Market Update - Time to Push Debt Out

By Henry.Durkee@nafinc.com November 16, 2017

Without a doubt debt has been very cheap for the past several years. Not to mention record low interest rates and fiscal stimulus have pushed up asset prices following the financial crisis. The stock market has pushed higher and higher as have real estate prices. But so has the debt load of the US Government, the US homeowner as well as college students around the nation. In fact the total US Household Debt has reached $13 trillion, $280 billion higher than in 2008 as the financial crisis unfolded.  We’ve been told that the loans made today are of much higher quality than loans made before the financial crisis. That’s certainly true with mortgages but what about other types of debt? Subprime auto is experiencing heavy losses nearing pre-crisis levels, student loan debt has reached $1.4 trillion with a 11.2% 90-day delinquency rate and credit card balances continued to rise. Mortgages have become the safe form of debt but other forms are becoming very risky. What’s the solution?

As it stands today tax reform likely won’t be passed in its current form. Certainly any type of stimulation to the economy could cure the current debt problems (and potential crisis for students). If nothing is done it’s going to be very difficult to continue to borrow our way into prosperity. And that’s where rates come into play…

If you’ve been watching the market you’ve seen short term rates via the Federal Reserve continue to rise while long term rates have remained relatively flat. See the chart below that represents the spread between the 2yr and 10yr Treasuries. As you can see over the last 8+ years the spread has nearly collapsed, meaning it’s becoming cheaper to borrow over the long term relative to the short term. This is often referred to as a flattening of the yield curve. It’s generally a result of the Federal Reserve raising interest rates and a low growth and inflation outlook for the longer term. Yes there are some supply and demand effects as well. So why care?

As a mortgage banker it certainly is an encouraging sign on the likely long term path of lower interest rates. It also serves as economic encouragement for borrowers to take debt over longer periods of time. If it costs the same to borrow for thirty years versus two years, why not borrow for thirty? And given the equity that has built up over the last several years in real estate, most homeowners have a very effective method to borrow debt versus other forms, especially considering the tax advantage of a home mortgage.

The 10yr is currently at 2.32% versus the average for all of 2017 at 2.32%. The entire range for 2017 has been very tight with it trading between 2.04% and 2.62%. 2018 however could be a very different year with a new Fed Chair (yes Janet Yellen is being replaced by President Trump). We will also see how inflation plays out now that the FOMC has raised twice in 2017 and possibly a third time will come in December. The current odds of a December hike are 92% and a 50% chance of two hikes in 2018. I’m going to call 2018 as a make or break year for the Federal Reserve. They are raising rates, so let’s sit back and see how this plays out. Not to mention a flattening yield curve. If it goes negative (2yr yield is higher than the 10yr yield) then hang onto your hat.

 

image: http://www.newamericanagent.com/uploads/images/Jason_11.16.17.png

2 yr - 10 yr spread

 



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Market Update - Halloween Edition

By Henry.Durkee@nafinc.com October 27, 2017

Hello everyone and welcome back to the Mortgage Rundown brought to you by New American Funding.  Today I’m going to review what’s happened in the markets these past 12 months and my predictions for the future.

The end of 2016 saw interest rates move higher by 70bps right after around the election of a new US President.  Republicans retained house and senate majority and looked to advance their agendas on tax reform, health care reform and infrastructure spending.  The 10yr finished 2016 at 2.45% and as you can see on your screen it reached an all-time low in July at 1.36%.

In the 1st quarter of 2017, fears of inflation have plagued the markets with many economists calling for the Federal Reserve to raise rates 4 times this year.  Core PCE has almost reached 1.9% and the unemployment rate is right around 4.7%.   The Fed’s dual mandate of below 5% unemployment and 2% inflation is about to be met.  As you can see on this graphic unemployment has been falling continually since 2009.

The 2nd quarter saw inflation falling at a dangerous pace and suddenly the market doesn’t believe the Fed can raise 4 times in 2017.  The market believes that tax reform and health care reform are still on the table.  The 10yr Treasury moved very little.  It started the quarter at 2.38% and finished the quarter at 2.31%.  The graph on your screen shows the change in inflation over the past five years.

The 3rd quarter brought more bad news on inflation with Core PCE and CPI below 2%.   There were two FOMC meetings in Q3 but the Fed made no changes to the benchmark rate during either session. Over the quarter there was rate volatility as the 10yr fell to 2.04% before climbing all the way to 2.33% by September 30th.   

The fourth quarter has begun with a more hawkish tone as there is now an 80% chance the Fed raises rates in December.  Keep a close eye out for more inflation data from October.

Looking into the future, my prediction is that tax overhaul and health care overhaul will continue to stall.  Inflation without an overhauled tax code will remain relatively low.  The Fed’s unwinding of the balance sheet will take precedence over interest rate increases and last but not least the 10yr will remain below 3%.

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Understanding Comps

By Henry.Durkee@nafinc.com January 21, 2016

You've probably heard professionals working in the real estate industry throw around the term 'comps' a few times. However, you might not understand them or know what they mean for you and the homebuying and selling process.

Whether you're looking for a place to call your own or need to sell a property, knowing a bit about comparable sales, or comps, can go a long way.

Comps 101

When trying to buy or sell a home, one of the tools many professional real estate agents use is a list of comps. With these, an agent can see how much a property sold for and when, noted Bankrate. Typically, an individual will consider whether the home is in the same area, about the same size as well as the current condition. Similar properties can be used to determine what a fair asking price is or how much to offer a seller when looking to buy a new home.

"Comparable sales are a critical part of assessing the current market value of a property," Ziad Najm of Cedar Real Estate said, according to Bankrate.

This is a great way to have a deeper understanding of the local housing market and its current health.

What's the most important comparable feature

If you decide to use comps to figure out what the appropriate selling price for a home is, Zillow, an online real estate company, indicated the location of a home is the most important factor you should consider when looking for the most comparable home value. Location is essentially the highest priority and the best way to figure out the value of a home.

You will want to stay within a specific neighborhood or school district. If you find a comp outside of these boundaries it is not nearly as dependable for figuring out a fair price for the home you are selling or looking to buy.

Also look for similar features

In addition to the location of a home, another way to find appropriate comps is to compare features. If you have a fireplace, updated kitchen and new roof for the home you are trying to figure an appropriate value for, look for these features in the comparable home as well.

This goes the same for the number of bedrooms, bathrooms and size of the house too.

Consider the sale date

According to Zillow, when you use recent sales for comps, make sure you pay attention to the sale date. It is crucial to use sales that were completed within the last six months. The more recent the sale, the more accurate the comp selling price is to the current value of similar real estate.

It's also important to note that using an older comp that reflects a higher property value to price the house you are selling or make an offer on a home you're interested in will likely not wind up working in your favor. Buyers and sellers are aware of the market, or should be, and trying to make an out-of-date comp work for you is not the best idea.

Foreclosures and short sales impact on market value

Comps can become a bit tricky when you factor in foreclosed properties and short sales, noted Bankrate. Buying or selling may determine whether you want to include these types of comps when determining the market value of a home.

"It's definitely tricky," Najm said, according to Bankrate. "From the buyer's perspective, all sales, including bank-owned and short sales, should count to establish market value. However, standard sellers with equity should consider the lower, distressed sale comps. (But they) should also realize that prospective buyers may be willing to pay market, or above market, price for a standard sale."

Enlist the help of a real estate professional

An agent can provide you with a great deal of assistance when figuring out market value. According to Forbes, professionals working in the real estate industry have better access to these tools in addition to other properties, agents and additional individuals working in the industry.

You can benefit a great deal by harnessing the help of an agent.

While it is interesting to be able to use comps to figure out the market value of a home, gaining the insight and assistance from a professional who has expertise in the industry will ensure you don't make any mistakes. Pricing a home to high or too low when selling can wind up losing you potential sales. Making an offer that's too low might mean you miss out on the house of your dreams.

Real estate agents are there to help you as you embark on the homebuying or selling process. Take full advantage of their services while still being knowledgeable and have a better understanding of the current real estate market in your neighborhood. After all, two heads are better than one.

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