Rate Predictions and Perspective

A View from the Beach

February 13, 2018 – 


It is amazing how it seems every year we have predictions that interest rates will go up. And each year interest rates do go up. And then, they go back down. The yield of the 10-year Treasuries have gone up over 0.5% over the past few months. But they also went up just about the same amount during the winter of 2016-17. Similar rises were witnessed in 2015 and 2014, though the patterns were slightly different. Each time, rates came back down.

If we look at this pattern, we can conclude that rates are likely to come back down again, right? Not so fast. There is one intervening variable that occurred this year, as opposed to previous years. That variable is the tax legislation. Tax reform is designed to stimulate economic growth. In previous years, rates came back down because our economic growth never became too strong to ignite inflation. Nor did rates move high enough to scare the stock market into a correction, as has happened in the past week — not that stocks were not due for a correction after so many years of increases.

Some say that the Federal Reserve Board raising short-term interest rates makes higher long-term rates a certainty. But, we must remember, the Fed raised rates in 2015 and 2016, albeit not as quickly as 2017. In 2015 and 2016, the Fed was “normalizing” rates because the economy had stabilized. Now the economy is growing, and we have added a major stimulus. Rates are not rising because the Fed is raising rates, rates are rising because the markets and the Fed expect further economic growth. That being said, it is still impossible to predict the future of economic growth or rates. On the other hand, if you feel this is the last opportunity to take advantage of historically low rates, you may want to act accordingly.


The Markets. Rates on home loans continued their climb in the past week. For the week ending February 8, Freddie Mac announced that 30-year fixed rates increased to 4.32% from 4.22% the week before. The average for 15-year loans rose to 3.77% and the average for five-year adjustables climbed to 3.57%. A year ago, 30-year fixed rates averaged 4.17%, higher than today’s level. Attributed to Len Kiefer, Deputy Chief Economist, Freddie Mac — “The U.S. weekly average rate of 30-year fixed loans rocketed up 10 basis points to 4.32 percent this week. Following a turbulent Monday, financial markets settled down with the 10-year Treasury yield resuming its upward march. Rates on home loans have followed. The 30-year fixed rate is up 33 basis points since the start of the year. Will higher rates break housing market momentum? It’s too early to tell for sure, but initial readings indicate housing markets are sustaining their momentum so far. The MBA reported that purchase applications are up eight percent from a year ago in their latest Weekly Mortgage Applications Survey.” 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 9, 2018

Daily Value Monthly Value
Feb 8 January
6-month Treasury Security  1.73%  1.62%
1-year Treasury Security  1.91%  1.80%
3-year Treasury Security  2.32%  2.15%
5-year Treasury Security  2.57%  2.38%
10-year Treasury Security  2.85%  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)

 The housing market could be on the verge of a shake-up, as well-established credit scoring requirements are being reevaluated by the Federal Housing Finance Agency (FHFA), potentially opening up the mortgage market to a greater number of aspiring homeowners. The FHFA is contemplating whether to change a longstanding requirement for lenders to assess potential buyers using FICO scores, which some believe limit the pool of applicants because they are dated and conservative. The agency announced on Dec. 20 that it was seeking feedback from industry stakeholders regarding competition and operational concerns related to the scoring process. The National Association of Realtors (NAR) said altering the model could help Americans that have traditionally struggled with homeownership prospects. “The National Association of Realtors is a strong supporter of utilizing newer, more predictive and inclusive scoring models, which we believe will responsibly expand access to housing credit and homeownership opportunities to more hardworking Americans, especially first-time borrowers and those who lack access to traditional forms of credit because of ‘thin’ credit files,” NAR President Elizabeth Mendenhall said in a statement to FOX Business. The FICO model was adopted many years ago, but now the FHFA is asking lenders whether it would be advantageous to open the playing field to other, potentially more modern scoring models. The scores the FHFA is currently assessing include Classic FICO (current model), FICO 9 and VantageScore 3.0. Jeff Richardson, the vice president of marketing and communications at VantageScore, says that VantageScore can score more people than FICO. Of the 7.6 million consumers with credit scores at or above 620 who would be eligible for a home loan, Richardson explained that some have been credit inactive for a while by choice, which could render them un-scoreable by FICO. “We score those people. We look deeper into their credit file,” Richardson said. VantageScore has said it can score about 30 million more people than FICO. Source: Fox Business


Buyers paid more than the asking price in 24 percent of U.S. home sales in 2017, netting sellers an additional $7,000 each on average. Five years ago, 17.8 percent of final sale prices were higher than the asking price, according to the Zillow analysis. “Over the past year the American housing market has been struck by the combination of strong demand and limited supply,” the report said. “Young adult renters are increasingly feeling confident enough to buy, but they are entering a market with very few homes for sale, as inventory has been steadily declining for almost three years. Low interest rates have buoyed buyers’ budgets, raising the limits on what they can afford–and may be willing–to pay.” The report said homes sell quickly in such a competitive market, with the typical U.S. home selling in 80 days, including the time it takes to close on the sale. “Fierce competition means buyers may not win a home on their first offer. The typical buyer spends more than four months home shopping and has to make multiple offers before an offer is accepted,” according to the 2017 Zillow Group Consumer Housing Trends Report. Source: Zillow

Spending on residential remodels will continue to grow at a modest pace in the next two years, said industry experts at a press conference hosted by NAHB Remodelers at the International Builders’ Show in Orlando. NAHB predicts that remodeling spending for owner-occupied single-family homes will increase 4.9% in 2018 and another 0.6% in 2019. Remodeler confidence has stabilized at a positive level, as remodeling spending topped $152 billion in 2017,” said 2017 NAHB Remodelers Chair Dan Bawden, CAPS, CGP, CGR, GMB, a remodeler from Houston. “There is steady demand around the country, but the cost of labor and materials is challenging remodelers’ ability to meet that demand.” Economists at NAHB elaborated on several reasons behind the projected growth. “NAHB estimates that real spending on home improvements will grow by nearly 5% in 2018, as below-normal rates of home building are creating an aging housing stock,” said Paul Emrath, NAHB’s vice president for survey and housing policy research. “Factors inhibiting stronger growth include the ongoing labor shortage and rising material prices.” Source: National Association of Home Builders