The Federal Reserve’s D-Day: Interest-Rate Hike Reflects Confidence in the U.S. Economy

Executive Summary:

• The Federal Reserve’s decision to raise interest rates by 25 basis points was well anticipated by the markets and already built into the increases in mortgage rates that have occurred since the election.
• Currently at 4.16 percent, 30-year, fixed-rate mortgages remain very close to the highest levels in more than two years. But since the rate increase was considered a foregone conclusion, it will unlikely move the markets further past today’s increase.
• Nevertheless, the Fed suggested that more aggressive action possibly be taken in 2017 than was previously thought, including an intent to raise interest rates by 25 basis points three times over the next year rather than the anticipated two 25 basis-point increases.
• The more aggressive path is a reflection of stronger economic conditions since the middle of the year — as well as a faster pickup in inflation and a sharp drop in unemployment rates — but also an incorporation of expected fiscal-policy changes by some Fed members. Also, the hike reflects the Fed’s confidence that the economy has proven resilient and will continue to grow “moderately.” Estimates of gross domestic product growth and the U.S. unemployment rate over the next two years have also been revised more favorably.
• In the meeting’s follow-up interview, Fed Chair Janet Yellen acknowledged that 2017 will be poised with uncertainty and that future action will depend on what policies are put in place and the resulting impacts on the economy.
• Another note of caution is that President-elect Trump’s appointees generally have no experience with the workings of the government, thus the transition process may be rife with hiccups, and policies may take longer to implement.
• However, given the Fed’s vote of confidence in the U.S. economy and anticipation of higher inflation, higher mortgage rates will be top of mind for those who have been thinking about buying or selling a home.

Table 1 summarizes the impact of an increase in mortgage rates from 4 percent to 5 percent:

• With a 33 percent mortgage payment (including PITI) to income assumption, about 38 percent of Bay Area households could qualify for a home priced at $800,000, which translates to a $640,000 mortgage loan with a 20 percent down payment. An increase in mortgage rates reduces the share of households who qualify by about 90,000. Similarly, the number of households who qualify for a $1 million mortgage, or a home priced at $1,250,000, drops by 120,000 households. Figure 1 illustrates the change in the number of households who can qualify for $1 million and $500,000 mortgages under four interest-rate scenarios.

Figure 1:



Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include chief economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.



Article and images sourced from http://blog.pacificunion.com/the-federal-reserves-d-day-interest-rate-hike-reflects-confidence-in-the-u-s-economy/

Real Estate Roundup: Bay Area Rental Home Investors Can Score Nice Winter Bargains

Here’s a look at recent news of interest to homebuyers, home sellers, and the home-curious.

A WINTER WINDOW OF OPPORTUNITY FOR SAN FRANCISCO REAL ESTATE INVESTORS
With the holiday season waiting in the wings, many Bay Area home shoppers typically call off their searches until the new year. But for investors in the market for a rental property, the upcoming weeks could be the ideal time to buy.

That’s according to a new study by HomeUnion, which ranks U.S. real estate markets based on those that offer the best seasonal bargains for investors. Nationwide, single-family rental investors typically pay 7.2 percent less per square foot during the winter than they do in spring and summer and also see a slightly higher cap rate. Real estate activity drops in the winter in some cold-weather cities while rent losses are marginal, and investors also face less competition from families seeking to buy homes in a favorable school districts.

Relatively mild winter temperatures aside, San Francisco ranks as the nation’s second best seasonal market for rental investors, with cap rates increasing by 21.8 percent during the winter months. San Francisco landlords who buy a property over the next few months can expect to pay a median price of $920,000 compared with $1,200,000 this past summer.

Investors in San Jose and Oakland also see cap-rate increases in the winter, a respective 11.1 and 9.4 percent. Single-family rentals are selling for $308,000 less than they did in San Jose this summer and $117,000 less in Oakland.

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CALIFORNIA: HOME TO THE NATION’S MOST EQUITY-RICH HOMEOWNERS
Rising home prices continue to restore equity to more U.S. homeowners, with Californians doing particularly well in that respect.

ATTOM Data Solutions’ most recent Home Equity and Underwater Report says that there were more than 13 million equity-rich homeowners across the country at the end of the third quarter, representing 23.4 percent of mortgage holders. The company defines equity-rich homeowners as those that have at least 50 percent equity in their homes.

Four of the country’s five most populous states — California, Texas, Florida, and New York — were also in the top five for the number of equity-rich homeowners. The Golden State has more than 2.9 million equity-rich homeowners, a 7 percent gain from the third quarter of last year. California ranks second only to Hawaii for the number of equity-rich homeowners, at 35.7 percent.

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MORTGAGE RATES SOAR AS THE DUST SETTLES FROM THE ELECTION
Mortgage rates ballooned last week in the wake of the U.S. presidential election, which could make for a flurry of activity followed by a slowdown.

According to Freddie Mac data, 30-year, fixed-rate mortgages average 3.94 percent for the week ended Nov. 17, up from 3.57 percent a week earlier. In a statement accompanying the report, Freddie Mac Chief Economist Sean Becketti said that he expects a final blitz of home sales and refinances as buyers try to beat intrest-rate hikes, then a pronounced cooling in the market.

At last week’s Pacific Union Real Estate and Economic Forecast to 2019, company CEO Mark A. McLaughlin demonstrated how rising interest rates could impact affordability in the Bay Area. Assuming a 4 percent fixed interest rate on a 30-year mortgage, about 25 percent of Bay Area households can afford a $1 million mortgage. If interest rates rise to 5 percent, the number of households who can afford that $1 million mortgage drops to 20 percent; if rates rise to 6 percent, affordability further erodes to 16 percent of the population.

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UNEMPLOYMENT-BENEFIT CLAIMS AT LOWEST LEVEL SINCE THE 1970S
Amidst a U.S. economy that is still booming despite the political uncertainty that surrounds elections, the number of people receiving unemployment benefits has dropped to its lowest levels in 40 years.

In a press release, The U.S. Department of Labor says that there were 235,000 initial unemployment benefit claims for the week ended Nov. 12, the lowest level since November 1973. Claims have been below 300,000 for 89 consecutive months, the longest such streak since 1970.

The U.S. economy added 161,000 new jobs in October, with the unemployment rate declining to 4.9 percent. According to the latest numbers from the California Employment Development Department, the state’s unemployment rate remained at 5.5 percent on a seasonally adjusted basis for the fourth consecutive month in October.

(Photo: Flickr/thefuturistics)

Article and images sourced from http://blog.pacificunion.com/real-estate-roundup-bay-area-home-investors-can-score-nice-seasonal-bargains/

Very Few Signs of a Housing Bubble, Real Estate Executives Say

Residential construction activity and home price appreciation are both expected to see modest growth over the next 12 months, with the U.S. housing market showing very little indication of a looming bubble.

Those are a few of the key takeaways from The Summit, an annual conference held by John Burns Real Estate Consulting and attended by real estate consultants, investors, developers, and executives. The general consensus among attendees was that the U.S. housing market is in a state of slow, sustained recovery, though all assume that the country may face a moderate recession within the next three years.

This year’s attendees had fairly moderate expectations for construction volume, with 42 percent believing that the U.S. won’t issue 1.5 million permits until 2021, which translates to 5 percent annual growth over the next five years. Reasons given for the lagging construction activity include high regulatory and building costs and a lack of affordable labor. Participants expect single-family home construction to increase by 8 percent in 2017.

Home prices, too, should continue growing over the next 12 months, with attendees unanimously calling for single-digit appreciation. The vast majority — 77 percent — expect between 2 and 5 percent price growth. JBREC forecasts 5 percent price growth for this year and 3.5 percent in 2017, keeping with the theme of normalization that emerged at Pacific Union’s Real Estate Economic Outlook 2018 last November.

Homebuyers should continue to enjoy low mortgage rates in the coming year, with nearly 90 percent of attendees expecting rates to remain flat or to rise by 25 to 75 basis points. Fannie Mae’s chief economist believes that mortgage rates will actually dip even lower, pointing out that interest rates in some countries are currently negative.

Three years ago, attendees of The Summit offered 10 qualitative and quantitative signs of a housing bubble, and so far, only a few of them have surfaced. On the qualitative side JBREC cites an uptick in both urban high-rise and exurban home construction activity. Quantitatively, developer profit is slim to none in some markets, while others suffer from affordability constraints — including those in California and the Bay Area.

(Photo: Flickr/westpark)

Article and images sourced from http://blog.pacificunion.com/very-few-signs-of-a-housing-bubble-real-estate-executives-say/

Brexit: Something Is Rotten in Denmark

Executive Summary:

• The United Kingdom’s unexpected vote to leave the European Union, otherwise known as “Brexit,” was not accounted for in global financial markets prior to the vote. Thus, stock market volatility is sorting out the anticipated effects going forward.
• While the financial market volatility will persist, the direct impact on the U.S. is minimal.
• U.S. economic fundamentals remain strong, as they are based on domestic activity.
• Indirect impacts may actually bode well for U.S. housing markets, as investors seek safe, stable investments.
• However, more volatility may be in store in the weeks to come.

To say that global financial markets were not pricing in Brexit prior to the vote is an understatement. Financial markets have gone haywire overnight, with many recalling the sell-off following the Lehman Brothers collapse in 2008. While volatility will stay with us for some time, the current situation is nothing like the 2008 financial crisis. And though no market was spared again, Europe’s fragile markets suffered from a severe lashing and will likely to continue on the rollercoaster ride.

Nevertheless, the Brexit vote still does not mean that the U.K. will leave soon; the referendum is not legally binding, and only Parliament can pass the legislation to leave the EU. Even if this happens, it would take at least two years for the EU and the U.K. to renegotiate their bilateral agreements. However, since no one yet really understands the full implications of Brexit, a period of volatility and much uncertainty is likely to persist.

Who Wins and Who Loses?

Unfortunately, it is easier to surmise Brexit’s direct effects than its indirect effects. In principle, the exit decision should have little direct impact on the U.S. or global economies. The U.K. economy accounts for only 4 percent of global gross domestic product. Also, U.S. exports to the U.K. comprise only 0.4 percent of our GDP, while the U.S. receives just 3 percent of its imports from the U.K. Additionally, our country’s bank exposure to U.K assets represents only 3 percent — thus a potential U.K. recession would have a limited impact on U.S. financial systems.

Among all parties impacted, the outlook for the U.K. is the haziest, followed by the uncertainty that will shadow over the EU. And while the direct impact on the remaining 27 EU countries is somewhat limited, the indirect effects cannot be fully foreseen at this point. The volatility and debate over what the next steps should be will not bode well for confidence or economic growth, and it may lead to further loosening of monetary policy.

Indirect Effects on the U.S. Could Help Our Housing Markets

Brexit’s indirect effects on the U.S., however, may not be so gloomy. First, the Federal Reserve’s decision to raise interest rates will most likely be further delayed due to this development. Also, with global financial uncertainty seemingly everlasting, U.S. Treasuries are continuing to look very attractive and will probably woo many investors. Both factors are going to keep interest rates low — particularly mortgage interest rates.

Also, U.S. economic fundamentals are essentially unchanged, and the country should continue to post solid job and wage growth. U.S. housing markets may further benefit from global uncertainty, as they are still perceived as safe, relatively stable, and to some extent underpriced, especially when compared to London’s exorbitant real estate market.

Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.

Articles and images sourced from http://blog.pacificunion.com/brexit-something-is-rotten-in-denmark/

Real Estate Roundup: Mortgage Rates Keep Dropping in the New Year

Here’s a look at recent news of interest to homebuyers, home sellers, and the home-curious.

MORTGAGE RATES DIP TO 3-MONTH LOW

Mortgage rates have declined every week so far in 2016 and are currently at their lowest levels since the fall, a fact that could help motivate hesitant homebuyers who have been sitting on the fence.
That’s according to the most recent numbers from Freddie Mac, which said that 30-year, fixed-rate mortgages fell to 3.81 percent for the week ended Jan. 21, down from 3.92 percent from a week earlier and up from 3.63 percent a year ago. Fifteen-year mortgage rates displayed a similar pattern, dropping from 3.19 percent to 3.10 percent on a weekly basis but up from 2.93 percent year over year.
In a statement accompanying the report, Freddie Mac Chief Economist Sean Becketti attributed the declines to weak inflation in 2015 and global economic turmoil, which is driving investors to treasuries.

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HOW MUCH YOU NEED TO EARN TO OWN A BAY AREA HOME
California residents must earn more than those in any other state in order to purchase a home, with Bay Area homebuyers requiring the biggest paychecks in the nation.
In a recent analysis, consumer financial-services comparison website Finder.com examined how large of a salary residents of 78 metro areas needed to earn in order to comfortably afford a home, assuming a 20 percent down payment, the ability to cover per-person expenditures, and the ability to pay off debt not related to the mortgage. By those criteria, San Francisco area households need to pull in more than $180,000 per year to afford the average home costing $1,119,500, the highest in the U.S. San Jose was the second priciest market in this regard, with a salary of $129,864 necessary to buy a home valued at $805,000.
Los Angeles and San Diego also made the top five for biggest salary requirements. Finder.com notes that those four California metro areas were among just six in the country where the salary required to obtain a mortgage is higher than the salary needed to pay for mortgage payments, average debts, and average expenditures.

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SUPER BOWL TRAFFIC, TRANSIT MAYHEM PROJECTED FOR SAN FRANCISCO
Although Super Bowl 50 at Levi’s Stadium in Santa Clara is still almost two weeks away, its impact is already being felt in downtown San Francisco, as streets close and havoc is predicted to befall strained public-transportation systems.
Curbed SF reports that the construction of Super Bowl City began over the weekend at the Embarcadero. The extravaganza will disrupt 19 Muni bus lines and close an entrance to the Embarcadero BART and Muni stations for most days. BART trains themselves are expected to be packed to capacity, though the agency plans to add extra trains to the rotation.
Worse still, predicts Curbed, will be the traffic that the detours create. Although the city is only closing a compact grid of streets right around the site of the festivities, the San Francisco Municipal Transportation Agency is directing drivers traversing the streets to major northbound/southbound corridors such as Van Ness Avenue and Gough Street, which could potentially clog up traffic several miles west of the event.

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1 IN 3 REAL ESTATE DEALS FACES DELAY
About one-third of real estate transactions encounter a delay before closing, but savvy buyers can take steps to ensure smooth sailing.
Citing data from the National Association of Realtors, an article in The Washington Post says that 32 percent of real estate sales encountered a delay over the past three months. Of the deals that were delayed, financing issues were the most common culprit, affecting almost half of those buyers.
In order to keep one’s financial ducks in a row while closing a loan, homebuyers should not make any major purchases that could affect their credit score. The article also recommends that buyers be completely transparent with their loan officer, disclosing all financial obligations and changes in employment.
(Photo: Flickr/401(K) 2012)

Article and images sourced from http://blog.pacificunion.com/real-estate-roundup-mortgage-rates-keep-dropping-in-the-new-year/

Benchmark Mortgage Rate Dips on China’s Market Chaos

With China’s stock market rout rattling the markets near and far, and a subsequent flight to quality driving the 10-year Treasury yield down, the average rate for a benchmark 30-year mortgage slipped back below 4 percent over the past week.

At 3.97 percent, the current 30-year rate is 24 basis points above the 3.73 percent rate recorded at the same time last year, according to Freddie Mac’s mortgage survey.

And with the markets spooked, the probability of a second rate hike by the Fed in March has dropped from 56 percent at the end of 2015 to 44 percent today.

Article and images sourced from http://www.socketsite.com/archives/2016/01/benchmark-mortgage-rate-dips-on-chinas-market-chaos.html