A hot winter housing market

Winter is not usually a time of year when you would think of selling your home. After all, everyone gets into holiday and hibernation mode. Between Thanksgiving and New Year’s Day (during the winter housing market), home sale inventory is usually trimmed by an average of 50 percent and contract activity is significantly reduced.

But this winter will be different. Rising interest rates and pent up demand could make the housing market very active this winter.

Consider that mortgage interest rates are on their way up. Freddie Mac (freddiemac.com) reported last week about a mortgage interest “spike” that can get fence-sitters to jump into the winter housing market. The rate for the 30-year-fixed-rate mortgage averaged 3.94 percent, which jumped from the prior week’s average of 3.57 percent. On the face of it, the increase doesn’t seem significant. But the difference is about $70 per month on a $300,000 mortgage.

Last week’s interest rate surge could be the beginning of interest rate increases we’ve been anticipating (for five years). Speculation is that the bond market is anticipating and pricing in a Fed interest rate hike at next month’s Open Market Committee meeting. Of course, the next sixty days could be a lead up to new mortgage rate expectations, which could exceed 4.5 percent by the end of next year.

Historically low interest rates for a 30-year-fixed-rate mortgage have become part of our lives. Upward movement will be met with hyperbole and excitement from the media, claiming reduced home sales and a faltering real estate market. However, let’s put it in perspective. Mortgage rates averaged above 4 percent throughout 2014. The last time we had an average mortgage rate above 5 percent was 2010. In fact, the average mortgage rate at the height of the go-go market during 2006 was above 6 percent.

What does it mean for you if you’re planning a sale? Don’t wait until spring! Consider selling during the winter housing market. You won’t have much competition; and serious home buyers, who are sensitive to interest rates, will be looking through the holidays and winter.

If you decide to sell during the holidays and the winter housing market, make sure your home is ready. Decluttering is the most important aspect of home preparation. However, winter decluttering may be more difficult because of the colder weather and our desire to slow down during these months. Besides our inclination to “nest,” it’s easy to accumulate items in the house that make us cozy and comfortable. But winter clutter can be minimized by organization and a daily straightening-up for incoming buyers.

Check your home’s systems. Have licensed professionals inspect your furnace and roof. Besides keeping the house warm and dry for buyers who visit, checking these systems can prevent surprises when a home inspection is performed.

After a weather event, clear your walkways and driveway of ice and snow. Besides making it easier for home buyers to visit your home, it lessens the possibility of someone falling and getting hurt.

If your home is vacant, have a licensed professional winterize it. Winterizing your home can reduce the risk of bursting pipes and damaging plumbing fixtures. If you are out of town, have a trusted person check on the home regularly (even if you are listed with a real estate agent). Your “stand-in” should also be available to take care of any house related issues that occur in your absence during the winter housing market.

By Dan Krell
Copyright © 2016

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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.

February 17, 2016July 13, 2019

Is a negative mortgage rate program in your future?

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 rates…I’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 11^th 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.

By Dan Krell
Copyright © 2016

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

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December 22, 2015October 20, 2020

The Fed, interest rates, and the housing market

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 17^th to 0.25% – 0.5%. The last time the Fed changed the rate was almost exactly seven years ago on December 16^th 2008, when the rate decreased from 1% to near zero. And it’s the first rate increase since June 29^th 2006!

In the midst of what was to become the beginning of the great recession, the Federal Open Market Committee press release from December 16^th 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.

Putting 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 17^th 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).

By Dan Krell
Copyright © 2015

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September 24, 2015November 23, 2021

Can we really see negative mortgage rates?

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.

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 17^th, 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 17^th 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 16^th 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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September 26, 2013July 1, 2019

Are rising interest rates helpful?

After much speculation, mortgage interest rates appear to be on the move. Even with rising interest rates, rates are still relatively low. Some economists expect that when the Fed’s Quantitative Easing program begins tapering, mortgage interest rates may jump due to financial market volatility.

Many fear that rising interest rates could derail the recovering housing market. In an August 19th news release (realtor.org), Chief NAR economist Lawrence Yun stated that although the pace of home sales are at its highest since February 2007, the market could be experiencing a “temporary peak” due to home buyers’ seeking to close deals before interest rates rise significantly. Looking ahead, Dr. Yun expects that rising interest rates and limited inventory could create an imbalanced market due to inconsistent home sales.

Home sale prices also have been rising, prompting bidding wars, as the median home sale price was reported by NAR to have maintained nine consecutive months of double digit year over year increases. However, Dr. Yun stated, “Limited inventory in some areas means multiple bidding remains a factor; 17 percent of all homes sold above the asking price in August, although 63 percent sold below list price.”

This week’s release of July’s S&P/Case-Shiller Home Price Index (spindices.com) also revealed that home sale prices were still holding onto the double digit annual rate of gain over 2012 levels, as the 10 city and 20 city composites posted about a 12% year over year increase for July. However, it is pointed out that home price are still “far below their peak levels.”

The sharp increases in home sale prices sparked fears of another housing bubble. But price gains only increased about 2% from June to July. Monthly price gains have lessened, and the gradual slowdown of home price gains may indicate that home prices may be peaking. Chairman of the Index Committee at S&P Dow Jones Indices, David M. Blitzer, stated, “Following the increase in mortgage rates beginning last May, applications for mortgages have dropped, suggesting that rising interest rates are affecting housing. The Fed’s announcement last week that QE3 bond buying will continue for the time being may have only a limited, though favorable, impact on housing.”

The rapid increase in home prices has affected potential appreciation for many home owners who waited to sell their homes. And the increased inventory provided additional housing stock for eager home buyers. Given the recent increases in home sale prices, the expectation of an uncertain real estate market may not be welcome news by home buyers and sellers.

But home price increases have not only helped the housing market, but the economy as a whole. CoreLogic (corelogic.com) reported that the housing sector contributed about 17% to GDP growth during the first quarter of 2013. However, CoreLogic predicts that increasing mortgage rates will directly affect the housing market, and indirectly affect the overall economy: Single family housing starts (new homes) are thought to be declining because of increasing mortgage rates; and CoreLogic estimates that long term GDP growth to be about 1.75%.

It remains to be seen if modest increases in mortgage interest rates have been beneficial to stave off another housing bubble. However, given that the indicators and experts point to a housing recovery peak; increasing mortgage interest rates could suggest caution for the housing market.

Original located at https://dankrell.com/blog/2013/09/26/rising-interest-rates-a-help-and-hindrance-to-recovering-housing-market-2/