Are Higher Rates Good News?The biggest news with regard to the markets since the election has been the spike in long-term interest rates. The stock market has been rising as well, but there seems to have been a greater reaction on the bond market side. First, before anyone pins these trends to the surprise results of the election, one can clearly see that the movement of these markets started before the election took place. The stock market rallied strongly the day before the election and rates started rising several weeks before the election. Thus, while these movements have accelerated since the election, it was certainly not a reversal of trends.
Yes, the election definitely is a factor. With a new President coming in, the markets look at all the promises made during the campaign and start adding up the costs of implementing these promises. For example, take a look at the stimulus package of President Obama, which was in reaction to the Great Recession taking place when he came into office. The difference today is, the markets can see that the same level of stimulus is not needed now, as compared to then. While the economy could be doing better, no one would argue with the fact that the we are in a hundred times better shape than we were eight years ago. Thus, while the markets may fear a huge spree to fulfil promises such as infrastructure spending, this spending does not have to come all at once, and it is not likely that Congress will be writing checks to bust a budget already in deficit.
The bottom line is that rates are increasing because the economy is doing better, and that is good news. The markets were already factoring in an increase in rates by the Federal Reserve Board before the election. That increase is still expected to come in December. As long as the Fed does not surprise the markets with a 0.5% increase, instead of the expected 0.25%, then calm might return to the markets. Remember that long-term rates do not necessarily rise in reaction to the Federal Reserve moving short-term rates upward. As a matter of fact, after the increase last December, rates on home loans decreased due to other factors. Even with the present increase, keep in mind that rates are still very low by historical standards — and that is the best news.
Conforming base limits are rising from $417,000 to $424,100 and high-cost area limits are rising to $636,150. This is the first increase in loan limits since 2006. The Housing and Economic Recovery Act of 2008 (HERA) established the baseline loan limit of $417,000 and requires this limit to be adjusted each year to reflect the changes in the national average home price. However, after a period of declining home prices, HERA also made clear that the baseline loan limit could not rise again until the average U.S. home price returned to its pre-decline level. Until this year, the average U.S. home price remained below the level achieved in the third quarter of 2007 and thus the baseline loan limit had not been increased. Many areas between the base and high-cost limits have changed as well and the county-by-county limits can be found at this Link. The new limits are effective for loans delivered on or after January 1, 2017. Source: Federal Housing Finance Agency
Housing giant Freddie Mac plans to dispense with traditional appraisals on some loan applications for home purchases, replacing them with an alternative valuation system that would be free of charge to both lenders and borrowers. The company confirmed that it could begin the no-appraisal concept as early as next spring. Instead of using professional appraisers, Freddie plans to tap into what it says is a vast trove of data it has assembled on millions of existing houses nationwide, supplement that with additional, unspecified information related to valuation, and use the results in its assessments of applications. For consumers, the company believes, this could not only eliminate appraisal expenses — which typically range from $350 to $600 or more — but could cut down on current closing delays attributable to appraisals. It also could relieve lenders of their current burdens of responsibility for the accuracy of appraisals — a major sore point with banks that sell loans to Freddie subject to potential “buy back” demands if significant errors are later found in appraisals. Source: The Nation’s Housing, Ken HarneyYounger buyers are likely to drive growth in residential markets in the years ahead as the economy stays on a positive track and interest rates stay relatively low, two top economists said at the 2016 Realtors® Conference & Expo in Orlando, Fla. Look for existing-home sales to end the year at a 5.4 million level, a small increase from last year, NAR Chief Economist Lawrence Yun told Realtors® at a residential economic forum. For 2017, he expects sales to grow modestly, to 5.5 million units and then to 5.7 million the year after that. Long-term interest rates are expected to tick up but stay low by historical standards for the foreseeable future. He forecasted rates to end the year at 3.6 percent, then rise to 4.1 percent in 2017 and then to 4.5 percent. Dennis Lockhart, president of the Federal Reserve Board of Atlanta, who also spoke at the forum, said interest rate increases are unlikely to be a roadblock to healthy home sales. “Realtors® shouldn’t interpret the prospect of rising rates as ominous,” he said. Both Yun and Lockhart said young households will drive home ownership gains in the years ahead. That’s because the U.S. economy is showing resiliency even as other major economies, like Japan and the European Union, struggle. In the U.S., jobs and wages are growing and are expected to continue growing, which will undergird home sales. “There is pent-up demand” from younger households, said Yun. Source: REALTOR® Magazine