Seinfeld spent just about a whole episode discussing how late in the year it is appropriate to wish someone “Happy New Year.” We promise this will be our only Happy New Year message. But we do have a similar economic question to ponder as we enter the year. How long until we know what type of affect the Federal Reserve Board raising rates will have on interest rates and the economy?
As we indicated before, some of the effects are immediate. The prime rate was just increased by banks for the first time in almost ten years. For those who have home equity lines of credit on their homes or credit cards based upon their bank’s prime rate, rates will go up immediately. A small increase of .25% on a $10,000 balance amounts to only a few dollars per month. If the Fed continues to raise rates this year, these effects will be multiplied, obviously.
The affect upon real estate is quite different. Most home loans are fixed rates and thus based upon long-term interest rates which don’t necessarily increase at the same pace as the short-term rates the Fed are raising. According to Freddie Mac’s chief economist, Sean Becketti, interest rates should remain at “historically low levels” throughout 2016, in spite of whatever moves the Federal Reserve is expected to make. While any increase in rates on home loans is certainly not good news, we have to remember that rates are still at “historically low levels” as Becketti says, and the fact that the Fed is taking action means they have confidence in the economy. If the economy continues to expand, real estate will continue to thrive as will the economy, despite the Fed’s moves.
The Markets. Rates on home loans moved slightly higher this past week, with 30-year fixed rates over 4.0% for the first time in five months. Freddie Mac announced that, for the week ending December 31, 30-year fixed rates rose to 4.01% from 3.96% the week before. The average for 15-year loans increased slightly to 3.24%. Adjustables were mixed, with the average for one-year adjustables unchanged at 2.68% and five-year adjustables rising to 3.08%. A year ago, 30-year fixed rates were at 3.87%, a bit lower than today’s levels. Attributed to Sean Becketti, chief economist, Freddie Mac — “In the final week of 2015, Treasury yields jumped, reacting in part to strong consumer confidence in December. In response, the 30-year fixed rate rose to 4.01 percent, ending a 5-month span below 4 percent. After averaging 3.9 percent in the fourth quarter of 2015, we expect the 30-year fixed rate to average 4.7 percent for the fourth quarter of 2016.” Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.
Current Indices For Adjustable Rate Mortgages
Updated December 31, 2015
|Daily Value||Monthly Value|
|6-month Treasury Security||0.47%||0.33%|
|1-year Treasury Security||0.64%||0.48%|
|3-year Treasury Security||1.36%||1.20%|
|5-year Treasury Security||1.80%||1.67%|
|10-year Treasury Security||2.31%||2.26%|
|12-month LIBOR||0.868% (Nov)|
|12-month MTA||0.285% (Nov)|
|11th District Cost of Funds||0.649% (Oct)|
|Prime Rate||3.50% (Dec)|
Homeowners are among those who will benefit from a $760 billion tax deal that was signed into law in December. The deal includes two very important tax breaks for those who own homes. The law includes a retroactive extension of The Mortgage Debt Forgiveness Act through 2016. This law expired at the end of 2014 and, without an extension, any loan forgiveness achieved in a short sale would have been counted as income for homeowners who sold their homes for less than the amount of their home loan during 2015. Also extended retroactively until 2016 was the deduction for mortgage insurance payments, which expired at the end of 2014. Borrowers with adjusted gross incomes up to $100,000 can deduct 100% of their payments. Deductions are reduced by 10% for each additional $1,000 of adjusted gross income above $100,000. The threshold for married borrowers filing separately is $50,000 of adjusted gross income per person. Deductions are reduced by 5% for each additional $500 of adjusted gross income above $50,000. If you have questions regarding your eligibility for these tax breaks, it is suggested you contact your accountant. If you do not have an accountant to consult, we can recommend one.
Tepid growth in personal income and wealth has been widely regarded as one factor weighing down a more robust housing market recovery. Research from Fannie Mae suggests another factor might be in play. The company’s latest National Housing Survey said homeowners may be underestimating their home equity. In particular, said authors Steve Deggendorf and James Wilcox, if homeowners believe that large down payments are now required to purchase a home, then widespread, large underestimates of their home equity could be deterring them from applying for home loans, selling their homes and buying different homes. “A substantial group of homeowners may not recognize how much the values of their homes rose after 2011,” the report said. “And, even if they recognized that their homes’ values had increased, many homeowners may underestimate how much their homes’ values and home equity increased.” After having fallen nearly continuously from mid-2007 through mid-2011, house prices rose noticeably between mid-2011 and fourth quarter of 2014. From first quarter 2011 through fourth quarter 2014, house prices rose nearly 20 percent. The survey showed that, despite the 20 percent rise in house prices, the same number of homeowners (23 percent) perceived that they had negative equity at the end of 2014 as those who perceived that they had negative equity before prices rose 20 percent (26 percent on average in 2011). “Surprisingly, then, the significant rise in house prices was not perceived to lift many homeowners above water,” the authors said.Source: Mortgage Bankers Association
Rental costs are escalating and that’s unlikely to change anytime soon, according to a new report. About 11 percent more households are expected to pay more than half their incomes in rent in 2025, shows a new report from Harvard University’s Joint Center for Housing Studies and Enterprise Community Partners. Households are considered “severely cost-burdened” when they devote more than 50 percent of their incomes on rent. In several scenarios painted in the report, the authors say the number of burdened renter households could increase to more than 13 million in 2025 – from an estimated 11.8 million this year. What’s more, if rents continue to grow faster than incomes – a trend for the past 15 years – the number of severely burdened households could climb by up to 25 percent. In 2013, one in four renters – or 11.2 million households – devoted more than half of their incomes to rent, according to JCHS. That is up from 3 million since 2000 alone. The report says that renters are expected to grow too due to demographic changes. For one, the increase in the Hispanic population will contribute to the growth in rents, as Hispanics tend to be disproportionately renters and are more likely to pay a large share of their incomes in rent, according to the study. Source: The Wall Street Journal