January 3, 2017 –
The predictions for 2017 are all over the board with regard to the economy and the housing market in particular. While major variations always exist, this year the predictions vary more widely because of two major factors. First, we have a new administration being installed and we still don’t know what policies will change and how these new policies will affect the economy. We do know that a new administration always promises change and we can anticipate these changes, but it surely makes the prediction game more interesting. Secondly, interest rates have been rising since the election. We don’t know if these increases will hold and whether they will continue. Even though rates continue to be historically low, we don’t know how higher rates will affect the economy in the long-run.
Certainly, predicting the future is always a hit-or-miss game. For example, just about everyone predicted higher rates for 2016. Even the Federal Reserve Board said they anticipated raising short-term rates several times. Looking back, this increase in rates never took place. Thus, if the Fed can’t predict the future even a few months out, then we don’t expect that market analysts will fare much better. Remember that there are always intervening variables that can affect the future. These variables can and have included natural occurrences, political events, the economics of foreign nations, or even instances of terror.
If you look back at 2016, we had the Brexit event. But looking further back, we have had intervening events such as a Tsunami, wars and many international incidents of terrorism. While we hope that these types of events do not reoccur, when dealing with an entire world of possibilities, we do know they are possible. Thus, while many market analysts are making predictions such as higher interest rates, a continuation of the stock rally and moderating housing growth, we must understand that no one has a handle on the future. Higher rates and moderating housing growth seem to be the consensus opinion, but there is always wiggle room in the prediction game.
The Markets. Rates were up slightly for the week, continuing a trend seen for the past two months. Despite this trend, for 2016 the 30-year average of 3.65% was the lowest on record. For the week ending December 29, Freddie Mac announced that 30-year fixed rates rose to 4.32% from 4.30% the week before. The average for 15-year loans increased to 3.55%, and the average for five-year adjustables moved down to 3.30%. A year ago, 30-year fixed rates were at 4.01%, approximately 1/3% lower than today’s levels. Attributed to Sean Becketti, Chief Economist, Freddie Mac — “On a short week following the Christmas holiday, the 10-year Treasury yield was relatively unchanged. The rate on 30-year loans rose 2 basis points to 4.32 percent, closing the year with nine consecutive weeks of increases. As rates continue to increase, home sales and affordability will continue to be a concern for housing in 2017.” 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 30, 2016
|Daily Value||Monthly Value|
|6-month Treasury Security||0.62%||0.58%|
|1-year Treasury Security||0.85%||0.74%|
|3-year Treasury Security||1.49%||1.22%|
|5-year Treasury Security||1.96%||1.60%|
|10-year Treasury Security||2.49%||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)|
Increasingly, seniors are going against the conventional retirement wisdom about mortgages which, always before, preached that a cornerstone of a good retirement was to enter it debt free. That meant without a home loan. And yet about one-third of homeowners 65 and older have a home loan now. That’s up from 22% in 2001. Among seniors 75 and older, the rate jumped from 8.4% to 21.2%. The appeal, of course, is that home loans are cheap with low interest rates. That puts the question in sharp focus: is this good financial planning or is it reckless? Paying off a home loan brings a sense of relief. Tim Shanahan of Compass Securities Corporation in Braintree, Mass. said: “It’s a great feeling to have no debt and a significant accomplishment to be able to tear up the loan.” But is this still the smartest planning? As more seniors take on home loans, experts are re-opening the analysis. “The short answer to the question is it depends,” said certified financial planner Kevin O’Brien of Peak Financial Services in Northborough, Mass. O’Brien continued: “It depends on how strong the person’s cash flow is or not. It depends on how much liquid savings and investments they have after they might pay it off. It also depends on the balance they need to pay off in relation to their sources of cash flow, and liquid assets.” About one senior in four has told researchers he plans to work past 70 years of age. Also, at age 70, a person has every reason to claim Social Security – there are no benefits in delaying – so that means many 70+ year-olds now have two checks coming in, plus what retirement savings and pensions they have accrued. That complexity is why Pedro Silva of Provo Financial Services in Shrewsbury, Mass offered this advice: “We like to see clients go into retirement without debt because the tax benefits are using less. If clients will carry a home loan, then the low rates are a great opportunity to lock in a low payment,” Silva continued. “We encourage those folks who don’t foresee paying off their home in retirement, to stretch the payments out as long as possible in order to achieve the lowest rate possible.” Source: The Street — Want to know more about what might be right for your situation? Contact us for a referral to a financial planner, if you are not already working with one.
More homeowners are gaining equity and climbing out of negative territory, according to a report released by CoreLogic. Now, 93.7 percent of all financed properties—or 47.9 million homes—have more money invested in them than their estimated market value. Home equity has grown 10.8 percent in the third quarter compared to a year ago. “Home equity rose by $12,500 for the average homeowner over the last four quarters,” says Frank Nothaft, chief economist for CoreLogic. Meanwhile, the total number of financed residential properties that remain in negative equity are 3.2 million – or 6.3 percent of all financed homes, CoreLogic reports. Negative equity means that borrowers owe more on their loans than their homes are worth. In the fourth quarter of 2009, negative equity peaked at 26 percent of all financed properties and has steadily been declining ever since. “Price appreciation is the main ingredient for home equity wealth creation, and home prices rose 5.8 percent in the year ending September 2016,” says Anand Nallathambi, president and CEO of CoreLogic. “Pay-down of principal is the second key component of equity building. Many homeowners have refinanced into shorter-term loans, such as a 15-year loan, and by doing so, are able to build equity wealth faster.” Source: CoreLogic
Single-family houses are getting smaller, according to a new data analysis released by the National Association of Home Builders (NAHB). “After increasing and leveling off in recent years, new single-family home size continued to trend lower during the third quarter of 2016,” said Robert Dietz, NAHB’s chief economist and senior vice president for economics and housing policy. “This ongoing change marks a reversal of the trend that had been in place as builders focused on the higher end of the market during the recovery. As the entry-level market expands, including growth for townhouses, typical new home size is expected to decline. According to third quarter 2016 data from the Census Quarterly Starts and Completions by Purpose and Design and NAHB analysis, median single-family square floor area was effectively unchanged at 2,402-square feet for the third quarter. Average (mean) square footage for new single-family homes fell from 2,620- to 2,602-square feet.” Dietz noted that this trend away from larger homes is typical of what occurs in a post-recession period, albeit with a significant change. “This pattern was exacerbated during the current business cycle due to market weakness among first-time homebuyers,” Dietz said. “But the recent small declines in size indicate that this part of the cycle has ended and size should trend lower as builders add more entry-level homes into inventory.” Source: NAHB