February 20, 2018
The Wild Ride
Several weeks ago, we spoke about the negative effects of economic growth. The two factors we cited were higher interest rates and higher oil prices. Now we are starting to see the markets react to this new reality. Many are blaming rising interest rates for causing what we can now call a stock market correction. A correction which we have not seen for some time. Why would higher rates cause stocks to falter? Abnormally low rates have propped up the markets for years. Why keep your money in the bank earning 1.0% interest when you can earn 10% or more in the stock market? That is an over-simplification, but certainly higher rates are taking some of this extra stimulus out of the equation.
Not that rising rates are the only explanation with regard to the trepidation in stocks. As we also explained several weeks ago, the tax plan was great news for stocks because it immediately made companies more profitable by lowering their tax rates significantly. Stocks have been rallying for nine years, comprising the second longest bull market in history, but the rally intensified in anticipation of the tax plan. We surmised that all the good tax news was already built into stocks, but the rally continued anyway -- until rates started rising.
The question now is whether this is just a healthy and long-overdue correction which may reverse quickly, or is it the beginning of the end for the bull run? As always, we will stay away from predictions. Rates could ease back down or stabilize -- and the market could climb back. Right now, the economy is healthy and rates have not risen far enough to cause the economy to pause. Actually, if the growth eased a bit, this could cause the Federal Reserve Board to be less concerned with inflationary pressures and perhaps permit them to take their foot off the pedal. For now, we have a pretty wild ride going on.
Rates on home loans rose again in the past week. For the week ending February 15, Freddie Mac announced that 30-year fixed rates increased to 4.38% from 4.32% the week before. The average for 15-year loans rose to 3.84% and the average for five-year adjustables climbed to 3.63%. A year ago, 30-year fixed rates averaged 4.15%, higher than today's level. Attributed to Len Kiefer, Deputy Chief Economist, Freddie Mac -- "Wednesday's Consumer Price Index report showed higher-than-expected inflation; headline consumer price inflation was 2.1 percent year-over-year in January -- two tenths of a percentage point higher than the consensus forecast. Inflation measures were broad-based, cementing expectations that the Federal Reserve will go forward with monetary tightening later this year. Following this news, the 10-year Treasury reached its highest level since January 2014, climbing above 2.90 percent. Rates on home loans have also surged. After jumping 10 basis points last week, 30-year fixed-rates rose 6 basis points to 4.38 percent, its highest level since April 2014." 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
February 16, 2018
|6-month Treasury Security
|1-year Treasury Security
|3-year Treasury Security
|5-year Treasury Security
|10-year Treasury Security
|| 2.293% (Jan)
|| 1.282% (Jan)
|11th District Cost of Funds
|| 0.753% (Dec)
|| 4.50% (Dec)
A government shut-down has been averted and the compromise has produced good news for real estate. The two-year, $400 billion spending deal came as a result of a bipartisan group of lawmakers supporting the agreement. Congress now has until March 23 to write the legislation to accompany the spending deal that will fund the government for the rest of the fiscal year. The National Association of REALTORS® fought and achieved a number of wins for real estate, including a temporary extension of federal flood insurance and extension of NAR-backed tax provisions. Here are the details:
- Flood insurance. The National Flood Insurance Program has been extended until March 23, giving lawmakers time to work out an extension that could last until September 30. The deal also adds $27 billion in mitigation and resiliency funds to address issues arising from last year’s hurricanes, and it makes $12 billion available under the Community Development Block Grant program to fund U.S. Army Corp of Engineers flood mitigation projects.
- Extension of tax provisions. The deal retroactively extends provisions for the 2017 tax year for mortgage debt forgiveness; mortgage insurance premiums and energy efficiency improvements in commercial buildings.
- Tax Credit. The nonbusiness energy property tax credit applies to ten percent of the amount paid for qualified energy efficiency improvements such as energy-saving roofs, windows, skylights, and doors, and 100 percent of that paid for qualified energy products, such as high-efficiency water heaters, air conditioning units, and furnaces. Source: REALTOR® Magazine
Existing-home sales in 2017 surged to the best year for sales in 11 years, the National Association of Realtors® reported. Total existing-home sales—which include completed transactions for single-family homes, townhomes, condos, and co-ops—rose 1.1 percent in 2017 to a 5.51 million sales pace. The sales pace surpassed 2016’s 5.45 million, which had been the highest pace since 2006. End-of-the-year sales numbers were overcast somewhat by a slower sales pace in December. Existing-home sales decreased 3.6 percent in December month over month to a seasonally adjusted annual rate of 5.57 million. “Existing sales concluded the year on a softer note, but they were guided higher these last 12 months by a multi-streak of exceptional job growth, which ignited buyer demand,” says Lawrence Yun, NAR’s chief economist. “At the same time, market conditions were far from perfect. New listings struggled to keep up with what was sold very quickly, and buying became less affordable in a large swath of the country. These two factors ultimately muted what should have been a stronger sales pace.” The median existing-home price for all housing types in December was $246,800, which is 5.8 percent higher than a year ago. First-time home purchasers comprised 32 percent of sales in December, up from 29 percent in November. Source: NAR