10.28.2016 Homebuyers Are Bullish About Interest Rates

Believe it or not, it has been almost a year since the Federal Reserve raised the benchmark federal funds rate by 0.25 percentage points to 0.5 percent. This interest rate hike last December marked the first time since 2006 that the Fed had raised rates.

Every since then, Fed watchers have been trying to guess when the next rate hike will occur. After it raised rates last December, the Federal Reserve Open Market Committee (FOMC) said that it planned to raise rates by 0.25 percentage points four times in 2016.

Thus far, though, the Fed has stood pat on further rate hikes. The FOMC has only two more meetings this year: on November 1 and December 13. Few expect the Fed to raise rates right before the Presidential election, which leaves the December 13 meeting as its last chance if it’s going to raise rates before the end of the year.

Consumers’ Rate Expectations

For their part, U.S. consumers have adopted a very bullish attitude toward the future direction of interest rates. According to Fannie Mae’s most recent National Housing Survey, more than half (56 percent) of consumers believe that mortgage rates will stay the same or fall even further over the next year.

What a difference a year makes. In August of last year, 41 percent of consumers said they thought mortgage rates would stay the same over the next year while 5 percent said they expected rates would fall. It turns out that the 5 percent got it right.

Despite the Fed’s rate hike last December, the average interest rate on 30-year mortgages has actually fallen by 48 basis points since the start of this year to 3.49%. This translates to a savings of almost $100 a month on a $300,000 mortgage.

In only one of the past 45 Fannie Mae surveys did a higher number of consumers say they believed mortgage interest rates won’t rise. So we could be entering a paradigm shift in which homebuyers consider ultra-low interest rates to be a “new normal.” Meanwhile, the ongoing low-rate environment and consumer expectations of continuing low rates is keeping home prices from rising too much, some experts say.

Homebuyer Sentiment Index Falls

Another component of the National Housing Survey, the Fannie Mae Home Purchase Sentiment Index (HPSI), fell by 2.2 points in September to 82.8. This is still high by historical standards — it stood at just 60.0 in May of 2011 — but is down from a high of 86.5 in July.

The HPSI is comprised of six components, four of which decreased in September. These included a 5 percentage point drop in the net share of consumers who say now is a good time to buy a home and a 3 percentage point drop in the net share of consumers reporting confidence about not losing their job in the next 12 months.

In a news release accompanying the release of the HPSI data, Fannie Mae Senior Vice President and Chief Economist Doug Duncan stated: “The decline in the HPSI over the past two months from the survey-high in July of 86.5 adds a note of caution to our moderately positive housing outlook.”

We’re interested in hearing from you. What are you seeing in your marketplace in terms of homebuyers’ interest rate expectations? Send me an email at steven@lendtrade.com.

10.17.2016 Dodd-Frank Repeal Update: Rollback Bill Passes House Committee

Almost from the time the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed into law in 2010, critics of the legislation have been trying to repeal it. Last month, the House Financial Services Committee took a big step in this direction when it approved a bill that would roll back large portions of Dodd-Frank.

Click here to read an article we published in the spring when details of this bill were first made public.

In particular, the bill — dubbed the Financial Choice Act — would repeal the Volker Rule and remove the Durbin Amendment. These are two Dodd-Frank provisions that critics have been especially vocal about.

Mostly Party-Line Vote

Not surprisingly, the Financial Choice Act — which was sponsored by Republican Jeb Hensarling, one of the most prominent critics of Dodd-Frank — passed the House committee largely along party lines. The vote was 30-26 with just one Republican joining the Democrats in voting against it.

The bill’s supporters acknowledge that it won’t go anywhere this year, but hope it establishes a blueprint for framing a broader discussion on financial reform next year after the election. “He’s trying to frame the debate going forward and lay some groundwork for next year,” a legislative insider was quoted as saying in The New York Times of Hensarling’s sponsorship of the bill this year.

The Volker Rule prevents banks from conducting certain investment activities with their own accounts and limits banks’ ownership of covered funds (i.e., hedge funds and private equity funds). The Durbin Amendment, meanwhile, sets a limit on certain fees that banks are allowed to charge retailers for debit card transactions. Banks have strongly objected to the Durbin Amendment and in response have increased other consumer fees and reduced perks like debit card reward programs and free checking in order to recoup lost revenue.

More Details on the Bill

The bill would also undo one of the Dodd-Frank provisions that opponents have been most critical of. This provision requires banks to meet higher capital requirements by raising billions of additional dollars.

The Financial Choice Act would instead use a process referred to as capital election that would give banks a choice as to whether or not to hold additional capital to meet the higher requirements. Doing so would give banks regulatory relief, but banks wouldn’t be required to raise additional capital.

Rep. Hensarling put it this way in a speech to bankers earlier this year: “If a bank chooses to have a fortress balance sheet that protects taxpayers and minimizes systemic risk, then bankers ought to be allowed to be bankers.”

In addition, the bill would substantially reform the Consumer Financial Protection Bureau (CFPB). It would essentially turn the CFPB into a bipartisan commission similar to the Securities and Exchange Commission and repeal its ability to ban financial products and services it considers “abusive.” And it would replace regulators’ authority to wind down troubled banks by creating a new chapter of the bankruptcy code designed to accommodate the failure of complex financial institutions.

Finally, the bill would also strengthen fraud penalties against banks that engage in wrongdoing and consumer fraud. It would accomplish this by doubling the cap for the most serious securities law violations and permitting triple fines when penalties are tied to illegal profits. And it would increase the maximum criminal fines for individuals and institutions that engage in insider trading.

Pending Election Results…

The results of the upcoming election will obviously have a big impact on whether the Financial Choice Act or similar legislation gains any traction in 2017. We’ll continue to keep you updated on this important topic in the months to come.

We’re interested in hearing from you. What do you think about proposals to revamp or repeal Dodd-Frank? Send me an email at steven@lendtrade.com.

10.6.2016 Home Improvement Spending Soars While New Home Construction Wanes

New single-family home construction in the U.S. might be down, but we’re currently experiencing a boom in home remodeling and repairs, according to new projections that were recently reported in The Wall Street Journal.

John Burns Real Estate Consulting and the Harvard Joint Center for Housing Studies are predicting that Americans will spend more than $300 billion in 2016 on home remodeling and repairs. If this prediction pans out, it would surpass the record of $285 billion spend on home remodeling and repairs in 2007.

When adjusted for inflation, this year’s projected spending would come in about 5 percent below the 2007 record. However, it’s predicted that a new inflation-adjusted high will be reached next year.

An Atypical Housing Recovery

During the years after the housing bust, both new home construction and spending on home remodeling and repairs fell sharply, although the drop in spending on renovations was less pronounced.

But the current housing recovery isn’t anything like previous recoveries. Inventories are low in many areas of the country, which is leading to sharp price appreciation and even bidding wars on the most desirable homes. The number of for-sale listings as a percentage of occupied households hit a record low this year, according to The Wall Street Journal article.

Due to this combination of low inventory and rising prices, many homeowners are choosing to stay put and renovate instead of moving to a new home. This is one reason why spending on home remodeling and repairs is so strong while new single-family home construction is so weak — currently down 40 percent from a decade ago.

Another reason is the fact that home renovations can be done a little at a time, making it easier for homeowners to budget the funds for repair and remodeling projects. Also, many homeowners have seen strong appreciation over the past few years and are tapping into their equity via HELOCs to pay for renovations.

Finally, the U.S. housing stock is aging. Thirty-year-old and older homes now constitute about two-thirds (or 65 percent) of all homes in the country, compared to just under half (or 47 percent) of homes in 1995.

Not Just a Blip

This boom in spending on home remodeling and repairs doesn’t appear to be a blip on the radar. Spending on home renovation projects is projected to continue growing faster than new home construction at least through 2019, according to John Burns Real Estate Consulting, as construction of multifamily apartments slows down.

These trends are worth keeping in mind as you make your business plans for 2017 and beyond.

We’re interested in hearing from you. What are you seeing in your market when it comes to homeowners opting to spend money on renovations instead of buying new homes? Send me an email at steven@lendtrade.com.