Economics and Real Estate
There has been massive growth in the United States, the implementations of fiscal and monetary policy over the years since the Great Recession, and more importantly the recent volatility in the stock market for the 1st Quarter of 2018, has caused many to speculate whether or not we are finally at the peak of the business cycle.
- The real estate market almost mirrors the economy. So if the economy is healthy, the real estate market should be healthy and vice versa.
- The business cycle are periods of economic growth and contraction. So this is a vital factor on making informed decisions to determine whether you'll get top dollar for selling a house or to get the best deal on buying a house.
Therefore, following a decade since the Great Recession and since the economy appears strong, my recommendation is to sell now because there’s low inventory and house prices are high. It’s also good to buy right now because mortgage interest rates are still historically low.
Mortgage rates have always fluctuated and they have been much higher than where they are now.
- 1968 rates were 8.5%
- 1981 rates were 18.63%
- 1991 rates were 8.5%
- 2008 rates were 6%
- 2018 (Beginning of April) were 4.65%
This is why rates are likely to go up over time. I recommend you lock a rate sooner than later! Since higher mortgage rates make it more expensive for home buyers to purchase a home, it can diminish a buyer’s purchasing power, so it can lead house prices to fall. Luckily, it’s been forecasted that home prices should continue going up but much more modestly now year-over-year than it has in the past five years.
According to the NAR Chief Economist (Lawrence Yun), “House price gains will soften.” Based on the S&P CoreLogic Schiller National Home price Index, US house prices are 6.3% above the peak reached in the housing bubble in 2006.
It has been in the news lately that the Federal Reserve raising the federal fund interest rates that has cause some to worry, because these rates make loans more expensive. But the federal funds rate hikes are short term rates. Mortgage rates are generally driven by long term rates.
So it is the U.S. 10 year treasury note yield that has a direct relationship on mortgage interest rates. This is because the U.S. 10 year treasury note yield has great influences on the borrowing costs for individuals and corporations. The yield and mortgage rates move in the same direction. So when the yield rises, mortgage rates rise and vice versa.
A weak or strong stock market can dictate where mortgage rates will go based on how the U.S. treasury bonds and notes are affected. U.S. Treasury notes and bonds are safe havens for investors when they see a weak stock market.
- The U.S. Treasury note and the yield have an inverse affect on one another. For example, when the stock market is rallying, the demand for U.S. treasury bonds fall, which causes treasury bond yields to move higher. The opposite usually occurs when the stock market is falling.
Although I mentioned that the federal funds rate don’t generally have a direct impact on mortgage rates, they still have an impact on the overall economy which could affect mortgage rates. That’s why there are concerns right now that we could be at the peak of the business cycle. The Federal Reserve has been increasing the Federal Funds Rate since 2015.
The Federal Reserve is tightening the money supply each time they raise rates and sell treasury bonds. The purpose of these increases occur when the economy is growing or more importantly to fight inflation. The goal is to not have the economy overheat. This is why they aim to keep inflation at 2%. The problem with raising these rates is that if they are raised too quickly, it can lead to a recession.
- There are multiple indicators proving that the economy is growing, like the many jobs being added, GDP above 2%, the unemployment rate is currently at 4.1% which is now holding at a 17 year low. Job growth is important to look out for because solid employment and wage growth makes it reasonable to understand why people are able to afford buying houses.
- Therefore, the Federal Reserve Chairman, Jerome Powell aims to increase the Federal Funds Rate 3-4 times this year. In March of 2018, Chairman Powell raised interest rates by 25 basis points. Currently these rates are ranging from 1.5 to 1.75 percent. Prior to the Great Recession, the federal funds rate was 6% and then fell to 0% to help the economy out of recession. So these rates should only go up then down, unless of course- the Federal Reserve decides to implement quantitative easing to loosen the money supply by buying bonds and lowering the federal funds interest rates.
It’s unprecedented to see the stock market grow so much since 2016. Time will tell what will be next for our economy. One of the concerns is American consumer debt continues to surge ranging from credit cards, car loans and student debt. The crises in the Great Recession was due to the toxic mortgage backed securities and subprime loans. Now, the speculation is a credit crises for the next recession!
Please give me a call or email me should you have any questions or want to sell/buy a house.