Weekly Economic Update

Economic News:

What is a Soft Landing?

Will inflation come down after U.S. economy’s soft landing?

The vast majority of analysts forecasted a recession in the second half of 2023. We are now more than half-way through the second half and there are no signs of a recession, except in the housing sector. However, the economy continues to slow down from the solid growth of the first half of the year. Now most economists are saying that there is a good chance of a soft landing. But what exactly is a soft landing and what would it look like for the consumer?

From Wikipedia --- A soft landing in the business cycle is the process of an economy shifting from growth to slow-growth to potentially flat, as it approaches but avoids a recession. It is usually caused by government attempts to slow down inflation. Thus, a soft landing would be characterized by lower inflation and economic growth of zero to 1.0% per quarter. The classic definition of a recession would be two consecutive quarters of negative economic growth. We saw that during the pandemic induced recession, but those were certainly unprecedented circumstances.

The next question is --- will inflation come down during a soft landing? If inflation returns to the Fed target of 2.0%, it is much more likely that interest rates will also come down. If inflation stays high during a soft landing, then we are talking about the phenomenon of “stagflation.” Assuming stagflation is not in the cards and rates come down, we can add one more question. Would lower rates immediately supercharge the economy again? Certainly, there is a lot of pent-up demand in the real estate sector. We believe that the last quarter of this year and the first quarter of next year will be very telling with regard to answering these questions.

Next Steps on New Credit Scoring Models

FHFA: New opportunities for feedback from stakeholders affected by the new requirements’ implementation.

The next steps in the adoption of new credit score requirements by Fannie Mae and Freddie Mac will include more public engagement in the form of stakeholder forums and listening sessions, the Federal Housing Finance Agency (FHFA) has announced. The public engagement channels are aimed, in part, at identifying the issues, opportunities and challenges regarding the successful implementation of the FICO 10T and VantageScore 4.0 credit score models for use by the government-sponsored enterprises (GSEs). Approval of the models for GSE utilization was announced by the FHFA in October last year after a long review process that included what the FHFA described as “rigorous testing.” Both FICO 10T and VantageScore 4.0 “[exceeded] the required thresholds for accuracy, reliability and integrity.” After the adoption process is complete, scores from both models, when available, will be required on all single-family loans acquired by Fannie and Freddie. Additionally, it was also announced in October that the GSEs would switch from a tri-merge requirement on credit reports to a bi-merge requirement. Currently, credit reports are required by Fannie and Freddie from all three nationwide consumer reporting agencies: Equifax, Experian and TransUnion. Following the transition, the enterprises will only require reports from at least two of the reporting agencies. The change, per the FHFA, will “promote competition in the market while maintaining the information needed to support robust risk management.” The switch, the FHFA said, was originally proposed to happen in the first quarter of 2024, but will now occur later. The new opportunities for stakeholder feedback are essentially another round of collecting input from the many parties whose operations will be affected by the new requirements’ implementation. The FHFA announced engagement opportunities back in March, but has apparently decided that further feedback collection is needed to ensure the smooth transition. “We want to hear from market participants and impacted stakeholders to ensure a smooth transition that minimizes costs and complexity,” said Sandra Thompson, director of the FHFA. The announcements of further public engagement and an extension of the transition process were met with praise from industry groups. (Source: Scotsman Guide)

Real Estate News:

Much Less Than 20 Percent

Typical first-time buyers make 6% or 7% down payment on their first home.

Coming up with a large chunk of cash for a down payment is likely the first thing that comes to mind when people think of buying a house one day. But you probably don’t need as much money as you think. The idea of the 20% down payment as a standard dates back to the Great Depression, when mortgages were usually shorter than the 30-year term that is standard today. That’s a daunting figure at today’s prices. The typical house in the U.S. has a median price of around $400,000. Applying the 20% rule would mean you’d need $80,000. Close to 40% of Americans who don’t own a house point to a lack of savings for a down payment as a reason, according to a new CNBC Your Money Survey conducted by SurveyMonkey.

But in reality, “the typical first-time buyer has a down payment well under 20%,” said Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors. More often, Lautz said, people come up with just 6% or 7% as a down payment on their first home. During the first quarter of 2023, the typical down payment on a single-family home represented 7.5% of the median price, according to ATTOM, a real estate data company. In that case, on the median-priced house in the U.S., you’d need around $24,000. Better still, there are programs available that may help many would-be homeowners put down even less. Some federal government-supported programs allow you to buy a house with no down payment, or a very low one. The U.S. Department of Agriculture, the Federal Housing Administration and Department of Veterans Affairs, among others, have programs with low down payments. Even as home prices and interest rates have risen, “homeownership is still the best option for building equity long-term,” said Daniel Brennan, director of MaineHousing. Some states, cities and other groups have programs that award grants to homebuyers that bolster their down payment or help cover closing costs. (Source: CNBC)