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 in 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 Glass-Steagall was just repealed 2 years earlier, and this was the start of the mortgage industry deregulation that led us to 2008.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.
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!