Category: Interest Rates (Page 25 of 32)

Rising Interest Rates and Increasing Property Values – Updated Forecast 2018-2019

October 7, 2018 / Tom Bonetto

The question asked to me most often over the last few months is “is now a good time to buy?”

Many potential buyers are concerned about rising rates and property values. And yes – both are going up.

My answer to their question might surprise you – as I truly believe now is a great time to purchase real estate.

Purchasing Today – Why Now?

It was clearly more advantageous to purchase real estate last year, when looking through the rear view mirror. But I’m convinced that purchasing today will be MUCH better than this time next year.

Why? Well, for one, property values are increasing at over 5% per year, so that home you are looking at today will most likely be 4-5% more expensive next year.

Secondly, the Federal Reserve has signaled 3 to 4 more interest rate hikes over the next 15 months, the next most likely coming in December of this year.

So, let’s be clear about the fact that most experts agree that both prices and rates will most likely be higher next year versus today.

Why the shift? Read on for more….

First: The Good News – and There’s Lots of It

Unemployment is at it’s lowest level since 1969.

“This is the best job market in a generation or more,” said Andrew Chamberlain, chief economist at recruiting site Glassdoor.

Unemployment rates below 4% are extremely rare in 70 years of modern record-keeping. The two longest sustained periods came during the Korean and Vietnam Wars, when the combination of strong growth and the enlistment of young men from the civilian labor force helped to largely wring unemployment out of the economy.

Real wages were up nearly 3% in August of this year.

Per the Wall St. Journal, the Atlanta Fed’s “wage tracker” showed a 3.2% increase year-over-year for June. Most encouraging is the report of a bounce in labor productivity growth in the second quarter to 2.9%. That’s the best jump since the first quarter of 2015,

Home prices are rising steadily at over 5% year-over-year.

Home price gains are starting to decelerate (they are growing, but at a slower rate than last year)— but they’re still strong and are running well ahead of wage gains and inflation.

Inflation, the arch enemy of bonds and interest rates – is holding at the federal reserve target of 2%.

In a speech last week, Fed Chairman Jerome Powell suggested he sees little urgency to accelerate the central bank’s pace of interest-rate increases or to signal a more restrictive policy path ahead, in part because inflation is so low and stable.

Rates Today – and What We Can Expect

The stronger than expected economic data released over the last weeks and months are actually bad news for mortgage rates, and rates reached their highest levels in many years.

Last Wednesday’s bond rout sent the yield on the 10-year U.S. Treasury note, a closely watched barometer of investors’ sentiment toward growth and inflation, to its highest level since July 2011. Risky assets rallied, pushing the Dow Jones Industrial Average to a record and crude-oil prices to multiyear highs.

Together, the moves suggested investors are once again growing more and more about future growth, a shift from the more cautious outlook that many held for much of the year.

Interestingly, mortgage interest rates don’t necessarily move in step with the federal funds rate, as they are more closely tied to the 10-year Treasury Bond. So, borrowers today looking to get a mortgage aren’t directly affected by the latest Fed hike.

However, the federal funds rate does contribute to the longer-term trends of the 10-year Treasury, and long-term fixed mortgages as a result.

Here’s a little perspective on average mortgage rates since 2000:

Graph Courtesy MarketWatch

With the Fed likely lifting rates multiple times over the next year plus, the trend for long-term mortgage rates is up. It would not surprise me to see 6% interest rates in 2019.

Here’s a piece I wrote earlier this year that outlines more regarding rates and what we can expect in 2019…

The Bond Market and Interest Rates

The U.S. unemployment rate fell to 3.7%, its lowest level since 1969, the Labor Department reported Friday. Average hourly earnings, meanwhile, rose a seasonally adjusted 0.3% from August—the third straight month of solid, inflation-beating gains.

Fed officials raised their benchmark short-term rate last week and penciled in four more quarter-percentage-point increases through the end of 2019. That would lift the rate to a range between 3% and 3.25%. Until recently, many investors doubted the Fed would go that far.

The Fed is raising rates to keep the economy from overheating. If the economy becomes “too strong”, that could send inflation higher, and the Fed doesn’t want that to happen. They combat inflation by raising interest rates.

In essence, the bond market is starting to believe the Federal Reserve.

Finally, I’d invite you to read this article on how rising interest rates are not deterring buyers in today’s market…

What About Another Bubble?

Many clients are talking about a potential bubble, and they don’t want to be on the wrong side of it, if it were to burst.

However, most economists are not the slightest bit concerned about this.

Why? It’s about supply and demand. And the supply is tight. It isn’t forecasted to meet demand until sometime in 2021 or beyond.

Actually, it’s the lack of supply and the accompanying home prices quickly rising are the sources of market headaches. Remember your Economics 101 class on supply and demand? When supply is down and demand increases, prices move up.

In reality, the supply shortage is a much better problem to have, compared to a demand shortage. The current problem also portends no meaningful price decline nor an impending foreclosure crisis. Rather, there is a good possibility for solid home sales growth once the supply issue is steadily addressed.

As to new home building activity, housing starts did fall by a double-digit percentage in June, as mentioned above, but are up 7.8% year-to-date to June.

More will need to be built, as there is still a shortage. As more homes are built, an additional boost will be provided to the local economy along with more local job creations.

In Conclusion

So, it is safe to say that we will continue to see pressures in the bond market and mortgage interest rates overall. These increases do look to be gradual for the time being, but consistent and into 2019, for sure.

With that said, home prices are increasing nationally at over 5%, so the increase in interest rate will be more than offset by the increasing value of one’s home!

Secondly, home buying power is still extraordinarily high, despite rising home prices and rate hikes.

Find out more about that here.

In reality, now is a fantastic time to purchase. Contact me for more information, as it would by my privilege to help you.

References:

https://www.wsj.com/articles/bond-investors-catch-up-with-feds-plans-1538767826

https://www.forbes.com/sites/lawrenceyun/2018/08/02/no-housing-recession-over-horizon/#3d8212a5f79c

https://www.wsj.com/articles/real-wages-are-rising-1536359667

Rising Interest Rates Aren’t Deterring Buyers

September 10, 2018 / Tom Bonetto

Mortgage interest rates have risen consistently over the last year-and-a-half. At that time, rates for the 30-year fixed were just under 4%. Lately, the average is closing in on 5% percent for a 30-year fixed-rate mortgage.

Let’s take a look at the facts and crunch the numbers. You’ll likely find that minor rate fluctuations won’t affect a buyer’s ability to purchase a home

Despite these rising mortgage rates, there’s good news:

Rising mortgage rates don’t have to stifle the buyer’s dream of owning
In fact, a new study by Redfin shows that rising rates aren’t scaring off many shoppers
Rates remain historically very affordable, even if they are a bit higher today

Source: You can find out more here – by reading Erik Martin’s entire piece at The Mortgage Reports

What the research found on interest rates and purchasing patterns

A recent survey of potential buyers by Redfin reveals some interesting findings:

Only one in 20 would call off their search if rates rose above 5 percent
One in four said such an increase would have no impact on their search
Nineteen percent would increase their urgency to find a home before further rate increases
Twenty-one percent would look in other areas or search for a more affordable home
One-third would slow down their search to see if rates came back down

This means that many buyers understand the environment today – and realize the long-term benefits of home ownership.

How to read the data

Taylor Marr, senior economist at Redfin, says these results are telling.

“Only a small share of buyers will scrap their plans to buy a home if rates surpass 5 percent. This reflects their determination to be a part of the housing market,” he notes.

Marr says buyers are well aware that rising mortgage rates mean slightly higher monthly payments. Yet buyers are willing to make compromises, as they understand that actual wages are higher today, making the purchase more affordable. Also, they know that real estate generally appreciates. Finally, today’s rates remain very low, compared to historical norms.

“By historical terms, 5 percent mortgages are not that high. A rate below 7 percent is really a good deal on long-term money,” Joshua Harris, clinical assistant professor of real estate at NYU’s Schack Institute of Real Estate, says. “Plus, rents are generally high. So even at 5 percent, many buyers will still be saving money on monthly housing costs.”

What buyers can do now

Most experts recommend the following steps:

Buy now if you can afford it – “While rates are going up, so are home prices in most markets,” says Harris. “The job market is great. Many are seeing wage growth in many sectors. These forces will push rates up and give people more money to spend on a house. So waiting can be a very costly decision if you need a house and don’t want to rent.”

Get your financial house together – start the pre-approval process and get qualified for a loan. “Ask questions and understand the monthly payments you’ll need to make,” suggests Suzanne Hollander, real estate attorney, broker and Florida International University instructor. Will your income be able to cover the principal, interest, taxes and insurance? Will it provide enough money to live the lifestyle you prefer?”

Don’t sweat a minor rate hike – “So long as you intend to hold the home for at least five years, these small fluctuations shouldn’t affect your decision to buy,” Harris adds.

With economic gains outpacing mortgage rate interest rates in many markets, you may be better able to buy a home today than at any time over the last 10 years. Don’t hesitate to reach out to me and find out more!

The Latest on Interest Rates for 2018 and 2019

July 5, 2018 / Tom Bonetto

The Federal Reserve lifted the federal funds rate last month by a quarter percentage point to a range of 1.75 percent to 2 percent. The Fed has indicated that there will most likely be two more rate hikes this year.

Most financial experts expect the Federal Reserve to raise rates at least 3 times in 2019, as well.

Mortgage interest rates don’t necessarily move in step with the federal funds rate, as they are more closely tied to the 10-year Treasury Bond. So, borrowers today looking to get a mortgage aren’t directly affected by the latest Fed hike.

However, the federal funds rate does contribute to the longer-term trends of the 10-year Treasury, and long-term fixed mortgages as a result.

With the Fed likely lifting rates multiple times over the next couple of years, the trend for long-term mortgage rates is up.

Many experts are forecasting that mortgage rates could move near the 6% range sometime in 2019.

Why is the Federal Reserve raising rates?

Well, it’s a bit complicated, but there are some very good reasons – and they are all designed to help foster stable, economic growth.

‘Quantitative Tightening’

Between 2009 and 2014, the US Federal Reserve created $3.5 trillion during three phases of what was called “Quantitative Easing”. It was the Federal Reserve’s response to help reduce the dramatic market swings created by the recession about 10 years ago.

This seems to have helped the economy avert disaster, but their impacts were far from ideal. Nonetheless, the economy slowly lifted off as consumers rebuilt their balance sheets and asset values rose.

Today, the Fed is slowly reversing this stimulus program. They’re raising short-term rates and shrinking their bond and mortgage back securities portfolio.

The consensus thinking is that the Federal Reserve members fear that inflation will take hold if they keep interest rates artificially low.

Historically, when the bonds owned by the Fed mature, they simply reinvested the proceeds into new bonds. It essentially keeps the size of the balance sheet stable, while having very little impact on the market.

However, when quantitative tightening began in October of 2017, the Fed started slowing down these reinvestments, allowing its balance sheet to gradually shrink.

In theory, through unwinding its balance sheet slowly by just allowing the bonds it owns to mature, the Fed can attempt to mitigate the fear of what might happen to yields if it was to ever try and sell such a large amount of bonds directly.

Essentially, the Federal Reserve is changing the supply and demand curve and the result is a higher yield in the 10-year treasury note.

Inflation and Interest Rates

Inflation is beginning to inch up as the labor market continues to improve. Most indicators suggest inflation has been climbing in recent months. If you look at both the Producer Price Index and the Consumer Price Index, you will see the trends.

This is a general reflection better economic data, rising energy prices, and increased employment.

Rising inflation is a threat to government bond investors because it chips away at the purchasing power of their fixed interest payments. As mentioned earlier, the 10-year Treasury yield is watched particularly closely because it is a bedrock of global finance. It is key in influencing borrowing rates for consumers, businesses and state and local governments.

Positive labor and economic news keeps coming in (as predicted over the last 6 months), and the prospect of inflation will put pressure on bonds and interest rates.

What It All Means

With that said, home prices are increasing nationally at nearly 6%, so the increase in interest rate will be more than offset by the increasing value of one’s home!

Secondly, home buying power is still extraordinarily high, despite rising home prices and rate hikes. Find out more about that here.

In reality, now is a fantastic time to purchase. Contact me for more information, as it would by my privilege to help you.

Home Buying Power Still High, Despite Rising Prices and Rates

June 10, 2018 / Tom Bonetto

I’m receiving calls and questions all the time regarding mortgage qualification and home buying in today’s changing interest rate and price appreciation marketplace.

Your home buying power is the result of several variables – but there’s great news today when you consider increased income and historically low mortgage rates.

I’m linking today to an article by Amy Hale of The Mortgage Reports that really nails the answer. Go here for the entire article – and I’ve highlighted the key pieces below.

Are home prices really that high?

It might seem like home prices just keep rising, but according to the historical numbers, today’s housing is actually very affordable. “Real” home prices—those adjusted for income and interests rate changes—are currently 32.5 percent below their housing boom peak from 2006.

Home buyers still hold the power

According to the latest First American Real House Price Index, which aims to measure overall housing affordability by considering changes in income, interest rate and actual home prices, consumer home buying power is still strong.

“While unadjusted house prices have been on the rise since the end of 2011, nearly a seven-year run, consumer house-buying power has also increased by 14.3 percent over the same period,” said Mark Fleming, First American’s chief economist.

“House-buying power, how much one can buy based on changes in income and interest rates, has benefited from a decline in mortgage rates since 2011, and the more recent slow, but steady growth of household income.”

Buying power is actually up significantly from 2011 because real wages have actually increased over that time – household income has risen nearly 20% over the last 7 years. Also, mortgage lenders have relaxed some of the tight requirements and ratios for qualification. This combination makes it a great time for buyers and borrowers.

The real story on home prices

Overall, “real” home prices aren’t even close to their historical peak. In fact, according to Fleming, they’re currently 32.5 percent below July 2006’s prices and 9 percent lower than in January 2000.

Don’t let sticker prices fool you. American home buying power is still high. Want to get in on the market? Reach out to me for some answers, as it would be my privilege to help!

Today’s Mortgage and Real Estate Environment – Early Summer 2018 Edition

May 7, 2018 / Tom Bonetto

Believe me, I understand that home inventories are tight across the country. And that is making home buying a bit challenging right now.

Nevertheless, I see a great opportunity in this market for first time buyers, investors, and existing homeowners who want to take advantage of rising equity.

Look at it this way….real wages are moving up, home equity is rising, and interest rates are keeping inflation at bay.

The Current Outlook

This is a recipe for a strong, long-term real estate market.

A decade ago, the housing market was the U.S. economy’s biggest weakness. Now, it offers crucial support.

The housing market has been trending on a path higher for some time now as it gradually recovered from the financial meltdown nearly a decade ago. Interestingly, it has even gained additional strength lately, despite broadly higher home prices.

This is due to the fact that owning a home right now is one of the better investments you can make.

Some analysts are saying that a rise in mortgage rates, prompted by higher Treasury yields and inflationary pressure, could eventually cut into demand for new homes.

The benchmark 30-year fixed mortgage hit nearly 5% at the end of April, its highest since early 2014, according to weekly data from Bankrate.com. As recently as September, it was right at 4%.

Still, the economy is much stronger than it was the last time rates spiked in 2013, which means the housing market has more ability to withstand higher mortgage rates than it used to, most analysts say.

As a matter of fact, real wages are up for the first time in 10 years, giving would-be buyers more purchasing power.

Couple that with expected equity increases in those home purchases, this looks to be a fantastic time to purchase.

The Data

Industry experts are also predicting an increase in purchases. Industry giant Zillow predicts that 2018 will shape up to be an even hotter real estate market than in 2017.

An analysis conducted by Zillow Research, a division of Zillow Group that operates the Zillow real estate marketplace, found that homes sold faster than ever in 2017 largely due to shrinking inventory.

Rising Rents Means It’s Time To Buy

The analysis has shown that rents have been increasing consistently the past three to four years. In the last year, for example, rents have over increased 4% nationwide.

That’s not necessarily a giant jump, but those increases year after year add up. If buyers can lock-in a monthly mortgage, that alone is a huge incentive to get into the home buying market.

Per Forbes Magazine: “according to an online survey of more than 1,000 active buyers conducted in early March by Toluna Research for realtor.com, 23% of millennials surveyed indicated that rising rent was a trigger for their home buying purchase.

Realtor.com reports that HUD data shows rents were up in 85 of the top 100 metro areas, including nine metros where rents were up by double-digit percentages from a year ago.”

More from Forbes: “These are the market dynamics and challenges Millennials face especially in urban areas where they naturally migrate.

Craig Furfine, clinical professor of finance at Kellogg School, Northwestern University thinks differently. ‘An alternative viewpoint is Millennials have been reluctant to enter the housing market having witnessed the effects of the housing collapse of a decade ago. Now they see interest rates rising and they think now may be a good time to buy’.

Interestingly, just like their baby boomer parents, many Millennials want that family home with a yard and in a good school system. It seems like the foundation of home ownership desire hasn’t really changed in a long time.

Don’t hesitate to reach out to me for more, as it would be my privilege to help!