Four market conditions to watch
March 14, 2017
A party swap-out in Washington always brings change, even with a more conventional White House transition.
We looked into the potential impact on four key conditions homebuyers should be watching as the 2017 homebuying season warms up:
- Interest rates
- Home prices
- Availability of credit
- Student loan debt
What are housing, finance, and economic experts predicting, and what does it mean for you? Opinions differ (what a surprise!), and even veteran prognosticators admit to an unusual amount of uncertainty at this point. But it looks like the new administration’s expected policy changes, on balance, won’t change the homebuying landscape a great deal — at least for 2017.
So if you’re ready to buy, it’s shaping up to be another good year to do it.
1. Interest rates
So many factors go into mortgage interest rates that they’re hard to predict even when a new administration isn’t shaking things up. The closest thing to a consensus out there is that rates will rise somewhat in 2017— but not too much, maybe to 4.2 or 4.5 percent for a 30-year fixed mortgage — and tend to bounce around.
Most of us aren’t in the habit of tracking the federal funds rate. Still, it’s been hard not to notice that the Federal Reserve and Fed chief Janet Yellen have been in the news a lot. Why? back in December, Yellen and the rest of the Fed board raised the Fed funds rate (the rate at which banks lend money to each other overnight) for the first time in a decade. And on March 15, they raised the benchmark interest rate again, this time by one quarter of one point. These increases signal good news, indicating that the Fed views the economy as strong. The March 15 increase is minor and interest rates remain very low, but homebuyers might be less excited as mortgage rates will rise too. Since the Fed began raising rates, mortgage rates have risen about one half of a percentage point.
Now, the fed funds rate doesn’t directly affect mortgage rates. But banks want to pass along their borrowing costs. With the Fed suggesting two or three modest increases this year, and more in years to come, banks are starting to account for that in their long-term fixed-rate loans — i.e. that 30-year mortgage you want — sooner rather than later.
Meanwhile, the new administration has a variety of plans that could stimulate the economy — infrastructure investment, for example — and economic growth pushes interest rates up.
But while up will likely be the trend, some experts say that uncertainty about Trump’s plans, especially around financial regulation and tax reform, might result in more mortgage rate fluctuations than usual. That argues for locking in your rate if you’re buying in a dip.
We all want the lowest interest rate we can get. But as rates creep up, don’t feel pressured to buy before you’re ready. Remember that even with the predicted increases, rates will still be near historic lows — the average during the last 45 years has been 8.25 percent. And how’s this for perspective: the highest rate ever, for a 30-year fixed mortgage was in February 1982, a whopping 17.6 percent. That’s not a typo!
2. Home prices
There’s been upward pressure on home prices for a while, mainly because there aren’t enough starter homes for everyone who wants one. Fannie Mae economists expect prices of single-family homes to go up by 5.2 percent this year — a bit less than in 2016. The National Association of Realtors thinks increases will stay just under 4 percent.
The Trump administration is talking about relaxing or repealing the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd-Frank, passed by Congress to tighten up financial regulations in the wake of the 2008 crisis. That could loosen credit, making it easier for homebuyers to borrow. However, it also means demand would go up, and drive prices up. At the same time — always another angle! — rising prices should inspire builders to get busy. And when demand is met, prices tend to level off.
One interesting new piece of the demand puzzle is the potential difference between red and blue states. In a post-election survey that Trulia conducted, Republicans said they felt newly optimistic about the housing market, while Democrats had turned pessimistic. So demand could be higher in red states than blue.
3. Availability of credit
As we mentioned earlier, changes to Dodd-Frank could loosen up credit, making it easier to get a loan. Portions of the act require banks to make a reasonable effort to determine whether you’ll be able to repay the mortgage they’re selling you. Some argue that these regulations went too far, making it too hard to get a loan.
However, housing advocates like the National Community Stabilization Trust call Trump’s plans — to the extent that they’re known — an assault on critical consumer protections. Dodd-Frank, which established the Consumer Financial Protection Bureau, also contains various regulations aimed at curtailing the kind of predatory lending that helped create the foreclosure crisis.
The administration might also approach FHA-backed loans differently. Under the Obama Justice Department, some lenders became reluctant to underwrite these loans, maintaining that they faced big fines for small paperwork errors. If the Trump Justice Department is more forgiving, more lenders might start offering FHA loans, giving you a greater choice of lenders if you want one.
4. Student loans
Most of America’s nearly $1.3 trillion in student debt is government-backed student loans. If you’re saddled with one of them, homeownership is just one of the things you might be putting off. Student Loan Report surveyed 1,220 college grads with debt, and 63 percent said it was affecting their decision to buy a home.
On the campaign trail, Trump called student debt an “albatross” around the necks of young people — something we can all agree on! But it doesn’t look like real relief is coming any time soon.
Current income-based repayment plans for undergraduate loans cap monthly payments at 10 percent of your income and forgive what’s left of the debt after 20 years of payments. Trump has proposed raising the monthly cap to 12.5 percent while shortening the repayment period to 15 years. Overall, that would save borrowers money, although at the price of squeezing the household budget yet a little more during those 15 years.
Further, observers say that others in the Republican Party want to make these income-driven programs less, not more, generous — loan forgiveness comes at a cost to taxpayers. So even Trump’s modest plan might not make it past opponents.
One of the catches of these repayment plans has been that if you work in the private sector, the amount of debt forgiven is sometimes taxed as income. In other words, your education debt becomes tax debt. No word yet on whether Trump wants to change this. Stay tuned.