December 26, 2017
Tax Law Questions
For months we have been calling it a tax bill. Though we have covered the proposals, we have been careful not to predict what we would see in the final version. Today, the tax bill is law and, though we are aware of the major provisions, it is a very complex law and many of the details will be coming out in the coming days and weeks. As a matter of fact, we would not be surprised if there are a series of technical amendments in the near future intended to fix and/or clarify certain provisions as they are uncovered.
Today, we will not discuss the specifics of the law, but the possible macro-effects of the law's implementation. We have already seen one major positive effect. As we have mentioned previously, the major stock market rally America has witnessed in the past year was, at least partially, a direct result of the possibility of a tax cut for corporations. Theoretically, if you lower the tax liability of companies, their profits should increase, and they will be more valuable. But even this obvious effect is in question with regard to the future. Now that the tax law is passed, does that mean that the stock run will continue, or has all of the good news been built in to the valuation of stocks?
Another obvious effect of the law should be to boost the economy. If tax rates are lowered for most, this will give both individuals and corporations more money to spend. This leads to two questions. How much will the economy improve? Plus, since we are already near full employment levels, if the economy improves significantly, might this hotter economy increase inflation? The possibility of higher inflation would also bring the threat of higher interest rates. Again, this is not a prediction, but a question that will be answered as time goes on. Finally, the effect of the tax law on real estate, as a result of the changes in the standard and itemized deductions, will be another significant question we will cover as the details emerge.
Rates were stable again in the past week, but did not reflect a surge in long term rates after the survey was tabulated. For the week ending December 21, Freddie Mac announced that 30-year fixed rates rose one tick to 3.94% from 3.93% the week before. The average for 15-year loans increased slightly to 3.38%. The average for five-year adjustables rose to 3.39%. A year ago, 30-year fixed rates averaged 4.30%, more than 0.25% higher than today. Attributed to Sean Becketti, chief economist, Freddie Mac --"Rates on thirty-year fixed loans have been bouncing around in a narrow 10 basis points range since October. The U.S. average 30-year fixed rate increased 1 basis point to 3.94 percent in this week's survey. The majority of our survey was completed prior to the surge in long-term interest rates that followed the passage of the tax bill. If those rate increases stick, we'll likely see higher rates on home loans in next week's survey. But even with yesterday's increase, the 10-year Treasury yield is down from a year ago, and 30-year fixed rates are 36 basis points below the level we saw in our survey last year at this time. Rates on home loans are low." Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.
Current Indices For Adjustable Rate Mortgages
December 22, 2017
|6-month Treasury Security
|1-year Treasury Security
|3-year Treasury Security
|5-year Treasury Security
|10-year Treasury Security
|| 1.905% (Nov)
|| 1.132% (Nov)
|11th District Cost of Funds
|| 0.737% (Oct)
|| 4.50% (Dec)
| The shortage of listings that has defined the U.S. home sales market in recent years will begin to ease in the second half of 2018, according to a new report, but not before setting a record for consecutive months of decline. Increased inventory will help slow price appreciation, especially at higher price points, according to the report, published by realtor.com®. That will come as welcome news after the S&P CoreLogic Case-Shiller 20-city index this week showed that prices rose 6.2 percent in September from a year earlier, the largest increase in more than three years. Inventory has decreased on a year-over-year basis in each of the past 29 months, according to the National Association of Realtors®. The longest streak on record is 30 months. Relief is unlikely to come all at once, and some metropolitan areas will benefit before others, according to Danielle Hale, chief economist at realtor.com®. Homebuilding is finally catching up with demand, Hale said. Construction can have a chain-reaction effect on inventory, because buyers of newly built homes are often sellers of existing ones. “I think it will be a three-year recovery process to get back to normal,” Hale said. “We’re still going to be in a shortage situation in much of the country.” Source: Bloomberg
Renters are seeing their budgets increasingly squeezed as incomes stagnate while homeowners are reaping the benefits of lower interest rates. An analysis from Zillow shows that renters are paying out a larger share of their incomes on rents – an extra $2,000 a year – while homebuyers need a smaller share of their income to pay their house payments. In the third quarter of 2017, the median nationwide rental required 29.1% of median monthly income, up from 25.8% in the years leading up to the housing bubble. Payments on home loans required 15.4% of median income compared to 21% historically. "In most markets, current renters are at a disadvantage compared to years past because paying the rent takes up a much larger share of their income than it did before," said Zillow® Chief Economist Dr. Svenja Gudell. "For many people, that can mean less cash to put toward paying off student debt, building an emergency fund, or saving for retirement. For those hoping to buy a home, it could be a significant part of their down payment." Source: Mortgage Professional America
Building sites for single-family houses hit a record high last year, even as lots were the smallest ever, according to data from the Census Bureau’s Survey of Construction. The median lot size sold in 2016 dipped to 8,562 square feet, or just under a fifth of an acre. That’s a small decline from 2015, when the median fell to under 8,600 square feet for the first time. Price-wise, half the lots nationwide were priced at or above $45,000, a value first reached in 2015. Before that, the previous record was the $43,000 posted in 2006, in the midst of the housing boom -- two years before the market came apart at the seams. Despite the record-high lot prices, they accounted for less than 17 percent of sale prices of new single-family homes started in 2016, which is the lowest share since at least 1999. The declining share suggests that other construction costs, including labor and materials, are outpacing rising lot values. Meanwhile, despite smaller lots, builders are managing to make their backyards larger, according to research from online real estate brokerage Trulia. The typical house completed so far this year included 7,048 square feet of outdoor space, marking the third year in a row yard sizes have grown. The trend breaks a 25-year run toward smaller outdoor spaces. Yard sizes are increasing because the footprints of the houses themselves are shrinking, as builders try to cut costs by making their houses smaller. At the same time, buyers are demanding better-designed outdoor spaces. Source: Lew Sichelman, UExpress