This is Ann Alsina of CovingtonAlsina, with your Monday Money Report.
The markets were up last week despite Thursday’s drop. Good news came in the form of lowered inflation and earnings reports. The Personal Consumption Expenditures Index, or CPE, showed June’s inflation rate coming in 3%, a drop from May’s 3.8%. We’re in the middle of quarterly earnings season, where publicly traded companies report revenue and profit numbers. Of the 51% of companies that reported, 80% have beaten their estimates.
Our Federal Reserve Bank increased rates by another quarter of a percent, which was widely expected. Thursday’s drop was driven by news from the Bank of Japan that they will allow the yield on their 10-year government bond, or the interest the bond pays, to rise above the current cap of half a percent.
As interest rates rise, mortgage rates have also increased. Given current rates, does it make sense to buy a house right now? Buying a home has many advantages over renting. You’re building equity, which has traditionally been a large source of wealth in America. Your mortgage also remains constant, where your rent may go up every year. The mortgage interest deduction may result in significant tax savings. On the flip side, if something breaks when you are renting, the landlord has to fix it. You have no maintenance costs.
How do you decide if you should buy a home? A general guideline is to have no more than 30% of your income go to housing, and no more than 40% on debt altogether, including your mortgage. Start with how much you can afford to pay each month and work backwards to see how big of a mortgage you can handle. If you want a more expensive home, you need to save more for a bigger down payment. In addition, you need savings on hand for all the things that can break or go wrong.
If you’re willing to be house poor for a few years, meaning you have a nice house but little discretionary income, you may consider the likelihood of upcoming raises or promotions, and the possibility that rates may drop in a few years and you can refinance.
You should also know that, while rates seem high now, they are relatively low from an historical perspective. In 1981, the 30-year mortgage rate peaked at 18.4% according to Freddie Mac. From 1971 to today, mortgages rates averaged 7.74%. The biggest consideration should be if you can afford both the monthly payments and the upkeep on the house, and not the mortgage rate.
Your action item this week is to use ten dollars wisely. If you have credit card debt, pay an extra ten dollars. If you don’t add ten dollars to your savings account. If your savings account is already solid, give it away to a cause you believe in. Little amounts add up over time.
Follow us on Facebook and check out our website at covingtonalsina.com for more information and great resources.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
 Wall Street Journal, Stock Market News by Joe Wallace and Hannah Miao, 07/28/23