2018 has certainly started out on fire. Stocks are off to the races setting new highs everyday, on the Dow, S&P and NASDAQ. The economy is on firm footing as employment appears to be maxed out. Inflation has been a point of contention for the Fed but is virtually non-existent as the rise of efficient technologies has removed the need for higher paid wages. The Federal Reserve is going through an over-haul year as new voting members are set to take center stage under the guide of Fed President Jerome Powell. Federal tax reform is also starting to flow back to employees as larger corporations are taking advantage of corporate tax change.
As a lender, I have always found it incredibly important to bring this type of information to the forefront of the real estate industry and to you, the REALTOR. It is, after all, one of the main reasons why demand for home ownership has increased. Net worth is increasing. Spendable cash is available. People are back to work and home affordability in our area is one of the best in the country. It appears almost inevitable that we are on verge of another solid year in real estate. So what is there to be concerned about?
For the past couple of years I have been on my soapbox about rising rates and although we did not see them spike, they did rise year over year by a .125%. At this point in the economic game, I feel we are in for a correction that will dwarf a small move of .125%. Your buyer and sellers need to be made aware of what is happening and what will happen. Here is the synopsis for a .25-.50 rise in 30yr rates over the next 6 months.
- Bullish/bearish sentiment is at 30 year high. The percentage of bullish players in the stock market is so great (they are in the market/buyers) what happens when they want to take profits. In the meantime, where is the new money coming into the market to keep the fueling the buying?
- The scenario of a rallying stock market along with major tax reform is incredibly similar to what we saw back in 1986. Stocks continued their upward trend then we saw a 5% correction in 1987.
- Foreign investment in US debt is under pressure with a weaker dollar. For years, European and Asian investment outlets have been purchasing US debt/treasuries/MBS in search of yield compared to their own sovereign debt. That is slowly going away as values of foreign currency rise vs the dollar making a ‘swap’ into US debt a losing proposition.
- The Fed and their balance sheet. QE is over and has been an absolute joy for our rate market. Since 2009, the highest 30yr mortgage that I ever locked was 4.75% and even then I can remember the buyer elated because it was under 5%! As balance sheet reduction and secondary market purchases decline, bonds/mortgage backed securities will start to hit the market; 8 billion fewer purchases, April 12 billion…you will now start to hear the term quantitative tightenin/QT. In October of this year, we will be in full swing ($20bb rolling off the balance sheet).
To counter these moves that impact the fixed income markets, we can still rely on a stock market correction which will hopefully push buyers back into the yield/rate market. In the meantime/1st quarter, prepare yourselves for rates with a 4 ‘handle’ on 30yr product. Prepare your buyers now that higher rates are here and will continue the trend higher.
The housing market is poised to have another great year for sure. It’s now our job to be able to explain to real estate clients that the cost to borrow money is going to go up, but still at historically low rates. They just won’t be able to share their rate at the next cocktail party so proudly.