Ok, it is now a tradition here at One South — predicting the coming year and offering some guidance as to what is likely to transpire as we move throughout the coming 12 months.
Last year, I think we did a really good job of calling the coming year’s market (if you would like to see for yourself, you can see 2016’s article here.) I was especially proud of this specific section — “So what do we do about the election? Regardless of your political views, once we get within shouting distance of the 2016 election, we are going to slow down. Do your housing business in the spring if at all possible … then feel free to watch the debates and yell at the TV.” Wow, did that ever turn out to be prophetic.
So, with no further adieu, lets talk about 2017 and what we will face.
As we go to press with this post, interest rates are anywhere from a quarter to a half point lower than they were last year at this time. I repeat, interest rates are LOWER than last year at this time. 30 year fixed rate mortgages are still in the middle to upper 3% range.
To review your macro economics class, the 30 year mortgage rate is largely influenced by the markets opinion of inflation. And despite the Fed walking around looking like Sherlock Holmes trying to find any clue of rising prices, there just seems to be little evidence that inflation fears are warranted. Gas prices are still down and global demand is sluggish, at best. And while our economy seems to be doing ok, it is still nowhere near the go-go days of the early 2000’s.
This is a fun chart to show the 30 year fixed interest rate levels. The slider at the bottom allows you to isolate specific time periods and see how truly unprecedented this in our nations’s history.
So the real questions are a) ‘when will they begin to rise?’ and b) ‘what will happen when they do?’
Will rates rise in 2017?
I think they will — and in all honesty, I think they need to. Do you remember the bars with nickel beer night? While it might have been fun for a while, at some point too much cheap beer comes back to haunt you (and yes, I just used a beer analogy to explain the mortgage market.
Look, in order to break the economy’s addiction to low rates, we need to prove to ourselves that 5-6% money for 30 years is not necessarily a bad thing. For years, the US not only survived, but thrived, when rates were in excess of 7%. For the most part, hybrid mortgages, ARMs or other blends take the place of the 30 year fixed mortgage and keep housing affordable. We will be fine.
The bigger issue will be what will happen to values when rate rise. Currently, we have a comfortable level of equity in the market. For the most part, the de-leveraging of the market that occurred in 2008-2012 has created equity not only in housing, but in other industries as well. If (ok — WHEN) rates rise, values tend to flatten or fall. And when values fall, the equity we think we have is not necessarily as big as we may have believed. And when prices fall below debt, the world tends to end.
So if you are asking me what will happen — rates will rise in the spring due to demand and when they do, we will see a bit of an uncomfortable spike. The spike will subside quickly, but I think that it will dampen our summer a bit.
Just make sure to get your business done in the spring.
Seasonality and Inventory
At One South, we are big proponents of factoring in seasonailty to pricing.
Take a look at the chart below — do you notice a pattern? Of course you do.
< CHART >
The rate of pending sales increases sharply in the spring months and then falls quickly. The impact of this seasonal demand cannot be understated — if you use comparable sales from the incorrect season, you are pricing your home incorrectly. While activity does not go to zero in the latter summer and into fall/winter, it is SUBSTANTIALLY below spring rates. Be warned.
And when you combine this seasonal impact with a total lack of inventory, you get 2017’s version of March Madness. Multiple offers, bidding wars, stressed appraisers, ‘unreasonable’ sellers and a whole lot of disappointed buyers will be the norm. All I can say is fasten your seat belts, put your tray tables in upright and locked position and prepare for takeoff — it is going to happen.
Maybe I am nuts, but keeping rate this low for this long, while great for housing, is going to have some collateral damage elsewhere.