seller clear anything on the report that could become a liability in the future, such as an existing lien.
What Happens If There Is a Lien on the Property
A title company often withholds proceeds from the sale of the house to pay the liens. The title company will refund the money to the seller if the seller clears up the issue.
Types of liens include:
Once clear title has been established, the buyer will have ownership and exclusive use of the property.
Ten Important Questions to Ask Your Home Inspector
According to the US Department of Housing and Urban Development
1. What does your inspection cover?
The inspector should ensure that their inspection and inspection report will meet all applicable requirements in your state if applicable and will comply with a well-recognized standard of practice and code of ethics. You should be able to request and see a copy of these items ahead of time and ask any questions you may have. If there are any areas you want to make sure are inspected, be sure to identify them upfront.
2. How long have you been practicing in the home inspection profession and how many inspections have you completed?
The inspector should be able to provide his or her history in the profession and perhaps even a few names as referrals. Newer inspectors can be very qualified, and many work with a partner or have access to more experienced inspectors to assist them in the inspection.
3. Are you specifically experienced in residential inspection?
Related experience in construction or engineering is helpful, but is no substitute for training and experience in the unique discipline of home inspection. If the inspection is for a commercial property, then this should be asked about as well.
4. Do you offer to do repairs or improvements based on the inspection?
Some inspector associations and state regulations allow the inspector to perform repair work on problems uncovered in the inspection. Other associations and regulations strictly forbid this as a conflict of interest.
5. How long will the inspection take?
The average on-site inspection time for a single inspector is two to three hours for a typical single-family house; anything significantly less may not be enough time to perform a thorough inspection. Additional inspectors may be brought in for very large properties and buildings.
6. How much will it cost?
Costs vary dramatically, depending on the region, size and age of the house, scope of services and other factors. A typical range might be $300-$500, but consider the value of the home inspection in terms of the investment being made. Cost does not necessarily reflect quality. HUD Does not regulate home inspection fees.
7. What type of inspection report do you provide and how long will it take to receive the report?
Ask to see samples and determine whether or not you can understand the inspector's reporting style and if the time parameters fulfill your needs. Most inspectors provide their full report within 24 hours of the inspection.
8. Will I be able to attend the inspection?
This is a valuable educational opportunity, and an inspector's refusal to allow this should raise a red flag. Never pass up this opportunity to see your prospective home through the eyes of an expert.
9. Do you maintain membership in a professional home inspector association?
There are many state and national associations for home inspectors. Request to see their membership ID, and perform whatever due diligence you deem appropriate.
10. Do you participate in continuing education programs to keep your expertise up to date?
One can never know it all, and the inspector's commitment to continuing education is a good measure of his or her professionalism and service to the consumer. This is especially important in cases where the home is much older or includes unique elements requiring additional or updated training.
Appraisal to Establish House Market Price
In the real world, very few individuals order appraisal reports to establish an offering price or to substantiate a purchase price. At the point that an offer to purchase (in a typical residential transaction) is made, the price has been set by other parties, not the purchaser. The price has been determined by the seller, who wishes to obtain the highest price possible, or the agent, who receives a percentage of the price as compensation and often represents the seller in the transaction.
The real estate agent will typically perform a comparative market analysis (CMA). The appraisal laws in most states allow real estate agents to perform CMAs without an appraiser's license or certification. A CMA is a necessary part of the agent's preparation for a listing and consists of examining sales of properties in the area to arrive at a listing price. The reliability of the CMA depends upon the agent's experience and the characteristics of the property. The agent will suggest a selling price to the seller based upon the analysis. However, neither the seller nor the agent is bound by the results of the analysis, and the agent is not required to follow any formal procedure in completing the CMA. If a seller wishes to list the property at a price higher than the price suggested by the agent, then the agent may be forced to accept the listing at that price or risk losing a commission.
Purchasers believe that they are getting a good deal if they make an offer lower than the listed price, but how far above the market value was the property listed? 10%, 15%, maybe even 20% above the fair market value? A negotiated price of 10% less than the listed price on a property that was listed at 20% above its value is not a bargain. The agent cannot tell the purchaser that the offered price is higher than the value, or even higher than their own CMA. In most states, they must submit the offer to the seller.
The seller of a property may want to order an appraisal before listing the property. Of course, the cost of the appraisal is always a deterrent, especially if the seller knows that a buyer will pay for it when applying for a loan, but the appraisal is often justified. The seller could lose a sale if the property appraised for less than the sale price when appraised by the appraiser.
What to Do When Your House Doesn't Sell
by MSN Real Estate online
The longer your house is sits on the market, the less likely you are to get a deal that benefits you. Avoid waiting too long to make a decision:
- Listen to feedback
Ask your agent to poll colleagues who have shown your home. If location is the problem, you may not have any choice but to reduce your price. But if your home's appearance is the issue, deal with what seems to be holding buyers back, such as cleaning up the basement or painting the interior.
- Reduce your price
This is the most obvious decision. If the market has slowed since you listed the home six weeks ago, the comparable recent home sales you used to set your price may be obsolete. Consider reducing your price by as much as 10 percent; that's a strong signal to other agents that you are motivated to sell. If you still have no takers after another four to six weeks, you may have to cut your price again.
- Change agents
If your listing contract is about to expire, evaluate your agent's performance in light of market conditions. An agent who knows you, your property, and the neighborhood well is probably worth keeping, especially if he or she has good suggestions to improve your situation. But an agent who is ineffective, or who clearly inflated your the list price in order to get your business, probably is not someone with whom you want to do business.
- Take your house off the market
If you aren't in a rush to sell, drop out of the market before your home is stigmatized by a no-sale
Your yard plays a vital role in attracting prospective home buyers. Here are six tips for making sure your yard doesn't sabotage any sales.
By Melinda Fulmer
Last year, 30% of all U.S. households did some kind of landscaping project themselves, with the average annual bill coming in at $356, according to the National Gardening Assn. Many of these projects can be a disaster, says Nicolaus, especially if buyers go to their local big-box garden center and just start grabbing attractive plants and pavers.
Go to a local nursery that has a knowledgeable staff that can tell you which plants will work best in your area. Do some planning first, then talk to these pros about what you want to achieve, how much you have to spend and how much time you're willing to put in watering, pruning and fertilizing. You can even take pictures of your yard and bring them along to help visualize specific plantings.
Here our panel of experts shares six landscaping tips to boost the value of your house without breaking the bank.
1. Lay the groundwork for successful landscaping. Make sure your property has proper drainage so water doesn't slosh back to the house and make the foundation unstable or conversely, erode backyard slopes. Make sure sprinklers aren't hitting the house. Water lines or mold on the bottom of your property can signal a bigger problem with the structure itself and point out expensive grading projects ahead, says Nicolaus.
2. Create a focal point. The yard doesn’t have to be filled with amazing beds of color. But it's nice if you can create a focal point with flowers or unusual shrubs along a porch or an area of architectural interest. Lacking that, Nicolaus recommends grouping bigger items to the left of the house and checking your placement of big shrubs and trees from inside the windows to make sure it enhances the view.
3. Create an atmosphere and then take it with you. Stoffregen suggests planting some of your flowers, shrubs, herbs and vegetables in beautiful containers. They can lend charm to your backyard when you're showing it, but then you don't have to leave your investment behind.
4. Plant for privacy and shade. Some of the biggest payoffs in landscaping are those that provide a sense of distance from your neighbors. Tall shrubs planted to screen a bank of windows on the side of your neighbor's house almost always pay off, landscape architects say. And borders that block the sights and muffle the sounds of busy streets are equally valuable. In the backyard, different plantings can create the feel of separate "rooms," such as a shady meditation garden or outdoor dining area.
5. Phase out undesirable or sick trees gradually. Instead of ripping out a centerpiece tree and leaving a front yard bare, Bee will plant another tree 15 to 20 yards away with some nice smaller shrubs underneath. When the new tree gets a little bigger and the two come in conflict, she takes the bigger one out.
6. Choose a wide array of plants that look good even when they're not blooming and in cold weather. "I rely a great deal on shrubs with interesting foliage that has good color or texture. They are a lot lower-maintenance than flowers," Bee says. She tends to put flowers in only one focal area and mixes shrub plantings up, so owners won't get stuck with a huge gap if one in a row of the same type of plant dies.
4 New Rules for Home BUYERS!
By Alex Markels, U.S. News & World Report
True, lenders are getting a little testy, but here's some advice on making it easier to get that home loan you need.
With house prices falling and inventory surging, it might seem that home buyers have it made.
But lending standards have tightened, and even borrowers with good credit, steady employment and cash for a down payment will undergo more scrutiny when applying for a mortgage than just a few months ago. To make sure you pass muster, consider these strategies:
Pump up your credit score. Black marks, such as late payments or unpaid tax bills, remain on your credit history for seven years -- even if you pay them off. But paying down other loans and reducing credit lines can improve your score in the short run. If you have a credit card that you don't use very often, cancel it.
Bring proof. The days of "stated income" loans, in which lenders don't require you to document what you make, are over. If you're employed, be prepared to show your W-2 form for the previous year, and if you're self-employed, your tax returns for the past three years. Other assets may require documentation, too. If you recently got money in a divorce settlement, you may be asked to show the actual decree.
Increase your down payment. The more money you put down, the better your chances of qualifying for a loan. Regardless of what you make or how good your credit, if you don't have at least 5% of the purchase price for a down payment, you could be out of luck.
Decrease your loan amount. Don't buy more house than you need. With prices falling or flat, your downside risk only grows with the more you pay. Besides, conforming loans under $417,000 are easier for lenders to sell in the secondary market and therefore easier to approve.
Reasons for an Appraisal
There are many reasons to obtain an appraisal.
The most common reason is for a real estate or mortgage transaction, but we have compiled a list of other reasons you may need to order an appraisal.
- To obtain a loan
- To lower your tax burden
- To establish the replacement cost for insurance
- To contest high property taxes
- To settle an estate
- To help you make one of the largest financial decisions in your life
- To provide a negotiating tool when purchasing real estate
- To determine a reasonable price when selling real estate
- To protect your rights in a condemnation case
- To allow you to obtain a qualified appraisal report
- To satisfy a government agency requirement such as the IRS
- To use in a lawsuit
If you need an apprraisal, just request one from our web site - www.askaboutrealestate.net
Daily Real Estate News | June 28, 2007
National Ad Campaign Seeks to Curb Foreclosures
NeighborWorks America, a national nonprofit group, is launching a new ad campaign in conjunction with the Ad Council to warn home owners that inaction is the worst possible response to mortgage troubles.
The campaign seeks to prevent foreclosures by urging home owners in financial trouble to call the Homeownership Preservation Foundation HOPE hotline, at 888/995-HOPE.
“Homeowners are facing foreclosure at record rates. This issue reaches into every social and economic demographic out there," says Colleen Hernandez, president and executive director of the Homeownership Preservation Foundation.
The National Ad Council produced the public service announcements, which are set to air on TV and radio in 16 markets across the country.
One TV spot shows how ominous phone calls from collection agencies dampen the spirits of a family having a lively conversation at dinner, while another shows a girl playing with a toy house as her family leaves their home, before a voice urges viewers to call a national hotline if they fear they could lose their home.
NeighborWorks says that foreclosures are devastating not only for families, but for the entire community. "For hard-hit neighborhoods around the country where dozens of homes within blocks of each other have been foreclosed upon, neighboring home owners can expect their home values to drop by 10 percent or more," the organization says.
Source: NeighborWorks America; News-Leader, Didi Tang (06/28/07)
Daily Real Estate News | June 28, 2007
New Vacation-Home Spots Off the Beaten Track
High-end buyers are increasingly looking for out-of-the-way destinations beyond the borders of the United States to purchase their vacation home. Top destinations include Nicaragua, Morocco and Uruguay.
"There's a desire for somewhere different now," says Nick Barnes, a partner at Knight Frank, a residential research firm. "The luxury market, for reasons of exclusivity, is willing to travel to more exotic locations, irrespective of infrequent flights and a longer flight time."
In Latin America, the most desirable destination is Punta del Este in Uruguay. Prices in luxury towers on the beach are $2,000 per square meter, which is about $180 per square foot.
"That number is way too high for an average Uruguayan or Argentinean investor but competitive for Europeans or Americans," says Julie Shields, a general manager at Dubai-based Jumeirah Group, whose portfolio includes the Burj Al Arab hotel, New York's Essex House and the Carlton Tower in London.
Source: Newsweek International, Michelle Jana Chan (07/02/07)
Daily Real Estate News | July 2, 2007
Fed Leaves Key Interest Rate Untouched
Federal Reserve policymakers voted unanimously last week to leave the key short-term interest rate at 5.25 percent, which is the highest in 6 ½ years, but unchanged since June 2006.
In the post-meeting statement, Fed Chairman Ben Bernanke said the economy is expected to continue to grow at a moderate pace during the rest of the year. He suggested that growth isn’t strong enough to warrant a rate increase to slow it.
"Some market participants may have been holding out for a signal that (the Fed) will cut rates, and they didn't get that," says chief economist Scott Brown of Raymond James & Associates. He says he expects the Fed to leave rates unchanged for the rest of 2007, but isn't sure where rates will be headed after that. "The next move is as likely to be higher as it is to be lower."
This short-term interest rate drives mortgage and other sorts of consumer loan rates.
Source: USA Today, Barbara Hagen Baugh (06/29/2007)
Daily Real Estate News | July 3, 2007
Population Booms in These Fast-Growing Cities
The largest population growth nationwide between 2005 and 2006 occurred in urban hubs in the South and the West, according to the latest U.S. Census Bureau figures.
New York continued to be the nation’s most populous city, with 8.2 million residents. This was more than twice the population of Los Angeles, which ranked second at 3.8 million.
Phoenix, with a population of 1.5 million, edged out Philadelphia to become the nation’s fifth most-populous city. Houston is fourth; Chicago is third.
Meanwhile, Rust Belt cities mostly continued to shrink. Detroit, Pittsburgh, Buffalo, and Rochester all recorded losses of more than 5 percent since 2000, but their 2005 to 2006 declines have been small, suggesting they may have reached equilibrium. Cleveland’s population has continued to decline by more than 5 percent. Columbus and Indianapolis, on the other hand, gained population.
Suburbs of major cities grew the most. North Las Vegas, Nev., a suburb of Las Vegas, had the nation’s fastest growth rate among large cities (100,000 or more population), increasing 11.9 percent during the period, to 197,567.
Other fast-growing suburbs were in the Dallas area: McKinney (ranking second), Grand Prairie (sixth), and Denton (ninth).
Florida had two cities among the fastest growing: Port St. Lucie (third) and Cape Coral (fourth). Arizona also placed two on the list, with Gilbert (fifth) and Peoria (seventh), both near Phoenix. Also rounding out the list: Cary, N.C. (near Raleigh) and Lancaster, Calif. (near Los Angeles).
— REALTOR® Magazine Online
Daily Real Estate News | July 5, 2007
Waterfront Property Weathers the Downturn
It might not be a bargain, but waterfront property's a safe bet when it comes to real estate investments that pay off, even when the housing market isn't so hot.
David R. Indermill of Penny Realty-Re/Max Coastal Properties near San Diego, Calif., has sold $60 million worth of beach real estate in the last nine years. Here is some of the key advice he offers clients are looking for the best waterfront value for their dollar:
- For oceanfront property, expect to pay as much as $2,700 per square foot for prime locations. Even if the home is a few blocks from the beach, it can cost $500 to $600 per square foot.
- Parking is golden. If you're buying a condo, don't settle for one space; buy a second even if it adds $20,000 to $75,000 to the price, because on-street parking is scarce and a hassle.
- Expect loud parties, especially in the summer.
- Small living spaces are par for the course. Rooftop decks can maximize the space available.
- Flowers and trees are a big plus for buyers. Curb appeal sells and landscaping can make or break a house.
- If it’s broke, fix it. Make sure the homeowner association maintains a generous budget for upkeep, as salty sea air and sand can cause problems for the structure. If you’re on your own, expect to spend annually for minor repairs or you’ll pay much more later.
- Restaurants increase value. Good nearby restaurants and entertainment attract people.
- Good management pays off. Any owner who expects to rent the property for part of the year should budget for a top-notch management team that takes care of the property and doesn’t put up with lousy tenants.
Source: The San Diego Union-Tribune, Roger Showley (07/01/2007)
Daily Real Estate News | July 3, 2007
What Your Kitchen Cabinets Say About You
Kitchen cabinetmaker Merillat surveyed new-home buyers and analyzed the results using a statistical clustering program. Four distinct segments of kitchen users emerged:
- Luxury Leaders. This group wants all the prestige features because social status is important to them and their kitchen is the star of their home. Appealing accoutrements include an adjoining office, morning room, and wine cellar. Luxury Leaders also like appliances that make entertaining convenient.
- Domestic Dwellers. This group sees the kitchen as a family gathering place. They prefer mainstream décor that is low maintenance and able to withstand heavy use.
- Busy Bees. Home owners in this segment spend a great deal of time in their kitchens multi-tasking, doing everything from paying bills to folding laundry and helping with homework. They appreciate products that improve efficiency and cut clutter.
- Career Builders. These are well-educated people who spend more time working than they do at home. They see their home as an investment and they are more concerned about resale value than they are about usability. One feature they do appreciate is a large island, which can function as a landing zone at the end of the day.
Economic Commentary
July 2, 2007
Core inflation continues to edge downward – but has it fallen by enough?
In its monthly personal income and outlays release for May, the Commerce Department’s Bureau of Economic Analysis reported that the chain-type price index for personal consumption expenditures excluding food and energy (the core PCE price index) rose by 0.1 percent for the second month in a row. More importantly, this brought the 12-month change in the core PCE price index down to 1.9 percent – the lowest pace of growth since early 2004. Why is this important? Its significance lies in two related factors:
• First, the core PCE price index is the measure that the Federal Reserve looks at most closely to get a handle on the underlying rate of inflation (although the Fed studies all of the inflation measures).
• Second, the Fed has a likely implicit target range of 1-2 percent for the core PCE price index.
As a result, the underlying rate of inflation has finally moved back within the Fed’s implicit target range (which was the object of the Fed’s significant tightening of monetary policy over the mid-2004 to mid-2006 period). But what does this mean for future Fed monetary policy actions?
In the early part of this decade, with growth in the core PCE price index low and falling, the Fed became concerned about the potential for deflation (negative inflation) and so eased monetary policy substantially – bringing the federal funds rate down to 1.0 percent for an extended period. After core inflation began moving up late in 2003, however, the Fed’s concerns about deflation were replaced with concerns about rising inflation – and the Fed began its two-year tightening regime. It is interesting that the Fed stopped tightening in mid-2006 with core inflation above the top of its implicit target range – although core inflation was just about at its peak at that point. It is likely that the Fed was looking ahead when it decided to stop tightening monetary policy, with an expectation that core inflation would edge back down into its implicit target range based on the previous tightening the Fed had done. If this is correct, then it illustrates an important point: since inflation lags the forces that cause it (mostly long-term changes in money growth for core inflation), then appropriate monetary policy needs to be forward-looking, otherwise the central bank would be conducting monetary policy similarly to a driver navigating by looking though the rear-view mirror. What does this imply for the future course of monetary policy?
Unless the Fed expects core inflation to fall well within its implicit target range, with the chance of it falling below that range, it is unlikely to ease simply because it fell back into that range. Moreover, if the Fed is concerned that the slippage of core inflation could be reversed, then it would continue to have a tightening bias in its policy. After all, core inflation did fall back within its target band for a month-or-two intermittently in 2005 and 2006. And, based on the language of the Federal Open Market Committee’s post-meeting statement on June 28, the Fed continues to be concerned about the potential for core inflation to move up again. This concern stems from two things:
•First, the unemployment rate remains low – and this could push wage inflation up.
•Second, strong and persistent gains in energy and food prices could spill into core inflation – perhaps pushed up by rising inflation expectations on the part of consumers as they face these higher prices.
The Fed is unlikely to change the course of monetary policy until it is more certain that the risks of rising inflation from these two factors have diminished sufficiently – something that probably won’t occur in 2007, but could happen in 2008.
The employment report for May will headline a holiday-shortened week of economic indicators.
close to the level of the past two months.
• On Monday, the Institute for Supply Management’s (ISM’s) index of manufacturing activity is expected to slip just a tad to 54.5 in June –
• On Tuesday, factory orders are projected to decline by 1.0 percent May – based in part on the already-reported drop of 2.8 percent in durable goods orders.
• Also on Tuesday, light vehicle sales should edge up to 16.2 million units (annualized rate) in June – showing that consumer spending remains steady.
• On Wednesday, we project that lots of hamburgers and hot dogs will be consumed in celebration of the 231st anniversary of the Declaration of Independence – although many other foods and beverages will be consumed as well, with significant amounts of fireworks.
• On Thursday, the ISM’s non-manufacturing index is expected to slip to around 57 for June – still a very strong reading.
• Also on Thursday, initial unemployment claims should edge up to around 315 thousand for the week ending June 30 – not much of a change from recent weeks.
• Finally on Friday, the employment report for June is projected to show a rise in nonfarm payroll employment of 110 thousand, an unchanged unemployment rate of 4.5 percent, an increase in average hourly earnings of 0.3 percent, and no change in the private workweek at 33.9 hours – somewhat weaker than in May.
David W. Berson - Fannie Mae Economics and Mortgage Market Analysis
Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economics & Mortgage Market Analysis (EMMA) group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, and are subject to change without notice. Although the EMMA group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. The analyses, opinions, estimates, forecasts and other views published by the EMMA group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.
|
|