Inflation and Interest Rates

Inflation continued to heat up in June, hitting a fresh pandemic peak that keeps the Federal Reserve geared for another big interest-rate hike later this month, economists project.

The consumer price index probably increased 8.8% from a year earlier, marking the largest jump since 1981, according to the median forecast in a Bloomberg survey. Compared to May, the widely followed gauge is seen climbing 1.1%, marking the third month in the last four that inflation has advanced at least The acceleration is likely to reflect higher gasoline and elevated food costs. Prices at the nation’s gas pumps reached a high of more than $5 a gallon in mid-June and will add at least 0.5 percentage point to the headline CPI monthly advance, according to Bloomberg Economics ahead of Wednesday’s report. 

High gas prices, which were increasing well before Russia invaded Ukraine, help explain both President Joe Biden’s dismal approval ratings and his upcoming trip to the Middle East, where he hopes to convince Arab leaders to produce more oil.

But fuel prices have started to ease this month, suggesting the CPI will simmer down beginning with the July data. Though still well-elevated, some cooling in inflation may already be in the works as bloated retail inventories lead to discounts and used-car prices soften. The core measure, which excludes energy and food, probably rose 0.5% in June on a monthly basis, the smallest advance in three months.

While Fed officials have already signaled a 75 basis-point interest-rate hike at their next meeting, smaller inflation prints in the coming months could lead to less-aggressive policy action later this year.

“If I’m right about June being the start of a string of lower core CPI prints, which is what the Fed wants to see, then I think comments from officials will quickly switch to a 50 basis-point hike for September and there were more calls for slowing to 25 basis points late in the year,” said Omair Sharif, founder of Inflation Insights LLC. 

Even though measures of goods inflation are seen decelerating, service components like housing may keep consumer price growth elevated for some months.

“Inflation of course has migrated away from the goods sector and is now firmly entrenched in housing -- thanks to a very tight housing market -- as well as in non-shelter services,” Citigroup Inc. economists Andrew Hollenhorst, Veronica Clark and Isfar Munir said in a note. 

“We continue to expect a slowing in activity and some slowing in prices but it could take time both to cool-down the overheating housing market and that may only flow through to rents with a lag,” they said.

If measures of inflation don’t decline as expected in the coming months, that could lead the Fed to take an “even more painful adjustment to the monetary policy stance,” Deutsche Bank AG economists said in a note. That would add to recession risks, because larger and faster interest-rate hikes take a greater toll on demand.

Need a Refinance with Excess Debt?

With the stimulus checks that have circulated in the last few years and people staying home more because of the pandemic, credit card debt shrunk drastically. People were able to pay balances down and even save some money. Unfortunately, it seems that with inflation at the level it is, credit card debt is now at an all-time high. According to the Federal Reserve, credit card debt rose by 20% in April 2022.

Because prices have risen on everything over the last few months, and most incomes have stayed the same, many consumers are being forced to rely more on credit cards to pay for every day living expenses like gas and food and sometimes even to pay their bills.

The big problem with this is that revolving balances are a large part of a consumer’s credit score. While payment history makes up the largest part of a credit score at 35%, the amount owed is the second largest factor at 30%. So, keeping balances low is just as important as paying bills on time. Revolving balances weigh more heavily than installment balances. While it is important for a good credit score to have both, close attention needs to be paid to revolving balances.

As consumers use their credit cards more this also means their credit scores are most likely taking a big hit. Optimally you do not want more than three credit cards with balances and those balances below 10% of the high credit. That’s not cumulative, that’s for each card.

While paying down credit cards might not seem feasible for some right now, there are things that people can do that could ease some of the pain without having to put out a lot of money. Even though interest rates are rising, which includes credit cards, it is still possible to get yours lowered. If a consumer has a long-standing relationship with a certain credit card, and they have no delinquent payments on it, there is a good possibility that once a year they will agree to lower the interest rate. It is always worth a phone call. Most credit cards have a variable interest rate. Right now, that interest rate averages 16.62% but by the end of the year that could rise to close to 19% which would be an all-time high. If a borrower has cards that have a long history and no delinquent payments, now would be a good time to ask for a lower interest rate.

Another possibility is to ask for the credit limit to be increased. For some, this can be a temptation to use the card more. However, if the limit is increased but your balance stays the same and decreases over time this shows responsible credit utilization and can help to raise your credit score. When Banks and lenders see several maxed-out credit cards or lines of credit it is a red flag to them of financial distress.

An option for those with several credit cards would be to transfer some or all the balances to the card with the lowest interest rate. Some creditors even offer 0% interest for up to a year or more when you open a card with them. While this can be a double-edged sword, in some cases this might be a good option to get through this time. Yes, it will be a new inquiry and a new account with no history but in the long run, it could make it much easier to get the balances paid down. HELOC’s and personal lines of credit normally also have extremely low-interest rates. Opening one to pay off credit cards could also be a viable option and would drastically reduce the time it took to pay off the balance.

While this is a frustrating time financially for a lot of consumers, we need to keep in mind it is only temporary and there are things that can be done proactively to ease the pain as we move through these times of uncertainty.

If I can be of any assistance, please reach out! You can reach me, Scott Rojo, at 916-548-3942 or through my website, rojomortgage.com/contact.

State of the Stock Market

U.S. stocks edged lower as major indexes pared recent gains that have come amid milder expectations for Federal Reserve interest-rate increases.
The S&P 500 opened higher, then turned lower, trading down about 0.2% Monday. The Dow Jones Industrial Average faded 0.1%. The technology-focused Nasdaq Composite Index dropped 0.4%. Markets are trying to hold the gains from a rally that drove the S&P 500 to its largest one-day percentage gain in two years on Friday. Weaker-than-expected U.S. economic data have caused investors to reassess their expectations for a blistering pace of monetary-policy tightening from the Federal Reserve.
The Fed’s plans to raise rates and tame inflation have sparked volatility in global markets this year and earlier this month sent the S&P 500 into a bear market, or a 20% drop from a recent peak.
But recent reports have indicated that the U.S. economy—and potentially inflation—is beginning to cool off. The latest evidence came Friday as the University of Michigan revised lower its June reading of inflation expectations over the next five to 10 years—to 3.1% from 3.3%.
U.S. stock futures had registered larger gains earlier in their session, but the rises softened after data showed that durable-goods orders for May had risen more than expected.
“Every good macroeconomic news is interpreted as bad market news,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers in Geneva. “If we keep seeing strong growth, strong inflation, then the Fed and the ECB will hike rates and we will enter a recession.”
In the near-term, he said stocks are likely to get additional support this week as investors rebalance portfolios ahead of Thursday, which marks the end of the second quarter.

If you're a potential home buyer it's easy to get discouraged, but we still have the best rates available right now. Let's see how we can help you get the loan you need for the home of your dreams. Call Scott Rojo to get started, 916-548-3942.

2385 BECKETT DRIVE, EL DORADO HILLS, CA 95762

Exceptional quality residence just a short stroll away from the new Sienna Ridge Shopping Center and the premier Serrano Golf & Country Club. This home is situated only 3 houses away from the large Beckett park. Built by Pulte homes in 2007 and recently renovated, this 3,688 square foot home showcases a main level master, 2 offices, a loft, and 3 upstairs bedrooms. Over $100k was recently invested in energy-efficient upgrades that include: solar, 3 Tesla home batteries, a whisper-quiet whole house fan, solar shades, and more. 

As you enter, you are welcomed by the executive office and an elegant formal dining room with cathedral ceilings and a stunning chandelier. The great room concept is ideal for entertaining and includes the kitchen, family room, dining nook, and a charming courtyard. The recently renovated kitchen offers white cabinets with a muted blue island, quartz counters, stainless appliances, a wine refrigerator, a built-in refrigerator, double ovens, and a walk-in pantry with a glass door.

The main-level master suite is spacious and relaxing. It features a sliding glass door to access the backyard, a spa-like bathroom, and a gorgeous dressing room/closet. The laundry room is conveniently located near the master bedroom and tandem 3-car garage. Upstairs, the loft is centrally located near the remaining bedrooms, bathrooms, and the secluded secondary office/fitness room. Retreat to the backyard that showcases remarkable sunset views from the expansive concrete dining patio. The private backyard features a lush lawn, mature fruit trees, raised garden boxes, and an inviting courtyard around the corner. Enjoy the highly desirable location that allows for an ideal El Dorado Hills lifestyle and award-winning schools (Oak Ridge High School). 

Serrano is one of the most sought-after places to live. Residents enjoy beautifully maintained front yard landscaping, gated entry, 24-hour roaming security, 17 miles of walking trails, 1,000 open acres, several neighborhood parks, and many amazing community events throughout the year. Serrano also hosts top-ranked elementary, middle, and high schools (located in the “dual boundary” zone for Oak Ridge High School). The prime location allows for easy access to the finest Serrano Golf & Country Club amenities as well as nearby dining, shopping, and Folsom Lake.

LISTED AT $1,299,000

Understanding Why Mortgage Rates Are Higher

To understand why mortgage rates are higher first need to understand how to get mortgage rates and how they are determined.
First and foremost, mortgage rates have increased mostly because of runaway inflation. When inflation comes in year over year at 8.6%, the value of a fixed asset such as a treasury bond or mortgage-backed securities is severely eroded and so the demand for those investments decreases significantly. When that happens the price drops very quickly until there is a much better ROI for the investor. In the last few months, mortgage rates on a 30-Year Conventional Loan rose from around 3% to around 6%. A 3% increase in just a matter of 3 months.
Secondly, what has compounded the rate increase and also makes it difficult for a borrower to get a rate with no "points" aka upfront money, is the fact that there has been little to actually zero demand - no bids on the secondary market - for mortgage pools at certain rate coupons. Basically unheard of! But why is that?
Well, let's say you and I are an investor looking for a fixed asset and we like the return that an MBS pool (mortgage notes bundled together) can provide us. The rates are low so borrowers won't likely refinance for a long time, there is valuable servicing income to be earned because of this and the investment is backed by assets that are almost assuredly going to perform due to low loan to values, low rates, and strict underwriting guidelines. Okay great, let's do it!
Well...when rates increase as quickly as they have and we see a recession is imminent, it becomes evident that rates have gone higher than they will be in months or possibly a year. So how are we going to earn our investment back if the loans we invest in right now are almost all refinanced/paid off within a year? We won't! So we need to put a premium on our pricing and in addition to that servicers won't pay a premium for servicing rights on these new loans. This leaves mortgage pools with very little demand and very low to no premiums paid by the secondary markets. This compounds the increase in rate from just being market-driven to also adding in the fact that because rates went up so high so fast that some rate coupons have zero demand. In addition to this, the servicing premiums have decreased between 30 and 80%.
The result is that in order to have any profit on the mortgage rates offered, you will most likely have to pay a point(s) or fraction thereof in order to get a competitive rate.

Don’t let this dissuade you though. The Rojo Mortgage Team is still working harder than ever to secure the best rates for their clients. Visit our website at rojomortgage.com or call Scott Rojo at 916-548-3942 to see how we can help you.

May 2022 - Luxury Market Report for Lake Tahoe, California