How Interest Rates Affect Buying Power

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Whether you are thinking about buying or selling a home, interest rate trends are an important factor to consider. Mortgage interest rates have been rising and experts, including Windermere Chief Economist Matthew Gardner, predict that they will continue to increase in 2019.

Interest Rates and Buying Power

The chart below shows the impact rising interest rates would have if you planned to purchase a $675,000 home while keeping your principal and interest payments at $3,500 a month.

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Every time interest rates increase by a quarter of a percent, your buying power decreases by about 3 percent.

What this means for buyers:
With prices moderating and interest rates slated to rise again, now is a good time to buy. If you’re betting on prices falling, you need to consider the strong possibility that an increase in interest rates would offset any potential price savings.

What this means for sellers:
Listing your home now means you will attract a larger buyer pool before interest rates rise.

Buying Is Now Thirty-Seven Percent Cheaper Than Renting

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The results of the latest Rent vs. Buy Report from Trulia show that homeownership remains cheaper than renting with a traditional 30-year fixed rate mortgage in the 100 largest metro areas in the United States.

The updated numbers actually show that the range is an average of 17.4% less expensive in Honolulu (HI), all the way up to 53.2% less expensive in Miami & West Palm Beach (FL), and 37.7% nationwide!

Other interesting findings in the report include:
Interest rates have remained low, and even though home prices have appreciated around the country, they haven’t greatly outpaced rental appreciation.

Home prices would have to appreciate by a range of over 23% in Honolulu (HI), up to over 45% in Ventura County (CA), to reach the tipping point of renting being less expensive than buying.
Nationally, rates would have to reach 9.1%, a 145% increase over today’s average of 3.7%, for renting to be cheaper than buying. Rates haven’t been that high since January of 1995, according to Freddie Mac.
Bottom Line

Buying a home makes sense socially and financially. If you are one of the many renters out there who would like to evaluate your ability to buy this year, meet with a local real estate professional who can help you find your dream home.

~Courtesy “Keeping Current Matters”

The Cost of Waiting

The “Cost of Waiting to Buy” is defined as the additional funds it would take to buy a home if prices and interest rates were to increase over a period of time.
Freddie Mac predicts that interest rates will increase to 4.8% by this time next year, while home prices are predicted to appreciate by 4.8% according to CoreLogic.
Waiting until next year to buy could cost you thousands of dollars a year for the life of your mortgage!

 

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Yellen: Expect Fed to gradually hike rates over next 3 years

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Federal Reserve Chair Janet Yellen says she expects the Fed to raise its benchmark interest rate several times a year through 2019, as it moves closer toward to its economic goals of maximum employment and stable inflation.

But in a speech in San Francisco Wednesday, she said she can’t say when the next interest rate will occur or how high rates will rise. She says that will depend on how the economy performs in the coming months.

She says Fed officials, who boosted rates for a second time last month, expect to raise rates “a few times a year” until they have pushed the Fed’s benchmark rate close to 3 percent by the end of 2019. The rate now stands in a range of 0.5 percent to 0.75 percent.

The 3 percent level for the Fed’s target for the federal funds rate, the interest that banks charge each other, is the point that the Fed currently believes is the so-called neutral rate — the level where the Fed’s interest rate policies are not spurring growth or holding it back.

“Right now our foot is still pressing on the gas pedal, though, as I noted, we have eased back a bit,” Yellen said. “Our foot remains on the pedal in part because we want to make sure the economic expansion remains strong enough to withstand an expected shock, given that we don’t have much room to cut interest rates.”

Currently, Yellen said inflation is still running below the Fed’s 2 percent objective, by its preferred measure of prices, and that some measures show that even though unemployment is below 5 percent, there could still be room to make further progress on jobs.

“For instance, wage growth has only recently begun to pick up and remains fairly low,” Yellen said.

She said as the economy gets closer to the Fed’s goals on employment and inflation, it will make sense to “gradually reduce” the level of support the Fed is providing by raising interest rates.

“Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road — either too much inflation, financial instability, or both,” Yellen said in her speech to the Commonwealth Club of San Francisco.

During her appearance, Yellen made no mention of the incoming Trump administration. President-election Donald Trump was critical of Yellen during the campaign, accusing the Fed of being political and keeping interest rates low to help Democrats.

Yellen has denied this charge. She has said she intends to remain as Fed chair until her term ends in February 2018.

Yellen was asked how the Fed safeguards its political independence while at the same time strengthening policy coordination with the executive branch.

One long tradition dating back decades, she said, is the Fed chair’s regular meetings with the administration’s Treasury secretary.

“During my time, I have had virtually a weekly breakfast or lunch with Jack Lew,” Yellen said, referring to the current Treasury secretary.

She said the meetings are used for exchanging views on the economy, but she said she has never felt pressure from the administration to follow a particular course on interest rates.

“We share a common interest in the success of the U.S. economy, and the administrations, at least the ones I have experience with, respect the independence of the Fed,” Yellen said.

~Martin Crutsinger, AP

2017 Home Price Outlook

It doesn’t look like recent interest rate increases will cool the U.S. real estate market.

Nothing can chill the real estate sector in the U.S. like rising interest rates. So is the Federal Reserve’s expected move to boost borrowing costs likely to dent the housing market?

Don’t bet on it. Experts predict that housing prices will continue to rise in many markets around the country next year even as mortgage rates drift up. The Federal Open Market Committee — the panel at the central bank that sets monetary policy — will hold a two-day meeting next week, with most forecasters expecting 0.25 basis point increase in short-term rates. Market watchers expect the Fed to hike rates several times next year is the economy stays on its current course.

But that small initial increase, which would be the first upward tilt in rates since December of 2015, is unlikely to reduce demand for housing. Home prices have continued to rebound this year. The Federal Housing Finance Agency (FHFA) House Price Index posted a 6 percent gain in the third quarter on a year-over-year basis.

Economist Andres Carbacho-Burgos of Moody’s Analytics expects nationwide housing prices as measured by that index to rise an average of 4 percent in 2017. Steve Hovland of online real estate management firm HomeUnion projects a similar uptick, while noting that some markets that have seen have seen the sharpest price increases during the recovery, such as New York, Los Angeles and Austin, Texas, could see a dip.

Mortgage rates have already started to creep up as house hunters ponder the impact of an imminent Fed hike. “Since early November, you have had a significant jump in purchase mortgage applications,” Carbacho-Burgos said. “A lot of that has to do with the expectations effect. People think `Oh my God, interest rates are increasing and we better purchase now before mortgage interest rates go higher.’”

Despite that perception, borrowing costs remain exceptionally modest by historical standards, while the average mortgage payment around the U.S. is still significantly below its level before the housing crash, Capital Economics notes. The average 30-year fixed rate mortgage is 4.04 percent, up two basis points over the last week, the lowest level they have been since 2014. Rates last month were 3.51 percent. That compares with an average of 6.41 percent since 1990, according to the Mortgage Bankers Association.

“Buyers that have committed to a home purchase are unlikely to be swayed by the increase in interest rates,” Hovland said in a statement. “In fact, the change in the monthly mortgage obligation is approximately $65 for a median-priced home. The lower end of the market can absorb that increase. However, sellers are going to need to bear some of the cost of capital increase at the top of the market.”

“The employment picture has brightened considerably,” Bob Walters, chief economist with Quicken Loans, said. “There is a ton of pent-up demand over the last eight, nine years.”

Millennials, America’s largest generation, are also starting to enter the housing market and in 2017 will make up roughly 40 percent of first-time home buyers, according to Hovland.

Still, finding an affordable home in many markets remains a challenge because of a lack of inventory, according to realtors’ associations in those markets. For people buying their first homes, “It’s very difficult to find a product for them that they can afford,” said Lane McCormack, president of the Atlanta Board of Realtors, adding that starter homes in her area can fetch $300,000 to $400,000.

Christopher Zoller, chairman-elect of the Miami Association of Realtors, said sellers of homes priced between $300,000 and $600,000 are getting multiple offers while sellers of luxury properties are having difficulty attracting buyers. “We see some buyer reluctance at the high-price end and we see some seller intransigence,” he said.

Tight credit conditions are also making it hard some house hunters to get a mortgage. Although average down payments are not much higher these days than in the past, lenders require borrowers to have good credit.

By JONATHAN BERR MONEYWATCH

Is it time to refinance again?!?

It’s a good time to check the rate on your home mortgage, because you might save money by refinancing. For that, American homeowners can thank British voters, central banks in Europe and Japan, and a global economy that just can’t get out of first gear.

The average interest rate on a 30-year fixed-rate mortgage was 3.49 percent Monday, which is down from 4.2 percent a year ago and 3.9 percent at the start of 2016 (the rates on 15-year fixed-rate mortgages and various forms of adjustable-rate loans are also down). This movement is being driven by shifts in the global bond markets.

There is even reason to think mortgage rates could fall further in the weeks ahead as banks start to pass more of the savings from low rates in the bond market through to customers — though would-be refinancers would have to be willing to bet that global markets won’t reverse themselves in the interim. Bond yields rose Tuesday, which suggests that some reversal may have already begun.

Using the rule of thumb that refinancing frequently makes sense when rates have fallen by a full percentage point, people who took out loans at the prevailing rate at various points in late 2013 and the first part of 2014 might see favorable economics for refinancing, as will those whose loan was first made anytime before mid-2010.

People with narrower gaps between their interest rate and those that prevail now might also consider refinancing. That makes sense particularly if they expect to remain in their current home for many years, thus allowing time for even modest monthly savings to accumulate enough to justify the one-time expenses tied to refinancing a loan.

Lower rates can make this a good time to refinance for people who want a different type of mortgage, like moving from a 30-year loan to a 15-year one to pay off the home faster.

For a first cut at exploring whether refinancing might make sense in your situation, use any of several online calculators, such as this one created by the housing site Zillow. A mortgage broker or banker can help determine the exact rate, eligibility and fees that would apply.

What no one can know is whether rates will pop back up or continue to drop. As much as mortgage rates have declined in 2016, and especially since Britain voted to leave the European Union on June 23, they actually haven’t declined as much as the long-term interest rates that prevail on the global bond market.

From the end of last year until Monday’s close, the interest rate on 10-year Treasury bonds had fallen 0.84 percentage points, while the average rate on 30-year fixed-rate mortgages was down only 0.41.

Essentially, banks have been able to keep much of the savings of falling global rates for themselves — the gap between those numbers, reflecting strong demand for loans and limited competition.

That gap between long-term rates on global markets and what banks charge their customers for a mortgage has spiked repeatedly in the last few years, as it has in the last month, but those spikes have inevitably been short-lived. Assuming the pattern holds, it would mean that mortgage rates will fall further in coming weeks, as competitive pressure takes hold and more banks pass along the low interest rates prevailing on the bond market to their customers.

That said, there’s no guarantee that will happen. Yes, there’s reason to think that banks will lower the premium they are charging for mortgages. But with Treasury yields at record-low levels, the same technical forces that have driven rates downward in the last few months could reverse. That means that even small improvements in the global economic outlook could cause a rapid rise in rates.

So if refinancing looks desirable now, you might save a little more on mortgage interest if you wait. But if you wait, your lucrative refinancing opportunity could evaporate. And if you have special powers to divine which direction rates are going next in this volatile year, every hedge fund manager on earth would pay handsomely if you would tell them.

Neil Irwin, New York Times

Run the numbers! Refinance calculator

How will US real estate be affected by Brexit?

Chief Economist for Windermere Real Estate, Matthew Gardner, who just happens to be British, gives his opinion on the impact of Brexit on the U.S.:

The decision of the British public to leave the European Union is a historic one for many reasons, not least of which was the almost uniform belief that there was absolutely no way that the public would vote to dissolve a partnership that had been in existence since the UK became a member nation back in 1973. However, rightly or not, the people decided that it was time to leave.

As both an economist, and native of the UK, I’ve been bombarded with questions from people about what impact Brexit will have on the global economy and U.S. housing market. I’ll start with the economy.

Since last Thursday’s announcement, there have been exceptional ripples around the global economy that were felt here in the U.S. too. This isn’t all that surprising given that the vast majority of us believed that the UK would vote to remain in the EU; however, I believe things will start to settle down as soon as the smoke clears. The only problem is that the smoke remains remarkably dense.

The British government does not appear to be in any hurry to invoke Article 50 of the Lisbon Treaty, which allows a member country to leave the conglomerate. Additionally, nobody appears able to provide any definitive data as to what the effect of the UK leaving will really have on the European or global economies.

As a result, you have those who suggest that it will lead to a “modest” recession in the UK, as well as extremists who are forecasting a return of the 4-horsemen of the apocalypse. But in reality, no one really knows, and it is that type of uncertainty that feeds on itself and can cause wild fluctuations in the market.

It’s important to understand that last Thursday’s vote does not confirm an actual exit from the European Union. There is a prolonged process of leaving that is set out in the EU Treaty which requires a “cooling off” period. And during this time, even confident political leaders, such as Boris Johnson who championed the exit campaign, might be tempted by reforms that would see Great Britain actually remaining in the EU.

The EU itself has been shaken by the vote, and there are already signs that many of its leaders are talking about moving away from the Federal structure of the Union in favor of a looser, intergovernmental agreement, that would allow greater sovereignty for its member states.

This is clearly an obvious attempt to accommodate what is already a groundswell of opposition to the Union that is much wider than just Britain, and now includes France, Spain, Greece and Portugal, all of whom are considering their own exits.

So what does this mean for the U.S.?

As far as any direct impact of the Brexit on the U.S. economy is concerned, I foresee a continued period of volatility given the aforementioned uncertainty. That said, any predictable effects on the U.S. will be limited to a “headwind” to growth, but not enough to drive us into a recession. Our financial system is solid and U.S. exposure to European debt is still limited. I wouldn’t be surprised to see a slowdown in U.S. exports as the dollar continues to gain strength against European currencies, but those effects will be fairly modest.

As for the impact on housing, U.S. real estate markets could actually benefit. Uncertain economic times almost always lead to a “flight to safety”, which means global capital could pour into the United States bond market at an aggressive rate. With this capital injection, the interest rate on bonds would be driven down, resulting in a drop on mortgage rates. And a drop in mortgage rates makes it cheaper to borrow money to buy a home.

On the flip side, one thing that concerns me about lower interest rates is that it could draw more buyers into the market, compounding already competitive conditions, and driving up home prices. And housing affordability would inevitably take yet another hit.

Let’s not fool ourselves; what we’re seeing is a divorce between the UK and a majority of Europe. And like most divorces, there are no good decisions that will make everybody happy. We need to be prepared for the fact that it is going to be a very ugly, nasty, brutal, lawyer-riddled, expensive divorce.

My biggest concern for the U.S. is that the Federal Reserve must now pause in its desire to raise interest rates (I now believe that we will not see another increase this year as a result of Brexit). This is troubling because we need to normalize rates in preparation for a recession that is surely on the way in the next couple of years. The longer we put that off, the less prepared we will be when our economy eventually turns down.

~ Mathew Gardner, Chief Economist Windermere Real Estate

Does Waiting to Buy Make Sense?

Whether you are a first time or a move-up buyer, there are two factors that will impact the amount of house you can afford in your price range: home prices & mortgage rates.

Here’s what the experts are predicting over the next twelve months for these two areas:

PRICES

Over 100 economists, real estate experts and investment & market strategists were recently polled as a part of the Home Price Expectation Survey. They were asked to project where home prices are headed. The average value appreciation projected over the next twelve-month period is approximately 4.4%.

MORTGAGE INTEREST RATES

In the latest Economic & Housing Market Outlook from Freddie Mac, they predict that the 30-year fixed mortgage rate will be 4.7% by this time next year. As of last week, the Freddie Mac rate was 3.69%.

What does this mean to you?

If you are a first-time buyer currently looking at a home priced at $250,000, this is what it could cost you on a monthly basis if you wait until next year to buy:

DATE               MORTGAGE        INTEREST RATE*        P&I**

Today                   $250,000                3.69%                      $1,149.29

2016, Qtr 2         $261,000                 4.7%                        $1,353.64

Difference in monthly payment                                          $204.35

If you are a move-up buyer currently looking at a home priced at $500,000, this is what it could cost you on a monthly basis if you wait a year to buy:

DATE               MORTGAGE        INTEREST RATE*        P&I**

Today                  $500,000                    3.69%                    $2,298.59

2016, Qtr 2        $522,000                     4.7%                      $2,707.29

Difference in monthly payment                                            $408.70

~KCM Blog