Rates in Perspective
Each time the Federal Reserve Board raises short-term interest rates, everyone seems to be expecting rates on home loans to follow suit. And sometimes this does happen, but often times it does not. Thus, we always find it helpful to remind our readers why the relationship is not a “one-to-one” phenomenon. For one, the Fed controls short-term rates indirectly. Fixed home loan rates are tied to long-term rates which do not always react in the same direction as short-term rates, though certainly there is a relationship.
Secondly, many times long-term rates rise in anticipation of a move by the Fed. Thus, rates have already risen by the time they announce their decision and the result may be either stable long-term rates or even a slight move downward if the move was fully anticipated. Finally, there are typically intervening factors that might change the direction of rates after a decision is announced. For example, after the most recent increase by the Fed, the trade war rhetoric heated up and this has caused some consternation in the stock market. If investors are selling stocks, often they are buying bonds which can cause interest rates to fall a bit.
The bottom line? If the Federal Reserve is raising short-term rates in response to a strong economy, we would expect long-term rates to rise as well. But not necessarily by the same amount or at the same time. For example, the Fed has raised short-term rates by close to 2.0% within the past three years. Rates on home loans have risen approximately 1.0% from their lowest point, which was the lowest on record. Meanwhile, both short-term rates and long-term rates are below where they were a decade ago and their historic averages. Where are rates going from here? As we watch for indications by the Fed, the Fed will be watching the strength of the economy when they meet again at the end of the month.
Homeowners and renters will put $13.2 billion in savings generated by the recently passed Tax Cuts and Jobs Act back into the housing market in 2018 through the purchase or rental of new homes, according to a data analysis by Zillow. Furthermore, an additional $24.7 billion in savings from the tax reform legislation will be spent this year on home renovations. The Tax Policy Center estimated that the average taxpayer received a $1,610 tax cut this year from the new law, and Zillow forecast renters will spend about 11 cents for every dollar from their tax cuts on buying or renting a larger home, while homeowners are expected to spend 15 cents on the dollar on home renovations. Lower income households are expected to spend more of their tax cut on buying or renting a larger home than higher income households. However, Zillow added that the amount of tax cut funds that lower income households are expected to spend—$200 million—could have been as high as $4 billion if the tax cut had been uniformly distributed instead of providing larger cuts to higher income households. “Despite new limits to two longstanding tax benefits for homeowners, the typical American taxpayer saw their tax burden fall in 2018 as a result of tax reform,” said Zillow Senior Economist Aaron Terrazas. “Some of these tax savings will still find their way into the American housing market, even though they were not explicitly targeted there, as renters and homeowners decide to use their tax savings to rent or buy a bigger home or renovate their existing home. Lower income households will spend more of their tax cut on buying or renting a bigger home, adding demand to an already rapidly appreciating housing market.” Source: National Mortgage ProfessionalThe majority of homeownership conversations focus on the impact from millennials, but senior citizens may actually have more influence in shaping the future market, according to the Joint Center for Housing Studies of Harvard University’s 2018 State of the Nation’s Housing report. The median age of homeowners is on the rise, increasing from 50 in 1990 to 56 in 2016. Americans over the age of 65 were the only age group who had a higher homeownership rate in 2017 (78.7 percent) than in 1987 (75.4 percent), according to the report. Further, the report states that “the only reason the national [homeownership] rate is near the 1994 level is because older adults now make up such a large share of households.” Many seniors say they want to stay put in their homes. Eighty-eight percent of seniors said they intend to stay in their current home as they age, according to a 2014 survey. This could create growth in home improvements and renovations that are focused on accessibility and aging while staying in one place. But that also could place more pressure on younger adults to find a home to buy. Aging baby boomers of 65 and older have grown by more than 7 million households over the past decade. There have been fewer home sales from this demographic than there used to be, which is also contributing to the shortage of existing homes for sale, the report notes. Source: The Joint Center for Housing Studies of Harvard University
Renters are less likely to be evicted or skip out on their leases thanks to improving economic conditions in the U.S., according to a new report from TransUnion. The report shows that renter risk decreased by 2% year-over-year as 34% of renters now have renter scores of 720 or higher. The score is based on a TransUnion proprietary scoring method. According to TransUnion Senior Vice President of Rental Screening Mike Doherty, landlords can thank a strong economy and low unemployment levels for the rise in renter dependability. “Strong local economies coupled with low unemployment rates are likely driving the improvement in the average ResidentScore,” Doherty said in a statement. “This is positive news for renters as fewer applicants are likely to be declined or be subject to higher deposits. For property management companies, this is a major plus as the likelihood of evictions, which can cost thousands of dollars, drops precipitously when renters have a higher ResidentScore,” he added. Source: HousingWire