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
