The stock markets impact on housing
Mortgage rates: This rate update will be a little longer than normal, there is a lot to talk about.
As November comes to a close, rates improved slightly over the month. The volatility in stocks providing some support to hold mortgage rates at current levels. Also, concerns over the Brexit deal and trade negotiations with China are helping support current bond prices; uncertainty always finds a home in the security of bonds.
Stocks and bonds have an inverted relationship, stocks flow out of bonds and into stocks on good economic news and vice versa. Now that the Fed has started to pull back its artificial support, we are seeing this relationship return as we enter a normalizing of the markets.
Now here is the real deal- Fed policies after the 2008 great recession keep rates at or near zero for over a decade. Companies used this leverage to buy back their own stocks causing the longest bull run in history. As rates rise, the stock market is starting to show signs of weakness. The stock market is not healthy when it is trading at 20 times earnings. As rates rise, companies are being affected by the interest on the debt they have accumulated to support the lofty levels of their stock price.
If you are hoping the Fed will see what the rate increases are doing to the stock market and pause, think again. Jerome Powell knows exactly what he is doing, and he is probably right to try and correct the current situation. Here is a quote from him in 2012 before he was the Fed Chair:
"My third concern — and others have touched on it as well — is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think. When you turn and say to the market, “I’ve got $1.2 trillion of these things,” it’s not just $20 billion a month — it’s the sight of the whole thing coming. And I think there is a pretty good chance that you could have quite a dynamic response in the market. I think we are actually at a point of encouraging risk-taking, and that should give us pause.
Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy."*
Despite Trump now speaking out against Powell’s decision to continue raising rates; in 2016 he also agreed that rates needed to rise. Here is a quote from the article I have sourced below: “Republican presidential nominee Donald Trump, who has previously accused the Federal Reserve of keeping interest rates low to help President Barack Obama, said on Monday that the U.S. central bank has created a "false economy" and that interest rates should change. "They're keeping the rates down so that everything else doesn't go down," Trump said in response to a reporter's request to address a potential rate hike by the Federal Reserve in September. "We have a very false economy," he said. "At some point the rates are going to have to change"” **
Housing news- Signs of slowing in housing are coming out in the recent reports, most likely the result of rising rates and normal seasonal slowing. Reading beneath the headlines a bit; Today new home sales came out showing contracts for October down 9%, that sounds really bad, but September was revised upward and taking that into account sales are down only about 1.6%. Yes, housing is slowing, but is resilient at the moment despite slowing. I believe if we slow from 6% to 2-3% appreciation levels that is a healthier and more sustainable level for housing long term. A good sign today is that mortgage application where up 5.5% last week, most likely due to the moderation of mortgage rates.
I believe that housing will prove to be a safer investment for people than the stock market for the time being. It’s interesting to me that people still bought homes when rates were in the teens but an eighth of a point movement today causes panic. I think this may be due to the changing perception of the public on what buying a home means. The American dream of purchasing a home of your own has been somewhat altered into some sort of investment scheme. Reminding clients of the desire to have something of your own, a tangible asset, should make housing thrive in any economy. If you can afford to own a home you should buy one, if you have money to invest, some of it should be in real estate. Let’s start changing the narrative on housing.
Program updates:
2019 Conforming loan limits have increased from 453,100 to 484,350. We are still waiting for the FHA loan limits to be released still, but expecting a similar increase.
Source:
*https://www.federalreserve.gov/monetarypolicy/files/FOMC20121024meeting.pdf
* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.