- 2017 REAL ESTATE MARKET PREDICTIONS: DON’T FEAR THE RATE HIKE
2017 REAL ESTATE MARKET PREDICTIONS: DON’T FEAR THE RATE HIKE
As I am sure you are aware, the Fed controls short-term interest rates — no surprise there. However, it’s worth noting that the Fed’s decision to increase short-term interest rates does not guarantee mortgage rates will follow suit. Take last year for example: the Fed initiated a rate hike and mortgage rates actually dropped over the course of the year. That said, the Fed’s plan to increase short-term rates dramatically increases the chances of mortgage rates going up, and real estate investors should take notice. If for nothing else, changes have already taken place in the real estate sector and housing market. Due largely, in part, to the recent election, and Donald Trump’s position on taxes and government spending, today’s rate is the highest we have seen it in quite some time. Uncertainty resulting in U.S. bond volatility has pushed rates higher than many predicted they would be at this point in the year. According to Freddie Mac, the average rate on the typical 30-year fixed-rate mortgage reached 4.13 percent as recently as December 8th. As a reference, 30-year fixed-rate mortgages were somewhere in the neighborhood of 3.5 percent prior to the election. While rates have already risen, and look as if they will again in the near future, they are far from high. Remember it’s all relative; while they are certainly higher than they were last month, rates are still far from where we have seen them in the past. At this time of the year in 2006, one decade ago, rates eclipsed six percent. Those that bought houses in 1982 were subjected to even higher rates, where the annual average reached 16.04 percent. “Mortgage rates remain near historic lows, although it may not seem that way to recent, first-time buyers and those considering a home purchase,” said Stephen Phillips, president of Berkshire Hathaway HomeServices. I maintain that real estate investors shouldn’t panic at the idea of rising interest rates, as 2017 real estate market predictions suggest rates will remain relatively low. Instead of reacting irrationally, take a minute to listen to what the market is trying to tell you. If for nothing else, rates are only increasing in lieu of the strengthening economy, and one sector — in particular — stands to benefit from sound economic fundamentals: housing. While it’s true rates will more than likely rise, the strength of the economy should be enough to offset the resulting borrowing costs. “If interest rates are rising because the economy is growing more rapidly, then, typically, incomes also rise, and the rise in incomes offset the increase in the size of the mortgage payment, and housing goes just fine,” said Doug Duncan, chief economist at Fannie Mae, in a recent interview with National Mortgage News. I remain particularly encouraged by the growing presence of millennial buyers in today’s market as well, and there is no reason every real estate investor shouldn’t share the same sentiment. Millennials are not only going to benefit immensely from economic stability, but they are expected to come out in full force next year. A recent survey by realtor.com, would have us believe that millennials will make up the largest pool of buyers in 2017, eclipsing baby boomers by about three percent. Millennials are expected to make up 33 percent of the buyer pool, and everyone from lenders and investors should take notice. Dare I say that millennial activity could make the rate hike a moot point for investors? Those real estate entrepreneurs that target their efforts on millennial buyers may be rewarded accordingly, and it’s not like they don’t have a lot of factors working in their favor. A number of financial institutions are offering low down payment mortgage options that should offset the higher cost of borrowing. ”In 2016, large financial institutions such as Bank of America, JPMorgan, Wells Fargo and Quicken all introduced mortgages requiring as little as 1 percent to 3 percent down. We expect increases in the availability of low down payment mortgages to draw more millennial buyers into the housing market,” said Nela Richardson, chief economist at Redfin. Despite the looming interest rate hike, millennials are awarded a number of borrowing options that make the prospect of owning a home a reality. Those that are actively looking to purchase a home aren’t likely to end their search simply because of an incremental increase in mortgage rates. Instead, they may just have to make concessions in certain areas. Those investors that can cater to their needs should be in a great position to succeed in 2017. “Rising rates may impact the location or size of the home they hope to purchase, but buyers that are fully committed to buying a home are unlikely to be swayed by the FOMC’s [Federal Open Market Committee] decision to raise rates,” said Erin Lantz, vice president of mortgages at Zillow. 2017 real estate market predictions are, for the most part, positive, and I tend to agree. I am convinced that millennial buyers will take their place as 2017’s largest pool of buyers despite a rate hike. That means there will be plenty of demand in a market where prices are still rising, although not at the rate we have grown accustom to in the last two years. That said, investors need to plan accordingly. While traditional borrowing will come at a higher cost, there will still be plenty of demand, provided you don’t neglect your largest target audience. Investors should do what they can to cater to their most likely customers: millennials. By Than Merrill on December 13, 2016
Written by McCormick Real Estate on . Posted in Uncategorized
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