Brexit benefits US housing

Brexit benefits US housing.
International home buyers (infographic from realtor.org)

The immediate response of Great Britain’s referendum to exit from the European Union was one of anxiety and fear.  Some thought the separation would set off a global recession, matching the financial crisis of 2008.  While others believed it would be a blip on the financial radar.  Of course, the housing industry is watching to see how if the aftermath of the Brexit will affect home buyers and sellers.  And it looks as if Brexit benefits US housing.

If you remember, last summer’s US market gyrations were attributed to China’s stock market declines.  As a result, many home buyers who relied on their 401k’s (or other investments) for their down payments had to make other plans. Some were unable to buy.  At that time, the National Association of Realtors® reported a decline in last August’s existing home sales, only to rebound in September (realtor.org).  Will the aftermath of last week’s Brexit have a similar effect? Or maybe Brexit benefits US housing.

Some expect that British home prices will fall as a result of the Brexit, which could affect our housing market.  Foreign home buyer investment in US housing will withdraw as foreign cash will look to the UK for housing bargains.  This will most likely affect the luxury home sector of the market, where many foreign home buyers have parked their money.

In the meantime, initial reactions indicate that the Brexit benefits US housing!  AnnaMaria Andriotis, writing for The Wall Street Journal (Mortgage Rates: How Low Can They Go?; wsj.com; June 28,2016) reported that mortgage interest rates may go lower as a result of the Brexit.  Lower interest rates could make housing more affordable for home buyers, while home owners continue to have opportunities to lower their mortgage payments.

The housing market has already been brisk.  The NAR reported on June 22nd that existing home sales increased to its highest levels in nine years!  Additionally, the S&P/Case-Shiller Home Price Index (spindices.com) reported June 28th revealed an additional 5% year-over-year increase for April 2016.

NAR chief economist Lawrence Yun concluded that low mortgage rates are an incentive for many home buyers.  Although he stated that first time home buyers are finding it difficult to enter the market for various reasons, repeat home buyers make up the majority of home sales.  As home prices increase, many repeat home buyers are finding down payment funds in the form of the proceeds of their home sales.

Yun felt that first time home buyers may find that increasing home prices will be a continuing obstacle.  This is compounded by the enduring low housing inventory.  However, new home construction may add other options for home buyers.

Aside from the interest rate benefit to home buyers, mortgage lenders are finding new programs to help those with little down payment funds!  Of course, the venerable FHA mortgage has been the go-to mortgage for those who qualify, because the down payment can be as low as 3.5%.  The downside to the FHA mortgage is the mortgage insurance premium.  To compete, Fannie Mae and Freddie Mac offer a 3% down payment program to those who qualify.  Like its FHA counterpart, the conventional 3% down payment program has also required private mortgage insurance.

However, HousingWire (hosuingwire.com) has reported that a few lenders offer a 3% down payment mortgage program without the PMI.  And within the last seven days, HousingWire reported that Quicken Loans and Guaranteed Rate Mortgage offer a 1% down payment mortgage program to those who qualify!

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Is a negative mortgage rate program in your future?

negative interest rates
from thestar.com

Five months ago I told you about the possibility of negative interest rates. Since then a lot has happened around the world (besides confirming the existence of gravitational waves): the Fed raised the target rate a quarter of a point in December; many are increasingly questioning the viability of the global economy; analysts point to geopolitics as a concern for economic stability; and Japan is the latest country to implement negative interest rates.

An increasing number of economists and financial experts have since openly discussed the specter of negative interest rates here in the U.S, as volatility in financial markets and global economies have many concerned. Such concerns may have prompted Senator Bob Corker (R-TN) to pose this question about negative interest rates to Fed Chair Janet Yellen during her testimony in the February 11th hearing “Semiannual Monetary Report to Congress” (banking.senate.gov); “…people are beginning to observe that the Fed is out of ammunition, unless you decide to go to negative ratesI’m not proposing this, I’m just observing what’s happening around the world and what’s happening here in our own country. I think people are waking up and realizing that the Fed has no real ammunition left…”

Even though the Fed recently raised the target rate from being near zero after almost seven years, the Fed anticipates future increases. However, Dr. Yellen stated in the past that negative interest rates are “not off the table” if the economy falters. This was reiterated (more or less) during her February 11th testimony. Interestingly, Dr. Yellen revealed that the Fed considered negative interest rates back in 2010, but felt that negative interest rates would not have worked well to “foster accommodation” (increase money supply to the markets) at that time. Additionally, Dr. Yellen stated that “…we are looking at them again because we want to be prepared in the event we needed to add accommodation…” However, she also stated that the evaluation is not complete as it is not certain if negative interest rates would work well in the U.S.

Negative interest rates may seem like a good idea to stimulate bank lending; but Christopher Swann’s recent CNBC commentary (The consequences of negative interest rates; cnbc.com; February 16, 2016) indicates there are also unintended consequences. Lending, as a result, could tighten because of bank losses and subsequent liquidity issues. Consumers would bear the brunt of the losses as banks would increase fees. As banks try to recoup losses, depositors will be charged for savings; which may prompt consumers to move their money out of banks. Swann points out how Swiss and Danish banks have “…hiked borrowing costs for homeowners since negative rates were introduced.”

A CNN-Money report shed light on European banks and negative interest rate mortgage programs (The crazy world of negative rates: Banks pay your mortgage for you? money.cnn.com, April 22, 2015). Luca Bertalot, Secretary General of the European Mortgage Federation, stated that “We are in uncharted waters.” He went on to describe how banks dealt with the dilemma of negative interest rates, “…they [Spain’s Bankinter’s] could not pay interest to borrowers, but instead reduced the principal for some customers.”

Housing would undoubtedly boom in a negative interest rate environment. However, rather than paying consumers to borrow, a mortgage’s principal would be reduced over time. Rather than creating a bubble, long term negative mortgage rate programs could possibly devalue real estate; and change how we view it as an asset.

Original published at https://dankrell.com/blog/2016/02/17/is-a-negative-mortgage-rate-program-in-your-future/

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

The Fed, interest rates, and the housing market

From Zillow.com

After a historic run of over seven years of near zero interest rates, the Fed pulled the trigger to raise the target rate on December 17th to 0.25% – 0.5%. The last time the Fed changed the rate was almost exactly seven years ago on December 16th 2008, when the rate decreased from 1% to near zero. And it’s the first rate increase since June 29th 2006!

In the midst of what was to become the beginning of the great recession, the Federal Open Market Committee press release  from December 16th 2008 (federalreserve.gov) described the rate change to near zero as a means to, “…promote the resumption of sustainable economic growth and to preserve price stability.  In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” And since, housing experts anticipated a Fed rate increase; often predicting how the real estate market would be affected.

Although a significant move by the Fed, the rate increase is minor and rates continue to be relatively low. And don’t worry, even with last week’s Fed target rate increase last week, it doesn’t mean the that mortgage interest rates automatically increase the same amount. Mortgage rates are gauged by bond yields, which usually anticipate and “bake in” any significant news into rates prior to economic announcements.

Real EstatePutting rates in perspective, Freddie Mac’s Primary Mortgage Market Survey indicated that the average national 30-year-fixed mortgage rate increased last week slightly from 3.95% to 3.97% (and up from the 3.80% a year ago). Furthermore, Freddie Mac’s Economic and Housing Research Weekly Commentary and Economic Update December 17th statement expects a gradual Fed monetary tightening, with a “modest increase” in long term rates. Additionally, “…Mortgage rates will tick higher but remain at historically low levels in 2016. Home sales will remain strong, but refinance activity should cool somewhat…” (freddiemac.com).

Some say that the Fed’s rate increase is premature, while others say that it may be too late to raise rates; however, many economic experts concur that the economy remains in uncharted waters. Regardless, housing experts agree that the Fed rate increase is good for the real estate market.

The National Association of Realtors® chief economist, Lawrence Yun stated that mortgage rates should continue to remain relatively low through 2016, saying, “…The raising of short-term rates could be more of a confidence play to the market — it provides a signal that the economy is strengthening, … and the lenders believe that, it may actually provide more lending opportunity for the banks…” (What the Fed’s Decision Means for Housing; realtormag.realtor.org; December 17, 2015).

Bankrate’s Mark Hamrick pointed out two benefits to the housing market from a rate increase (7 unintended benefits of higher interest rates from the Federal Reserve; bankrate.com; September 11, 2015). The first benefit is increased lending: Banks are incentivized to lend money when rates increase; possibly expanding mortgage lending which could increase the number of qualified home buyers participating in the market. The second benefit is increasing the pool of home buyers: increasing rates could get fence sitters into the market because of rising buyer costs. However, this may be a progressive effect through 2016, as mortgage rates are estimated to gradually increase beyond 4.5% (rising interest rates may also moderate ballooning home prices to prevent another housing bubble).

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Can we really see negative mortgage rates?

real estateSome speculate that it is possible for the Fed to set negative rates to stave off deflation; something that happened in Europe earlier this year.

Can you believe that 30-year fixed rate conventional mortgage rates have been below 5% for about five years? Rates have essentially been hovering around 4% (plus/minus) for the last three years. To put it in perspective, you’d probably have to go back to the 1940’s to get a lower rate. To contrast, rates from 1979 through the 1980’s were in double digits; and according to Freddie Mac’s Monthly Average Commitment Rate And Points On 30-Year Fixed-Rate Mortgages Since 1971 (freddiemac.com), the average mortgage commitment rate reached a peak of 18.45% during October of 1981.

With such low rates, it’s hard to imagine signing up for a mortgage at 18%, or 10%, or even 7% interest. Keep in mind that the consensus is that the average mortgage rate over the last forty years has been about 8.75%. And as economists have anticipated rising rates since 2011, rates have actually decreased.

Many thought that Fed would finally begin to raise the federal funds rate towards the end of this year. However, an interesting thing happened last week from probably the most anticipated Fed meeting ever. On September 17th, the Fed’s Open Market Committee issued a statement on the economy and monetary policy, and left the federal funds rate unchanged at a target rate of 0% to 1/4%. Although mortgage rates are not directly influenced by the federal funds rate, they are indirectly affected because the federal funds rate is the rate in which banks borrow money.

Initially it appears to be good news from the Fed’s September 17th press release, housing was described as improving, and it is felt that mortgage rates will likely to remain relatively low for the short term. However, in a press conference following the Fed statement, Fed Chair Janet Yellen referred to housing as “depressed.” Depressed is certainly not the description that anyone was expecting of a housing market that has seen slow improvement. Yet, it’s not the first time Yellen expressed concern for housing; she raised concerns about a housing market slowdown last year.

Should we also be concerned when others are optimistic? Maybe Yellen sees something that we do not. An August 16th 2013 Washington Post piece by Neil Irwin and Ylan Q. Mui details Yellen’s background and how she predicted the housing crisis and forecasted the following financial crisis (Janet Yellen called the housing bust and has been mostly right on jobs. Does she have what it takes to lead the Fed?). It’s not that Yellen is clairvoyant, as far as anyone knows, but rather her ability to connect the correct data points. In last week’s press conference she cited that housing was basically not improving in step with other economic indicators, such as employment.

So when will interest rates go up? Some speculate that it is possible for the Fed to set negative rates to stave off deflation; something that happened in Europe earlier this year. And in a couple of European counties, such as Spain, you could get a negative interest mortgage! CNN-Money reported on European negative interest rates, quoting Luca Bertalot (secretary general of the European Mortgage Federation) to say “We are in uncharted waters.” And described Spain’s Bankinter’s negative interest rate dilemma, saying that “they could not pay interest to borrowers, but instead reduced the principal for some customers (The crazy world of negative rates: Banks pay your mortgage for you?; money.cnn.com, April 22, 2015).”

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Housing market is partying like it’s 2006

house for saleAfter month’s worth of good housing market news, many optimistic home buyers and sellers are preparing for their jump into the market. But some caution that not all the data is positive and the jump into the market should be taken with care.

Have you noticed when there is positive housing news, someone offers data that throws a wrench in the recovery party? Maybe we’ve just become overly analytical about the housing market, looking for reasons to be optimistic. If one month’s home sales exceed expectations, the buzz is about how the market is recovering and anecdotes about multiple offers and fast sales are talked about as if it is the norm. However, when there is a disappointing month, some will try to explain it away giving reasons such as winter weather (even though the data is already seasonally adjusted) or some other one-time incident.

If you haven’t yet figured it out, housing economics is not cut and dried – there is truth in opposing views. The good news is that those who are positive about the housing market are probably correct; the bad news is that those who urge caution are also probably correct. The truth is that since 2010, the housing market has cycled with a two year period oscillating between positive and negative data – one year showing promise, while the next disappoints.

Sure, home prices have increased in recent years, with the sharpest increase occurring from 2012 through 2013. But rebounding home prices are like the sword of Damocles hanging over the housing market: as home prices rebound, affordability has become an issue for many home buyers.

Furthermore, there is a consensus that interest rates will rise sometime in the near future; and some are worried about the effect on the housing market. Spencer Jakab of the Wall Street Journal made this clear in his March 30th piece (Spring Puts Bounce in Housing Market: Home Prices May Get a Second Wind: wsj.com) by explaining the relationship between mortgage costs and affordability.

Jakab starts off by saying “The demise of the housing recovery has been greatly exaggerated.” And points out how home prices have rebounded, while February home sales were as good as (if not slightly better than) February 2014 (regardless of the two year cycle). He also indicates that although home prices have not reached their pre-crisis levels, they are at the highest levels since the crisis. However, he cautions those who are ready to call it a housing recovery trend. He states: “Once the Federal Reserve starts raising interest rates, likely sometime this year, affordability will begin slipping. Say 30-year mortgage rates are a percentage point higher a year from now, and prices are 5% higher. Then a monthly mortgage payment, assuming a typical down payment, would rise by about 18%.

Considering that average wages increased 2.1% during 2014, an 18% increase in the cost of home ownership could arrest home price appreciation and possibly cause a déjà-vu market liken to 2008-2009. If you don’t remember: homes were on the market for extended periods; home prices decreased; and home buyers and sellers retreated.

So why should we get all excited about a little good news? Rather than focusing on 2 data points each month (comparing a month’s data to the previous month, and the same month from the previous year), maybe it’s time to focus on the bigger picture.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.