Assessing Returns

A View from the Beach

ECONOMIC COMMENTARY
February 27, 2018 – 

There are many questions which have arisen because of the movements in the stock market and interest rates. For example, how high will interest rates need to go in order for investors to start thinking that they can achieve better returns than the stock market? That seems far-fetched because the stock market has done so well since the great recession, with the S&P gaining an average of over 10% per year. But, keep in mind that these gains have included a rebound from sharp losses during the recession and were fueled by record low interest rates.

And where would one go to achieve these better returns? One possible place would be real estate. One reason rates are rising is because recently, inflation has become a factor. Well, inflation has affected rents being paid and home prices for some time. If someone purchased a house five years ago, chances are they have done very well — whether they are living in the home or it is an investment property.

As we have said, this year’s wild ride has made it even tougher than normal to make predictions. It is possible that these gyrations could start affecting economic growth, despite the stimulus of the tax legislation. Investor and consumer confidence are really important factors — and neither likes to witness the uncertainty that volatility brings. The best news would be for the markets, rates and inflation all to calm down a bit as spring approaches. Next week’s jobs report could go a long way to convince the masses that everything is on-track and not overheating — if we don’t get a surprise on the low or high side.

 WEEKLY INTEREST RATE OVERVIEW

The Markets. The rise in rates for home loans slowed in the past week. For the week ending February 22, Freddie Mac announced that 30-year fixed rates increased to 4.40% from 4.38% the week before. The average for 15-year loans rose one tick to 3.85% and the average for five-year adjustables climbed to 3.65%. A year ago, 30-year fixed rates averaged 4.16%, higher than today’s level. Attributed to Len Kiefer, Deputy Chief Economist, Freddie Mac –“Fixed rates on home loans increased for the seventh consecutive week, with the 30-year fixed rate reaching 4.40 percent in this week’s survey; the highest since April of 2014. Rates on home loans have followed U.S. Treasurys higher in anticipation of higher rates of inflation and further monetary tightening by the Federal Reserve. Following the close of our survey, the release of the FOMC minutes for February 21, 2018 sent the 10-year Treasury above 2.9 percent. If those increases stick, we will likely see rates continue to trend higher.” 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.
Current Indices For Adjustable Rate Mortgages
February 23, 2018

Daily Value Monthly Value
Feb 22 January
6-month Treasury Security  1.84%  1.62%
1-year Treasury Security  2.02%  1.80%
3-year Treasury Security  2.42%  2.15%
5-year Treasury Security  2.66%  2.38%
10-year Treasury Security  2.92%  2.58%
12-month LIBOR  2.293% (Jan)
12-month MTA  1.282% (Jan)
11th District Cost of Funds  0.753% (Dec)
Prime Rate  4.50% (Dec)

REAL ESTATE NEWS
 Homeowners should find their homes adding value through the rest of this decade; but that means more pressure on affordability for buyers. A new report from independent mortgage insurer Arch MI calls for prices to rise 2-6% in each of the next two years. “With interest rates and home prices both on the rise, first-time homebuyers – largely Millennials – may want to consider making the jump from renting to owning sooner rather than later,” said Dr. Ralph G. DeFranco, Global Chief Economist, Mortgage Services, Arch Capital Services Inc. Despite the affordability challenges and the impact of the tax changes, DeFranco is not forecasting a bubble. “Our research shows few signs of a housing bubble because the typical warning signs aren’t present. Overall, the shortage of housing paired with a robust job market should keep the housing market strong and growing, short of an unexpected event and despite the contrary pressures that may be created by the tax bill,” he concluded. Source: Mortgage Professional America

 

Home sellers realized an average home price gain of $54,000 in the fourth quarter, the highest profit since before the Great Recession, said ATTOM Data Solutions, Irvine, Calif. The Company’s Year-End and 4Q 2017 U.S. Home Sales Report said average home price gains rose from $53,732 in the third quarter and from $47,133 a year ago to the highest since Q3 2007. That $54,000 average home seller profit represented an average 29.7 percent return on investment compared to the original purchase price, up from 28.8 percent in the previous quarter and up from 26.8 percent a year ago to the highest average home seller ROI since Q3 2007. At the same time, ATTOM reported homeowners who sold in the fourth quarter had owned their homes an average of 8.18 years, up from 8.12 years in the previous quarter and up from 7.78 years a year ago to the longest average home seller tenure as far back as data is available, Q1 2000. “It’s the most profitable time to sell a home in more than 10 years yet homeowners are staying put longer than we’ve ever seen,” said Daren Blomquist, senior vice president with ATTOM Data Solutions. ATTOM reported the U.S. median home price in 2017 at $235,000, up 8.3 percent from 2016 to a new high. Annual home price appreciation in 2017 slowed slightly compared to the 8.5 percent in 2016. Source: The Mortgage Bankers Association

Home shoppers without children are a growing segment in the housing market, and they tend to desire smaller houses than previous generations. The fertility rate among women 15 to 44 years old is at its lowest level since the CDC began recording such rates 108 years ago. As more couples delay having kids or opt to have fewer children, their needs in the housing market are very different than previous generations who tended to have bigger families. Fewer than eight in 10 childless buyers purchased a detached single-family home between July 2015 and June 2016, according to the National Association of Realtors®. Condos and townhomes are becoming a popular option among those who do not have children. In general, detached homes have been known to appreciate faster and hold their value longer than attached homes, according to Tamara Dorris, adjunct real estate professor at American River College in Sacramento, Calif. But that could change. “We’re seeing more and more people not having children by choice or purchasing homes as singles,” Dorris says. “These people tend to live in urban areas and have homes with less maintenance—such as attached homes.” Source: The Mortgage Reports

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