Markets continue record-setting rally as Biden unveils housing, economic plans
Markets were on a roll this week, rallying to record highs on Inauguration Day and continuing to rise as the week progressed. The Dow catapulted to a record close of 31,188.38 on Wednesday, with the communications sector pushing the S&P 500 to a record close of 3,851.85. Both indices hit record highs again Thursday morning before falling off slightly. The Nasdaq saw the biggest jump, gaining 2% to hit a record, spurred by Netflix’s report that far exceeded expectations. Tech continued the upward movement of the Nasdaq on Thursday as Apple vaulted by more than 3%. Tech earnings reports are due next week, and investors are generally bullish on the expected results. The markets did pull back slightly on Friday morning with some tech earnings falling short of expectations and growing doubt about the support for another $1.9 trillion stimulus plan. The 10-year Treasury note was trading down at 1.091% early Friday morning. The other factor that is casting a shadow over the rally is the concern of when we might hit a ceiling in equities. The last market correction occurred almost a year ago, on Feb. 27, 2020, just before the COVID-19 pandemic hit the economy in full force. That was just the 27th market correction since WWII. Some analysts feel the market is being too optimistic about the good news and not as wary of the weak economic data, rising infection rates and new strains of the virus. That being said, Goldman Sachs economists aren’t predicting a bear market and instead see long-term stabilization as the global economy balances itself out. Fresh unemployment data did little to move the market needle as investors are still positive about potential for another round of government stimulus support. The Labor Department’s report showed a total of 900,000 initial unemployment claims for the week ending Jan. 16. YELLEN’S PLANS AS TREASURY SECRETARY Former Federal Reserve Chair Janet Yellen is expected to be confirmed Friday as the first female Secretary of the Treasury. Speaking in a confirmation hearing in front of the Senate Finance Committee earlier in the week, Yellen reinforced the immediate goal of getting the American economy back on stable footing before moving ahead with any major policy changes. Yellen multiple times referred to impending financial reform after the COVID-19 pandemic was brought under control. She pointed to increasing taxes on wealthy Americans and corporations, but only if there was global support that would help keep American companies from using international loopholes to circumvent taxes. Trump’s 2017 tax cuts took the corporate tax rate down to 21% from 35%. Biden expressed on the campaign trail that he would like to raise that back up to 28%. Yellen echoed the sentiment that China has been enacting “abusive, unfair and illegal practices.” She added, “China is undercutting American companies by dumping products, erecting trade barriers and giving illegal subsidies to corporations.” However, Yellen took a departure from President Trump’s tactics and instead said she would rely on working with America’s allies to come to a resolution. Yellen also supported the ideal of a strong dollar as well as supporting further stimulus plans to get Americans on solid footing financially. BIDEN’S HOUSING PLAN President Biden continues to be vocal about how he would like to address housing in the coming months. His main objectives include a $15,000 first-time homebuyer tax credit that would be accessed immediately, therefore serving as more of down payment assistance than a rebate. Biden also plans to push big banks to expand into FHA lending, spur construction of single- and multifamily housing while enhancing the Community Reinvestment Act. Reducing the mortgage insurance premiums for FHA loans is an important point for Biden’s social justice reforms. FHA loans allow for as little as 3.5% down for a home, but anything below 20% tacks on mortgage insurance premiums that can last for the life of the loan. Helping people afford a home is only part of the issue. The next step would be making sure there are homes to buy. Biden’s plan outlines a $100 billion affordable housing fund for construction and rehabilitation of housing. A big piece of the rehab of homes is to make them more energy efficient. To that end, Biden wants to eliminate some zoning laws that have been used “to keep people of color and low-income families out of certain communities.” This idea faces a lot of headwinds including but not limited to cost and the Biden administration’s desire to remain environmentally conscious. Many of the regulations his plan would ease up on are environmental in nature and would contradict the desire for a greener building process. When it comes to cost, there are a myriad of problems. A builder survey this week showed single-family builders are concerned about “supply-side constraints related to lumber and other material costs, a lack of affordable lots and labor shortages that delay delivery times and put upward pressure on home prices.” Generally speaking, most of these initiatives will not be able to come to fruition until the economy is on a bit more stable ground. Interest rates are already slowly creeping up and the Fed will have to get to a point where it slows its purchase of mortgage-backed securities. Finding that balance in the coming months will help clear up the most pressing needs for housing. RATES ON THE MOVE, STILL HISTORICALLY LOW The latest averages from Freddie Mac show that interest rates for a 30-year fixed-rate mortgage went up slightly again last week, hitting 2.77%. Although not the lowest we’ve seen in the last year, that’s still nearly 100 basis points below what Americans were getting this time last year, and about 175 basis points lower than 2019’s average during this week. In the meantime, the Federal Housing Finance Authority has extended the moratorium on evictions and foreclosures through Feb. 28, 2021 for loans backed by Fannie Mae and Freddie Mac. The forbearance rate has dropped slightly as of Jan. 10, according to the Mortgage Bankers Association, but there are still around 2.7 million homeowners actively in forbearance plans. Moreover, the rate of borrowers exiting forbearance “remains much lower than what was seen in October and early November,” according to Mike Fratantoni, Senior Vice President and Chief Economist for the MBA. On the positive side, housing starts boomed in December, rising by 5.8% according to the Commerce Department. Permits for future homebuilding also increased by 4.5%. For eight straight months, single family starts have increased and overall, single-family homebuilding has increased by 12%. Those numbers indicate that we are on the fastest pace since 2006 for single-family housing starts. The chart below shows just how precipitous the drop was during the financial crisis and how much we’ve rebounded this year alone. While the construction pace is a positive, the same headwinds continue to work against homebuyers. The cost of new construction can offset the savings of historically low interest rates. More people are staying in their homes longer, including the hundreds of thousands of people who recently refinanced, which has greatly lessened supply. Supply has also been drained due to families moving away from cities in response to the COVID-19 pandemic in order to buy a home and get more space as they work remotely. All of these factors have put extreme upward pressure on home prices, yet another factor working against potential homebuyers.