Good news for home owners and buyers
alike – home appreciation remains strong.
Interest have moved to historic lows due to multiple factors, including the virus scare.
The Federal Reserve has cut it’s funds rate by .50 basis points in an attempt to “provide a meaningful boost to the economy”, per Chairman Jerome Powell.
With these things in mind, make sure you have a solid game plan to navigate the market right now. Think about inventory, equity in your home, second homes, and investment properties as strategies to build wealth.
It’s also a good time to take a look at refinancing any properties you own, as rates have dropped significantly over the last 2 years.
The housing reporting benchmark, CoreLogic, reported that home prices rose 0.1% in January and 4.0% year over year.
The year-over-year reading remained stable from last month’s report. CoreLogic forecasts that home prices will appreciate by 5.4% in the year going forward, which slightly higher pace. from the 5.2% forecasted in the previous report.
This is great news for would be buyers, as they can expect a great return on their investment!
Do reach out to me to find out more, as it would be my pleasure to help you determine the right strategy for today’s environment.
I receive a number of questions regarding mortgage interest
rates every time there is a meeting of the Federal Reserve Board.
Most assume that the Federal Reserve controls mortgage interest rates…and, interestingly, that’s not the case.
I’m linking to a fantastic article by Dan Green at The Mortgage Reports – he does a great job in highlighting what really takes place with mortgage rates. You can read the entire piecehere…and I’ll highlight a few key pieces below.
The Federal Reserve Open Market Committee
The Federal Reserve Open Market Committee (FOMC) is a rotating, 12-person sub-committee within the Federal Reserve, headed by current Federal Reserve Chairman Jerome Powell. The FOMC meets eight times annually on a pre-determined schedule, and on an emergency basis, when needed.
The FOMC’s most well-known role worldwide
is as keeper of the federal funds rate.
The Federal Funds Rate is the prescribed rate
at which banks lend money to each other on an overnight basis. It is not correlated to mortgage rates.
The FOMC met a few weeks ago and dropped the federal funds rate by .25 basis points to 1.75%.
The Federal Reserve does not control mortgage rates
Here’s a fantastic graph (courtesy The Mortgage Reports) that shows how the Federal Funds Rate does not track with the 30-year mortgage rate (the green section tracks the mortgage rate, while the blue section highlights the Federal Funds rate):
When the Fed Funds Rate is low, the Fed is
attempting to promote economic growth. This is because the Fed Funds
Rate is correlated to Prime Rate, which is the basis of most bank lending
including many business loans and consumer credit cards.
For the Federal Reserve, manipulating the Fed
Funds Rate is one way to manage its dual-charter of fostering maximum
employment and maintaining stable prices.
The Federal Reserve can affect today’s
mortgage rates, but it does not and cannot set them.
The Federal Reserve has no direct connection
to U.S. mortgage rates whatsoever.
The Fed Funds Rate and Mortgage Rates
As Dan Green states: “It’s a common belief that the Federal Reserve ‘makes’ consumer mortgage rates. It doesn’t. The Fed doesn’t make mortgage rates. Mortgage rates are made on Wall Street.
Here’s proof: Over the last two decades, the Fed Funds Rate and the average 30-year fixed rate mortgage rate have differed by as much as 5.25%, and by as little as 0.50%.
If the Fed Funds Rate were truly linked to U.S. mortgage rates, the difference between the two rates would be linear or logarithmic — not jagged.”
With that said, the Fed does exert an influence on today’s mortgage rates.
Fixed Mortgage Rates vs. Treasury Yields
A far better way to track mortgage interest
rates is by looking at the yield on the 10 year Treasury bond. These two seem to track quite closely:
The 30-year fixed mortgage rate and
10-year treasury yield move together because investors who want a steady and
safe return compare interest rates of all fixed-income products.
U.S. Treasury bills, bonds, and notes directly affect the interest rates on fixed-rate mortgages. How? When Treasury yields rise, so do mortgage interest rates. That’s because investors who want a steady and safe return compare interest rates of all fixed-income products…and investors move to these type of products to fulfill their needs.
What the Fed Says Impacts Mortgage Rates…and Bond Prices
Dan Green outlines how the Fed impacts rates: “the Fed does more than just set the Fed Funds Rate. It also gives economic guidance to markets.
For rate shoppers, one of the key messages for which to listen is the one the Fed spreads on inflation. Inflation is the enemy of mortgage bonds and, in general, when inflation pressures are growing, mortgage rates are rising.
The link between inflation and mortgage rates is direct, as homeowners in the early-1980s experienced.
High inflation rates at the time led to the highest mortgage rates ever. 30-year mortgage rates went for over 17 percent (as an entire generation of borrowers will remind you), and 15-year loans weren’t much better.
Inflation is an economic term describing the loss of purchasing power. When inflation is present within an economy, more of the same currency is required to purchase the same number of goods.”
Meanwhile, mortgage rates are based on the
price of mortgage-backed securities (MBS) and mortgage-backed securities are
U.S. dollar-denominated. This means that a devaluation in the U.S.
dollar will result in the devaluation of U.S. mortgage-backed securities as
well.
When inflation is present in the economy,
then, the value of a mortgage bond drops, which leads to higher mortgage
rates.
This is why the Fed’s comments on inflation are closely watched by Wall Street. The more inflationary pressures the Fed fingers in the economy, the more likely it is that mortgage rates will rise.
It does look
like most economists are pointing to a recession (although most do think it
will be relatively mild by historical standards) in the next 12 months.
A recession
occurs when there are two or more consecutive quarters of negative economic
growth, meaning GDP growth contracts during a recession.
When an economy is facing recession, business sales and revenues decrease, which cause businesses to stop expanding.
How do the
economists know this? And what does this
mean for interest rates and real estate values?
Read on for more…
Recessionary Indicators
The Yield Curve
One of the major
indicators for an upcoming recession is the spread between the 10-year US
treasury yield and the 2-year US treasury yield.
While
various economic or market commentators may focus on different parts of the
yield curve, any inversion of the yield curve tells the story – an expectation
of weaker growth in the future.
What does
this inverted yield curve look like?
Here’s a good depiction:
Why does
inversion matter? Well, the yield curve inversion is a classic signal of
a looming recession.
The U.S.
curve has inverted before each recession in the past 50 years. It offered a
false signal just once in that time.
When
short-term yields climb above longer-dated ones, it signals short-term
borrowing costs are more expensive than longer-term loan costs.
Under these circumstances, companies often find it more expensive to fund their operations, and executives tend to temper or shelve investments.
Consumer borrowing costs also rise and consumer spending, which accounts for more than two-thirds of U.S. economic activity, slows.
Unemployment
Unemployment
is a recessionary factor, too – as economic growth slows, companies generate
less revenue and lay off workers to cut costs.
A rapid
increase in the overall unemployment levels—even if relatively small—has been
an accurate indication that a recession is underway.
Here’s a
chart that shows what happens when unemployment starts to trend upward – and
notice that recessions follow shortly thereafter:
As you can
see, when things in the economy starts to slow down, one of the first things
business do is to reduce their labor force.
The curve is flatting now, and unemployment might be ticking up soon.
Mortgage Rates During Recession
When a
recession hits, the Federal Reserve prefers rates to be low. The prevailing
logic is low-interest rates encourage borrowing and spending, which stimulates
the economy.
During a
recession, the demand for credit actually declines, so the price of credit
falls to entice borrowing activity.
Here’s a
quick snapshot of what mortgage rates have done during recessionary periods:
Obtaining a mortgage during a recession might actually be a good opportunity. As mentioned, when the economy is sluggish, interest rates tend to drop.
Refinancing
or purchasing a new home could be a great way to get in at the bottom of the
market and make a healthy profit down the road. A borrower should be market-
and financially savvy when considering large real estate purchases in a
recession
Real Estate During Recession
Believe it
or not, outside of the “great recession” of 2007 (which was caused, in part, to
a housing crisis), home values and real estate actually appreciate historically
during times of recession.
That seems counter intuitive…but because interest rates generally drop during recessionary periods, homes become MORE affordable to potential buyers (even though property values are higher), due to the lower payments provided by those lower rates.
When more
people can qualify for homes, the demand for housing increases – and so do home
prices.
In Closing
Although no one likes to see recession, you can observe that it actually can be beneficial for homeowners and would-be purchasers to refinance or purchase during these periods.
If you have more questions and or would like to strategize about purchasing or refinancing, don’t hesitate to contact me, as it would be my pleasure to help you!
Tapping into home equity by
refinancing is more of a possibility today and becoming very popular for many
borrowers.
As interest rates have moved lower in the last 3 weeks and housing values across the country continue to steadily increase, homeowners now have access to a much larger source of equity and possibly better payment terms!
With current mortgage rates low
and home equity on the rise, many think it’s a perfect time to refinance your
mortgage to save not only on your overall monthly payments, but your overall
interest costs as well.
It’s really about managing the
overall assets that you have in order to maximize the returns. Make sure you
are working with the right mortgage
lender to help in figuring out which product is best.
What is a Cash-Out Refinance?
A mortgage refinance happens when
the homeowner gets a new loan to replace the current mortgage. A cash-out
refinance happens when the borrower refinances for more than the amount owed on their existing home
loan. The borrower takes the difference in cash.
Rates Are Down and Home Equity is
Up
Since rising home values are returning lost equity to many homeowners, refinancing can make a good deal of sense with even a small difference in your interest rate. Homeowners now have options to do many things with the difference.
More home equity also means you
won’t need to bring cash to the table to refinance. Furthermore, interest rates
can be slightly lower when your loan-to-value ratio drops below 80 percent.
Here’s what many of my customers
are doing with that equity:
Consolidate higher
interest debt
Eliminate mortgage
insurance
Purchase a 2nd Home or Investment
Property (or a combination of both)
Home Improvement –
upgrades to kitchen, roof, or pool
Benefits of Cash-out Refinances
Free Up Cash – A cash-out refinance is a way to access money you already have in your home to pay off big bills such as college tuition, medical expenses, new business funding or home improvements. It often comes at a more attractive interest rate than those on unsecured personal loans, student loans or credit cards.
Improve your debt profile – Using a refinance to reduce or consolidate credit card debt is
also a great reason for a cash-out refinance. We can look at the weighted
average interest rate on a borrower’s credit cards and other liabilities to
determine whether moving the debt to a mortgage will get them a lower
rate. Some borrowers are saving thousands per month by
consolidating their debt through their mortgage.
More stable rate – Many borrowers choose to do a cash-out refinance for home
improvement projects because they want a steady interest rate instead of an
adjustable rate that comes with home equity lines of credit, or HELOCs.
2nd Home or Investment
Property – many borrowers are utilizing the
value of the cash in their home to purchase rental properties that cash flow
better then the monthly payments of the new loan.
Tax deductions – Unlike credit card interest, mortgage interest payments are tax
deductible. That means a cash-out refinance could reduce your taxable
income and land you a bigger tax refund.
Reasons NOT to Refinance
Terms and costs – While you may get a lower interest rate than your current mortgage, your cash-out refinance rate will be higher than a regular rate-and-term refinance at market rate. Even if your credit score is 800, you will pay a little bit more, usually an eighth of a percentage point higher, than a purchase mortgage. Generally, closing costs are added to the balance of the new loan, as well.
Paperwork headache – Borrowers
need to gather many of the same documents they did when they first got their
home loan. Lenders will generally require the past 2 years of tax returns, past
2 years of W-2 forms, 30 days’ worth of pay stubs, and possibly more, depending
on your situation.
Enabling bad habits – If you’re doing a cash-out refinance to pay off credit card
debt, you’re freeing up your credit limit. Avoid falling back into bad habits
and running up your cards again.
The Bottom Line
A cash-out refinance can make
sense if you can get a good interest rate on the new loan and have a good
use for the money.
Using the money to purchase a
rental property, fund a home renovation or consolidate
debt can rebuild the equity you’re taking out or help you get in a better
financial position.
With that said, seeking a refinance to fund
vacations or a new car might not be that great of an idea, because you’ll have
little to no return on your money.
It would be my pleasure to see if this type of plan
might be a good one for you.
Now that 2019 is here, let’s take a look at what we can expect regarding interest rates and the housing market.
Experts are predicting some interesting shifts moving into 2019, including continued home appreciation (although at a slower rate) and slight interest rate increases.
Let’s
take a look at the key components that drive the real estate market….
2019 Geopolitical/Finance Dynamics
One important way to understand what lies
ahead has to do with taking a look at world events and the other issues that
drive the economy. Here are a few things
that will impact the market in 2019:
Trade issues with China
Possible economic slowdown, although early 2019 results have been positive
Late 2018 Stock Market pullback – Early 2019 Rally
The Federal Reserve – 2 planned hikes in 2019
Rates set to rise in year ahead – How much and what will the impact be?
Keeping an eye on inflation…watch oil prices and wage pressures
Continued stock market volatility?
The Federal Reserve
The Federal Reserve raised borrowing costs four times in 2018, ignoring a stock-market selloff and defying pressure from President Trump, while dialing back projections for interest rates and economic growth in 2019.
By trimming the number of rate hikes they
foresee in 2019, to two from three, policymakers signaled they may soon pause
their monetary tightening campaign. Officials had a median projection of one
move in 2020.
The
Federal Open Market Committee “will continue to monitor global economic
and financial developments and assess their implications for the economic
outlook,” the statement said.
Here are
some things to watch in 2019:
Every meeting will have a press conference, making every meeting a live meeting, increasing speculation and volatility.
Federal Reserve “Dot Plot” shows 2 hikes in 2019
Inflation could rise with higher oil prices and wage pressures
Fed scheduled to reduce their balance sheet of mortgage-backed securities and treasury bonds by $50B per month
Prediction:Fed will hike 1 time to get the Fed Funds Rate (FFR) to 2.75%, although they would love to get the federal funds rate to 3% – and they will stay course on balance sheet reduction.
The pause in Fed rate hikes acts as important catalyst to turn the
tide in favor of Stocks.
Interest Rates
It’s not very often that major players across
an industry agree, but on this point, almost everyone does. Nearly all industry experts predict the
30-year mortgage will average above 5% for 2019.
Five percent used to be considered an
ultra-low rate. But after years of rates in the 3s and 4s, it seems pretty
steep. Still, affordable home payments
won’t be hard to find, even as we adjust to the new normal.
The National Association of Realtors (NAR)
predicts 30-year fixed interest mortgage rates to average around 5.3 percent in
2019.
“The potential buyer who’s thinking if now is
the right time to buy needs to do the math and determine what the impact of
potential rising rates would be on their payment,” said Paul Bishop, the NAR’s
VP of Research.
Here are some of the key factors for 2019:
Inflation is main driver of rates, and inflation should tick higher with oil prices rebounding and wages increasing. Many states increasing minimum wages.
Fed will continue to allow $50B to roll off balance sheet and is no longer buying
US Government borrowing more in 2019, which will add supply to the market that will need to be absorbed
More supply and less demand = higher rates
Stock market increases will most likely hurt rates
Prediction:The 10-year Treasury Note will trade between 2.75% and 3.25% for most of the year. High point for 10-year is estimated at 3.5%. Mortgage rates will fluctuate in the low-mid 5% range
30-year Fixed Mortgage Rates in the 5% to 5.5% range for most of
the year
Housing
Most experts predict the fevered bidding wars
and snap home-buying decisions won’t be as big of a factor in most
markets. Slower and steadier will characterize next year’s housing market.
That follows a 2018 that started off
hot but softened into the fall as buyers – put off by high prices and
few choices – sat out rather than paid up.
Affordability
issues will remain a top concern going into 2019, exacerbated by rising
mortgage rates. But some of 2018’s more intractable issues will begin to
loosen up. The volume of for-sale homes is expected to rise and diversify,
while the number of buyers is forecast to shrink.
Below are a few of the factors to watch in
2019:
Negative media
Rocky beginning of the year
Stocks begin to stabilize positively
Spring market rebound
Demographics still favorable – More demand than supply
Prediction: 3.5% – 4% year-over year. Appreciation still creates significant wealth – and the media will get this wrong.
Sales and appreciation moderate slightly, but housing remains
healthy, especially after Q1 for much of the US
Finally, more homes to choose from
One of the biggest complaints among buyers in
the last several years is that there weren’t enough homes for sale. In fact,
the supply of houses hit historic lows in the winter of 2017 and has yet to rebound
substantially. That fueled bidding wars, price increases and frustration.
The supply crunch is expected to ease some in 2019 with inventory rising 10 percent to 15 percent, according to many experts. But the increase will be skewed toward the mid-to-high end of the market – houses priced $250,000 and higher – especially when it comes to newly built houses, said Danielle Hale, chief economist of realtor.com.
That’s good news for move-up buyers, but not
so much for the first-time millennial buyer. “There’s still a mismatch on the
entry-level side,” she said.
If you have more questions about 2019 – and are thinking of purchasing, don’t hesitate to reach out to me, as it would be my pleasure to help!
Thomas Eugene Bonetto
Mortgage Loan Originator
NMLS: 1431961
About The Coach
Tom Bonetto has been helping his customers and players achieve their best for nearly 30 years. His goal is to provide both a superior customer experience and tremendous value for both his business associates and his players alike.
