January 2020 Market Update
HOME AFFORDABILITY UNDER STRAIN
Home prices continue to post gains at near record levels, putting strain on affordability. In November, home sale prices increased 5.2% year over year according to Redfin. Median home prices now at $311,600.
“Given that inventory is falling quickly, we’d expect to see even stronger price growth, especially when compared to last year’s soft market,” said Redfin Chief Economist Daryl Fairweather.
“The fact that homes are selling faster indicates that there are buyers ready to pull the trigger and take advantage of low interest rates,” Fairweather added. “If lack of inventory and high demand continues, buyers who take a wait-and-see approach could face less favorable conditions in the spring season like bidding wars and faster price growth.” – housingwire.com
“The fact that homes are selling faster indicates that there are buyers ready to pull the trigger and take advantage of low-interest rates,” Fairweather added. “If a lack of inventory and high demand continues, buyers who take a wait-and-see approach could face less favorable conditions in the spring season like bidding wars and faster price growth.”
REAL ESTATE RICHES
At the same time mortgage debt reaches record highs, so does home equity. Homeowners are experiencing spikes in equity and real estate riches, at least on paper. A recent study by CoreLogic reported that 64% of homeowners saw an average gain in home equity of 5.1% in the third quarter of 2019; which equates to $467 billion in real estate wealth nationwide.
Find out if you are eligible to refinance your mortgage to pay off your debt here.
COMPLIANCE WOES EASE
In a recent study titled 2019 Regulatory and Risk Management Indicator survey, conducted by Wolters Kluwer, a firm that provides compliance solutions to the lending industry, found that the mortgage industry is more confident navigating the rules and regulators that have been implemented by local and federal governments over the last decade. At least, in recent years under the Trump administration.
“Respondents indicated more confidence in their ability to maintain compliance, keep track of changing regulations, and demonstrate compliance to regulators, reaching the highest confidence levels in the survey’s seven years,” said Timothy Burniston, Wolters Kluwer’s Compliance Solutions senior advisor for regulatory strategy. “These findings suggest a strengthening of lenders’ compliance program management practices.”
Is the increase in “confidence” expresses by the lending industry due to better systems and implementation of policies and procedures to help comply with the regulations, or is it due to simply less regulation?
Earlier this year, the U.S. Department of the Treasury released a 21-page report entitled Regulatory Reform Accomplishments Under President Trump’s Executive Orders, which, as the title suggests, details the actions it has taken toward decreasing regulations.
Trump took several executive actions at the beginning of his administration to establish regulatory reform as one of his main policy priorities. On January 30, 2017, the president issued Executive Order 13771, “Reducing Regulation and Controlling Regulatory Costs.” This order declares that for every new significant regulation issued, at least two prior regulations, sufficient to offset the incremental cost of the new regulation, be identified for elimination. – housingwire.com
It could also be argued that the increase in “confidence” maybe due to the complete lack of enforcement of the regulations by the federal government under the Trump administration. The very agency that was empowered to enforce regulations, the CFPB, has essentially stated that they would not create any new regulations, nor enforce those currently in place. The police are not policing.
Confidence can be elevated when one does not have to worry that an infraction of the law, will not lead to any prosecution or penalty. Punishment will never deter crime, if there is no one to catch you.
FHA RAISES LOAN LIMITS IN 2020
The Federal Housing Administration is raising the FHA loan limits in 2020 for most of the country by $17,000, to $331,760; due to the rise in home values. In high cost areas, the FHA loan limits were raised $40,000 to $765,600.
Fannie Mae and Freddie Mac already announce higher conforming loan limits of $510,400 in 2020. FHA sets limits at 65% of the conforming Agency loan limits.
MORTGAGE RATES TO STAY LOW
Long term interest rates spiked to nearly 5% on a 30-year fixed mortgage just over a year ago; the highest rates in nearly a decade. Yet, still arguably low. Over the last twelve months, while volatile, interest rates have slowly crept downward. All the indicators are predicting that interest rates will stay low or may even fall further.
In a recent report by Freddie Mac, predicts interest rates to stay well below 5%, hovering around 4% or lower, through 2021.
“The economy has seen increased volatility in November as hopes for a favorable resolution to the trade dispute have recently waned,” said Sam Khater, Freddie Mac’s chief economist.
“However, given low interest rates, modest inflation and a solid labor market, the U.S. housing market continues to stand firm, and, our forecast is for the housing market to maintain momentum over the next two years.”
As trade and tariff negotiations look more optimistic of coming to an end with a positive outcome, recession fears have been muffled. Although there are still many indicators that predict the possibility of a recession by the end of 2020. If fears of a recession rise, long term interest rates could experience substantial pressure downward. The stock market continues to set record highs, yet the bond market has been resilient to follow suit. One of the indicators will be proven right in 2020.
THE GREAT WEALTH TRANSFER
The greatest transfer of wealth is underway in America, and millennials are becoming millionaires at record pace. Today, according to a 2019 report from Coldwell Banker Global Luxury and Wealth Engine, there are 618,000 millennial millionaires, and that number is going to rise substantially over the next decade.
The population of wealthy young people is growing, the report finds. And they’re getting richer: “By 2030, millennials will hold five times as much wealth as they have today, and are expected to inherit over $68 trillion from their predecessors in the Great Transfer of Wealth.
The “Great Wealth Transfer” refers to the trillions of dollars that will be passed down to millennials from their baby boomer parents, who are considered the wealthiest generation in history.
Almost half, 44%, of the millennial millionaires are concentrated in California. That’s “consistent with the general millionaire population,” the report says, adding that “the Golden State also has the highest percentage of business owners (23%) and the highest percentage of real estate investors.” – cnbc.com
Millennials now make up the largest generation in history, at over 75 million. While they have grown up with a stereotype of being entitled and lazy, they are becoming the ruling class, and they will be wealthy. They are the most diverse generation, well educated, environmentally conscious, largely progressive and the fastest growing generation without religious affiliation.
And millennials are entering into the housing market in record droves.
THE FATE OF THE CFPB IS OFFICIALLY IN PLAY
The Supreme Court has announced, that on March 3rd, 2020, it will hear arguments regarding the constitutionality of the Consumer Financial Protection Bureau.
The case will determine (1) Whether the vesting of substantial executive authority in the Consumer Financial Protection Bureau, an independent agency led by a single director, violates the separation of powers; and (2) whether, if the Consumer Financial Protection Bureau is found unconstitutional on the basis of the separation of powers, 12 U.S.C. §5491(c)(3) can be severed from the Dodd-Frank Act.
Things are not looking good for the CFPB due to the recent new conservative additions to the Supreme Court, that have already shown a history of leaning toward less regulation. Even the current director of the CFPB, Kathy Kraninger is on the side of those that oppose the power of her own agency saying, “The bureau should adopt the Department of Justice’s view that the for-cause removal provision is unconstitutional.”
The end of consumer protection may be near.
STEP CLOSER TO END CONSERVATORSHIP
The Federal Housing Finance Agency (FHFA), the agency in charge of Fannie Mae and Freddie Mac, is in the process of interviewing Wall Street companies that specialize in taking companies public, according to the FOX Business Network. The offering, estimated to be between $150B - $200B, would be the largest in history.
In 2008, when the GSEs were taken into conservatorship by the federal government, their stock fell to just pennies. The new public offering could come as early as 2021, with the end of conservatorship by the end of 2024.
The Treasury has already approved the GSEs to retain $45 billion in capital to assist with the process of taking Fannie and Freddie out of government control.
The goal of the Trump administration is to end conservatorship so that if in the future they were to need a bailout, it wouldn’t come from the taxpayers. Although if the GSEs will pulled out of conservatorship and lost the “implied guarantee” of the federal government, investors would be hesitant at best to invest in the GSEs. What investor would invest in a 30-year bond at under 4% without a federal government guarantee to protect against potential losses.
Answer: No one.
The process of taking Fannie and Freddie public once again has a fair share of challenges. To end conservatorship and retain the implied guarantee will take an act of Congress, currently controlled by the Democrats. It is wildly believed that the Dems will not likely do anything to assist the Trump administration. If the Democrats win back the Presidency in 2021, it is likely that they will retain control over the GSEs for the foreseeable future. It is also foolish to believe that if the GSEs do get the implied guarantee, that the government will not come to the rescue if there was another meltdown as seen in 2008.
RATE WATCH – FLAT (treading lower)
It could also be argued that the increase in “confidence” may be due to the complete lack of enforcement of the regulations by the federal government under the Trump administration.
The very agency that was empowered to enforce regulations, the CFPB, has essentially stated that they would not create any new regulations, nor enforce those currently in place. The police are not policing.
According to the Redfin report, inventory fell 12.1%, year over year in November. Demand remains strong, and inventory continues to fall, causing home prices to surge. While there are signs that the economy is cooling, the housing market is showing no signs of a pullback. The current trend is unsustainable.on like bidding wars and faster price growth.”
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