December 20, 2016 –
The Federal Reserve Board has spoken. The increase of .25% in short-term interest rates surprised absolutely nobody. However, the markets did not like the statement accompanying the increase which alluded to as much as three rate hikes in 2017. Of course, last year they talked about the same thing and we had only one due to several factors. Of course, this year we also have had the “election effect” on the bond market, which means that rates were already moving higher before the move.
When the markets are skittish, any hawkish statement by the Fed was likely to make the markets more volatile, which is exactly what happened. We actually believe that the markets could have reacted poorly if the Fed did not increase rates. This is because the economy has shown enough strength to convince the markets that keeping rates at artificially low levels was no longer necessary. We must remember that the Fed controls short-term rates directly and long-term rates only indirectly. If the markets feel the Fed is being soft against the threat of inflation, the markets will act on their own in this regard.
So, what is the bottom line, now that the deed has been done? The Fed’s announcement after the increase tells us that they are satisfied with the direction of the economy. When the Fed raises rates because the economy is getting stronger, this is certainly good news. The markets are showing further optimism based upon the possibility of new economic policies expected to be implemented by the new Administration. If this optimism turns out to be right, we will see more rate increases in the coming year, which coincides with Chairperson Yellen’s statement. Again, this represents good news for the average American and the housing markets, because more jobs will be created. That would be quite a feat since the economy added over 2 million jobs again this year.
The Markets. Rates continued their post-election climb last week to hit another new high for 2016, and the numbers did not reflect the reaction to the Fed raising rates. For the week ending December 15, Freddie Mac announced that 30-year fixed rates rose to 4.16% from 4.13% the week before. The average for 15-year loans increased one tick to 3.37%, and the average for five-year adjustables moved up to 3.19%. A year ago, 30-year fixed rates were at 3.97%, more than 1/8% lower than today’s levels. Attributed to Sean Becketti, Chief Economist, Freddie Mac — “As was almost-universally expected, the FOMC closed the year with its one-and-only rate hike of 2016. The consensus of the committee points to more rate hikes in 2017. However, the experience of this year, combined with the policy uncertainty that accompanies a new Administration, suggests a wait-and-see outlook. This week’s rate survey was completed prior to the FOMC announcement. The MBA’s Applications Survey posted drops in both refinance and purchase applications, registering the impact of recent rate increases.” 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.
Updated December 16, 2016
|Daily Value||Monthly Value|
|6-month Treasury Security||0.65%||0.58%|
|1-year Treasury Security||0.91%||0.74%|
|3-year Treasury Security||1.61%||1.22%|
|5-year Treasury Security||2.10%||1.60%|
|10-year Treasury Security||2.60%||2.14%|
|12-month LIBOR||1.643% (Nov)|
|12-month MTA||0.596% (Nov)|
|11th District Cost of Funds||0.598% (Oct)|
|Prime Rate||3.750% (Dec)|
New homebuyers may be about to flood the US market for existing homes to lock in the lowest rates they can. In the past several weeks — since Donald Trump was elected president — rates on home loans jumped alongside other interest rates. This happened as investors raised their expectations for economic growth and inflation, placing their bets on Trump’s plans to spend heavily on infrastructure and cut taxes. “In the short-term, some prospective buyers may rush to lock in their rate and buy now, ” said Lawrence Yun, the chief economist at the National Association of Realtors. The NAR released its monthly report on existing-home sales, which showed that sales rose at the highest annualized pace in a decade during October. And if rates continue rising, existing-home sales — which record the most housing transactions — could increase to record levels. Additionally, a strong jobs market and higher wages could offset any drop-in demand that higher rates cause, according to David Berson, the chief economist at Nationwide. The housing market has been faced with an inventory crunch that drove up prices, especially in coastal metros. The median existing home price rose 6 percent year-on-year in October to $232,200 — the 56th straight rise. Ralph McLaughlin, the chief economist at Trulia, said Trump’s focus should be on policies that encourage existing owners to sell and build, not just those that boost demand. “Such policies could include a reduction in capital gains taxes for homes sold by investors to owner-occupiers, an increase in tax rates on rental income, or both,” he said in a note. Source: The Real Deal
The number of custom-home building starts set a post-recession high in the third quarter, according to U.S. Census Bureau data. The bureau defines custom-home building as homes built on an owner’s land, with either the owner or a builder acting as the general contractor. In the third quarter, there were 49,000 total custom starts, compared to 47,000 in the third quarter of 2015. Over the last four quarters, there were 169,000 total custom single-family home starts, a nearly 8 percent increase over the prior four quarters, according to the National Association of Home Builders’ analysis of the data. The custom-home building market share now makes up 22 percent of single-family starts. That is still down from a peak of 31.5 percent set during the second quarter of 2009. “The market share for custom-home building will likely experience ups and downs in the quarters ahead as the overall single-family construction market expands,” according to NAHB’s Eye on Housing blog. “Recent declines in market share are due to an acceleration in overall single-family construction.” Source: NAMB
Older home owners who leverage the equity in their home may be better off in funding their retirement, according to a new study by the Urban Institute. However, the recession may have hampered many retirees’ abilities to do so. “Not only does a house meet the basic needs of shelter, but it’s an asset that typically can be used to build wealth as home owners pay down their home loans,” the study’s authors note. “In fact, many retirement security experts argue that the conventional three-legged stool of retirement resources—Social Security, pensions and savings—is incomplete because it ignores the home.” Before the recession, home owners aged 65 or older could have used their home’s equity to increase their retirement income by over 50 percent – up to $60,000 –either by borrowing a home equity line of credit, selling their home at a profit, or taking a cash-out refinance or second mortgage. However, the Urban Institute’s study notes that percentage fell to 50 percent – up to $49,000 – by 2012, even though retirees accumulated an average 10 percent more equity than in 1998. Home owner’s equity grew from $117,000 to $166,000 between 2000 and 2006 before falling to $129,000 by 2012. The study’s authors say that older home owners have more opportunity to unlock the wealth potential of their homes in retirement, particularly now with the recession over. Source: RIS Media