Mortgage Rates are at Historic Lows...But...

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Mortgage Rates are at Historic Lows...But...

 

     As 'gurus' across the land prepare and release their forecast for 2017, one thing is near the top of all the mortgage forecasts - rates.

 

     Since the election of Donald Trump, rates have climbed and climbed substantially from the low-mid 3's to the low-mid 4's, the highest we've seen Mortgage Rates Risingin a few years.  For home buyers, higher rates mean higher payments and reduced buying power.  For sellers, it means 'sell now' before the reduced buying power of buyers translates into lower offers and eventually, declining sales prices.  Sound a little doomy & gloomy?

 

     "Fear not!" say the gurus.  The best years they had in the mortgage business were when rates were at 6.875%!  They were doing plenty of loans when rates were above 10%!  In that case, we should all just relax, right?  See things as they are - all rainbows and sunshine!  Sure, we can do that, if we want to ignore facts.  

 

Fact #1: we are NOT in the market we were in during the "6.875% days"

 

     The last time the mortgage market had rates average 6.875% or higher for the year with less than a 1 point discount charge was 2001.  That year was a perfect storm for EVERYONE to do well in the mortgage market.  Glass-Steagall was just repealed 2 years earlier, and this was the start of the mortgage industry deregulation that led us to 2008.  Interest-only products?  Check!  High LTV's?  Check!  Poor credit applicants?  Check!  Seemingly never-ending (but slow & steady) home appreciation?  Check!  

 

     2001 was also the tail end of huge rate reductions from a high of 16% mortgage rates in 1981 - rates steadily fell year over year and 2001 and beyond was the first time periods mortgage rates went below, and stayed below, 7%.  This trend, coupled with the rise of sub prime mortgages, meant more home buyers, and more refinance opportunities.  It would have been nearly impossible with this perfect storm for there NOT to be huge business opportunity in the mortgage market.

 

     This isn't our world today.  Subprime has made somewhat of a comeback, but our market is heavily regulated and the products that existed in the early 2000's are illegal today.  We're also in the first rising interest rate environment we've been in since 1998.  So it's easy to do mortgage when you're refinancing everyone with an 8% loan into their fancy new 6.875% loan.  What's more difficult is to maintain loan volume when everyone that's gotten a mortgage in the past 3 years has a rate that starts with the 3's.  They're not going to give that up for a rate in the 5's, or even the 4's, despite these rates being "historically low".

 

Fact #2:  10% on $125,000 is cheaper than 4% on $304,500

 

     For those gurus who "were sellin' homes when rates were 10%, so they can sell em' now!", they seem to forget one little piece of data that poses a problem for their optimism -- the last time rates were at 10% or higher was in 1990 when the median home sales price (at the start of the year) was $125,000.  It's important to remember, buyers only care about their rate at tax time (when a higher rate is a benefit). The rest of the year, they care about their monthly payment.  

 

     With the median home value now over $300,000, a payment with a rate of even 4% is substantially higher than the mortgage payment would have been in 1990.  Factor in the anemically slow wage growth we've seen (which I'd argue hasn't even kept up with inflation), and you've got a market where people simply can't afford increased payments, even by small increments.  

 

Fact #3:  Wages aren't keeping up

 

     Stocks are up, home prices are up, gas prices are going up, rates are headed up, and wages are going up, but not quite enough.

 

     Looking at historical 'booms' for the housing markets, wage growth has almost always either been at 4% or higher, or it didn't matter (think right before the crash when everyone was using "stated income" products).  With wage growth high, people have flexibility and can handle the blows that come with increasing credit card rates, mortgage rates, and manage to save for things like down payments & home repairs.  In a stagnant wage growth cycle, even small changes can have huge impacts on a household budget.  

 

     While this area is one that has improved (as of November, we're just south of the 4% mark for wage growth), it's still not pretty when you compare wages VS costs.  Think about this:  wage growth in January 2010 was at 1.6%.  Today, we're at 3.9%.  In January 2010, the median home value was $218,200.  Today, it's north of $300,000.  2% more in wages simply cannot compensate for 50% higher home prices.  Now tack on a rising rate environment to the home price increase.  Higher rates for mortgages, car loans, credit cards, and student loans.  The result is a pretty ugly picture.

 

No Optimism?

 

     I write this not to scare people, or bring about pessimism, but to point out that despite all that marketing companies will tell you, the picture for 2017 isn't extremely rosy.  That said, there are plenty of reasons to be optimistic.  Though wage growth hasn't been stellar, it's moving in the right direction.  There are opportunities for people who have been sitting on the sidelines, and even more opportunities for people who are about to cash in on the equity they've gained since 2010.

 

     Homes will be bought, and they will be sold, but to think the market is going to bring people your way as an LO or real estate agent is foolish.  You're going to have to be creative, have to market in new ways, explore and develop niches and continue to bust your butt.  The gift of low rates appears to have run it's course, so while yes, rates ARE historically low, it simply doesn't matter as much as it did 1 or 2 years ago - what matters is the trend, and they're trending upwards.  2008-2010 caught a lot of people by surprise.  This time around, let's learn from the past, get familiar with the numbers, and prepare for the shifts in the market place that will continue to come and go.



     My prediction for 2017?  It's incredibly tough to say as we've got a new President, and market shifts in directions that haven't been seen in nearly a decade as home values are back up, stocks are soaring, and the Fed looks to raise interest rates.  If I have to gaze through the clouds of the crystal ball, though, I'd venture to guess that rates will stabilize, perhaps with a window of coming down but not to previous levels, and ending even or slightly higher than current levels.  I see home values flattening out as the extremes of appreciation are past us.  My big wildcard for the year will be whether the automation of the mortgage process coupled with the increased availability of credit will be enough to offset stagnant wage growth and the leveling off of home prices.  I anticipate a great 2017 for those willing to work for it, and some floundering for those who aren't.  It won't be an easy year, but for those willing to put in the work, it could be a great one!
   

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Rainmaker
606,859
Mike Bjork
American Pacific Mortgage - Redondo Beach, CA

A lot of good points, Jon!  I think 2017 will definitely be an interesting time to see how the post-election optimism unfolds.  It will be interesting to see if the Market got ahead of itself with all of it's euphorism.  Have a great 2017!

Dec 22, 2016 10:34 AM #23
Ambassador
2,476,489
Dick Greenberg
New Paradigm Partners LLC - Fort Collins, CO
Northern Colorado Residential Real Estate

Hi John - That's an excellent analysis, and my inner economist agrees with you on every point. Doing some hard thinking about how this is likely to affect our individual business models is the smart move now.

Dec 22, 2016 11:58 AM #24
Rainmaker
3,815,057
Barbara Todaro
RE/MAX Executive Realty - Franklin, MA
"Franklin MA Homes"

Hi John Meussner well deserved feature.... and the bottom line is to continue to work, focus and be consistent with marketing....

Dec 22, 2016 12:29 PM #25
Rainer
187,619
Chris Lima
Atlantic Shores Realty Expertise - Port St Lucie, FL
Local or Global-Allow me to open doors for you.

There's a lot to digest in this very informative post and I certainly can see why it is featured.  It's obvious that the rates would eventually start to creep up and it took a while, but here we are.  I am hoping that some of the buyers in my database are not sending me "should've, would've, could've" emails in a few months.  This market, the new year, the new regime are certainly worth watching.  I am excited to see the changes.  Hopefully, I will remain positive.

Dec 22, 2016 01:02 PM #26
Rainmaker
1,164,444
Amanda S. Davidson
Amanda Davidson Real Estate Group - Alexandria, VA
Your Alexandria Virginia Real Estate Agent

John, very well written post and I'm glad it's featured. It was inevitable that rates increase and for now (speaking for Northern Va only) it's brought more buyers out wanting to lock in before they increase more. I am interested to see what 2017 brings but, one thing is for sure. We need to continue to be creative with marketing and keep our nose to the grindstone to be successful as there are always new challenges to face. Happy Holidays my friend.

Dec 22, 2016 02:59 PM #27
Rainer
49,997
Dorothy Liu
Alain Pinel Realtors - Sunnyvale, CA
Realtor, Broker, Silicon Valley, 650-492-0859

The housing market will be also based on the unemployment in your area.  For the Silicon Valley area the unemployment rate is around 3.2% to 3.8% while it is 5.5% for all California based on the Chief Economist, Leslie Appleton-Young.

Dec 22, 2016 08:53 PM #28
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Harry F. D'Elia
Real Estate and Beyond, LLC - Phoenix, AZ
Investor , Mentor, GRI, Radio, CIPS, REOs, ABR

I still think rates are still low where people can still qualify for a home.

Dec 23, 2016 06:31 AM #29
Rainmaker
291,764
Diana Dahlberg
1 MONTH REALTY - Kenosha, WI
Real Estate in Kenosha, WI since 1994 262-308-3563

Interesting details of your well deserved Feature post John.  My take on it is that there will always be buyers and sellers and the world will continue to turn.  We just need to be "on our game" and work hard as we always have, and be ready to educate our clients through this process!

Dec 23, 2016 08:22 AM #30
Rainmaker
287,963
M.C. Dwyer
Century 21 Showcase REALTORs - Felton, CA
Santa Cruz Mountains Property Specialist

Well-deserved feature:  a very thoghtful post comparing the past to the present.   There will be unknowns tossed in at inconvenient moments too.    My area is a "bedroom community" to the Silicon Valley, where demand still exceeds supply, and unemployment is low.    Still, I tend to think the rapid appreciation of the past few years is ripe for a pause.     

Dec 23, 2016 03:13 PM #31
Rainer
144,935
Jim Joeriman
Coldwell Banker Riviera Realty, Inc - Lacey Township, NJ
Helping Agents Reach New Heights

Once the stock market corrects, money will flow back into bonds.

Dec 24, 2016 05:03 AM #32
Rainmaker
264,935
John Wiley
Jones & Co. Realty - Cape Coral, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

Very thought provoking post. We must always keep on top of the mortgage industries changes. I think it will come down to the consumer and how they feel the changes affect them.

We will have to help them by sharing our knowledge of the financial and real estate market.

Dec 24, 2016 08:47 AM #33
Rainmaker
751,467
Sam Shueh
(408) 425-1601 - San Jose, CA
mba, cdpe, reopro, pe

The days of inflational home values will not be seen in 2017 as affordability is working against the interest rates.  As mentioned few cares if it was 8.75% to 10% but if you are working a historical low interest any 1% will shake the world.

 

Dec 24, 2016 09:50 AM #34
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Debbie Reynolds
Platinum Properties - Clarksville, TN
Your Dedicated Clarksville TN Real Estate Agent

Rates will be going up and so will inflation. Along with that will be business growth and hopefully higher wages. 

Dec 25, 2016 02:39 AM #35
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Debbie Reynolds
Platinum Properties - Clarksville, TN
Your Dedicated Clarksville TN Real Estate Agent

John, Merry Christmas and Best Wishes for an Amazing 2017.

Dec 25, 2016 02:40 AM #36
Rainer
358,410
John Dotson
Preferred Properties of Highlands, Inc. - Highlands, NC - Highlands, NC
The experience to get you to the other side!

John,

Merry Christmas - belated.

I have said for years that we are not going to get out of our economic crunch with free money.  Interest rates NEED to go up and there should be no fear of upward movement on the part of the public.

I sure can remember the 70's when interest was at 18-24%.

There is stupidity at both ends of the scale.

Dec 26, 2016 08:23 AM #37
Rainer
355,005
Anna Hatridge
Goodson Realty - Bonne Terre, MO
Missouri Realtor with Goodson Realty

Congratulations on the feature.  Good information.

Dec 26, 2016 10:01 AM #45
Rainmaker
50,896
Vickie Teel
Keller Williams Peace River Partners - Punta Gorda, FL
It's all about YOU!

Great post John and congratulations on the feature!  There's some good information in this post and I agree with what others have said - we have to keep working hard and doing all the things we know we should be doing to get and keep business.

Dec 27, 2016 08:33 AM #46
Rainmaker
1,391,348
Gary L. Waters, Broker Owner, Waters Realty of Brevard, LLC
Waters Realty of Brevard, LLC - Rockledge, FL
... a small office, delivering big service!

Rising home prices, rising interest rates, global warming and rising tides....still, I am optimistic about 2017!

Dec 28, 2016 10:22 AM #47
Rainmaker
823,237
Jan Green
Value Added Service, 602-620-2699 - Scottsdale, AZ
HomeSmart Elite Group, REALTOR®, EcoBroker, GREEN

Excellent post and thoughts on the new year, rates and the housing market.  I agree 100% that agents will have to be creative and provide value added service to stay relevant.  Sounds like a new post!  Happy New Year and kudos to you on your business!

Dec 30, 2016 06:24 AM #48
Rainer
190,470
Noel Mayer
FAIRMOUNT REALTORS - Montclair, NJ
YOU'RE RIGHT AT HOME WITH NOEL

What a New Year "2017"

I've gain so much from your expertise and knowledge of the business by following (you) the members of  the Active Rain Community 

Thank you so much Happy New Year !

Jan 02, 2017 03:48 PM #49
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