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48 FED MINUTES SHOW CONCERN ABOUT INFLATION, BROADER ECONOMY e Federal Reserve's daring move to increase the federal funds rate just before the end of 2015 was no surprise to most, but what the mortgage industry did not know was that this initial move would only the beginning of a series of events. e Federal Open Market Committee (FOMC) released its minutes to the December meeting Wednesday afternoon, showing clear concern about inflation and the economy as a whole. e minutes noted that "some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasized the need to monitor the progress of inflation closely." Officials also explained that they expect "economic headwinds will persist and that inflation will rise gradually to 2 percent over the next three years," and because of this "most participants judged that it would be appropriate for the federal funds rate to remain below its longer-run normal level from 2016 to 2018," the minutes said. So when will the next rate hike occur? "Participants projected that a gradual rise in the federal funds rate over that period would be appropriate as some of those headwinds, such as sluggish foreign economic growth, diminish and the temporary factors holding down inflation dissipate. Some participants noted that a gradual increase in the federal funds rate would be consistent with their expectation that the neutral short-term real interest rate will rise slowly over the next few years," the minutes stated. As far as housing is concerned, the residential mortgage market was little changed from the previous meeting. "Credit remained tight for borrowers with low credit scores, hard-to-document income, or higher debt-to-income ratios. Interest rates on 30-year fixed-rate mortgages increased 30 basis points, in line with increases in yields on mortgage-backed securities and comparable- maturity Treasury securities. Nevertheless, mortgage rates continued to be quite low by historical standards," the minutes said. In addition, a number of officials found that there appear to be "continued improvement in the housing sector, including ongoing house price appreciation, low levels of home inventories, the substantial gap between the rate of household formation and the relatively slow pace of construction, and the possibility that homebuyers may be entering the market in anticipation of higher mortgage rates." "Now that liftoff is behind us, the question on everyone's mind is how quickly rates will normalize," said National Association of Federal Credit Unions Chief Economist Curt Long. "e Fed appears to be eyeing four quarter-point rate increases in 2016, but that depends on a lot of factors falling into place. e minutes indicated that the committee is somewhat less pessimistic about the possibility of slow growth abroad and the threat that might pose to the U.S. than many observers. As for inflation, there appears to be a growing divergence of views about risks to the Fed's 2 percent target from lower oil prices and a stronger dollar." AMERICANS ARE SPENDING MORE THAN EVER ON RENT Rising rental costs as well as a surge in the number of households renting resulted in Americans spending about $19 billion more in rent during 2015 than they did in 2014, according to a recent report from Zillow. In 2015, the number of rental households increased by about 1.8 million from the previous year up to about 43 million, while the aggregate rent paid jumped from $519 billion up to $535 billion (close to a 4 percent increase), according to Zillow. To put into perspective the amount of aggregate rent paid by Americans in 2015, this number was comparable to the Department of Defense's budget (approximately $575 billion) and nearly five times the aggregate cost of dental care for Americans in 2014. e high rents paid by Americans are hampering home sales, according to Zillow. In November, Zillow issued a report stating that would-be homebuyers were in a catch 22 because of high rental costs—they can't afford a down payment on a house because they are putting so much money toward rent, and they are putting so much money toward rent because they can't afford a down payment on a house. Renters in the New York metro area accounted for more than one-tenth of the country's total rent paid in 2015, at $56 billion. In Los Angeles, renters spent about $35 billion on rent in 2015. In all, renters in the nation's largest 50 metro areas paid about two-thirds of the aggregate rent last year. Of the 50 largest metros, the area where renters paid the lowest rent was Salt Lake City with $800 million, according to Zillow. e two metro areas where the most rent was paid on single-family units were Los Angeles and Chicago. Zillow reported in November that rental affordability had worsened 28 of the largest 35 metros over the previous year and that rental affordability is worse than the historical average in 34 of the 35 largest metros. Mortgage affordability worsened in 18 of the largest 35 metros in the previous year, according to Zillow. Chief Economist Svenja Gudell said that although paying a mortgage is more affordable than renting, "many current renters aren't able to realize the savings that come with homeownership because as home values and rents keep rising, it's getting increasingly difficult to clear the down payment hurdle." In December 2015, there were approximately 78,100 foreclosure starts nationwide, up 17 percent from November but still down by 15 percent from December 2014, according to Black Knight Financial Services. KNOW THIS

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