Addressing the Executives Club of Chicago on March 3, Fed Chair Janet Yellen strongly indicated that the March 14-15 Federal Open Market Committee meeting will mark the occasion of the first interest rate hike of 2017.
The hike is made more likely by the results of President Donald Trump’s first job report released on March 10, which recorded an unexpectedly high increase in nonfarm payrolls by 235,000 jobs (higher than economists’ forecast of 200,000) and a fall in the unemployment rate from 4.8% to 4.7%.
The hike would be one of at least two, if not three, hikes that look likely in 2017 and would follow a raise in short-term interest rates by 0.25 percentage points in December. Higher interest rates may damage the refinance market that has buoyed the drastic rise in home sales over the last five years; although the last six months of 2016 saw a slight flattening of that trajectory, both existing and new home sales so far in 2017 have been relatively strong and maintained a slow upward trend.
Any impact on mortgage rates would be contextualized by their jump following Trump’s election. Prior to the election, the 30-year fixed-rate mortgage had fallen below 3.5%; the month following his election saw an increase of half a percentage point, and mortgage rates may have another half point to rise following a further hike.
Still, Brad Hunter, chief economist for Home Advisor, expects the effect of an interest rate hike on mortgage rates to be gradual and high home financing costs are not a reason to panic. Demand continues to rise against a backdrop of low supply inventory. High demand is most pronounced, and most growth is expected, in the entry-level, first-time homebuyer market where rents have been rising at rates in excess of inflation.
In addition, Fannie Mae (FNMA, Financial) has rolled out its Day 1 Certainty package, announced in October of 2016. The package consists of a DU validation service (automated income, employment and asset validation using third-party vendor data) as well as improved efficiency of value appraisal and a property inspection waiver. This will also cushion any potential impact of interest rate hikes on borrowing.
It hardly bears repeating, however, that the hike is just one of the developments that will affect the outlook for the 2017 U.S. property market. Global commercial real estate company Colliers International (CIGI, Financial) identifies three primary planks of Trump’s economic platform: a stimulus package of tax cuts and infrastructure spending, deregulation and restriction of immigration.
In February, Treasury Secretary Steve Mnuchin announced the administration’s plans for “very significant” fiscal policy reform, which includes limiting itemized deduction. Deductibility of mortgage interest is a key component of a house’s affordability and restrictions on tax relief could exert downward pressure on home prices. The exact impact of these reforms is, however, unlikely to materialize until 2018 as finalized plans are not expected until August, when they will be subject to congressional approval. And per this real estate website for wholesale properties, more property market investors are taking advantage of the current bullish outlook to flip properties at a profit.
The second plank of Trump’s platform – his promised rollback of some of the Dodd Frank Act’s regulations – may be able to cushion any potential blow to lending dealt by the first plank if the move helps small- and medium-sized banks that have been frozen out of mortgage lending by local regulations. The increase in nonbank lenders backed by the Federal Housing Administration has also ensured the availability of home financing. These lenders require smaller down payments and offer more lenient credit standards than banks.
Trump’s most radical legacy on the property market may well come from the third plank, his immigration policy, which is shaping up to be a combination of travel bans, a crackdown on undocumented migrants and restrictions on workers with green cards and work visas under the H1-B. This is significant because as domestic-born U.S. rate of homeownership slips, the foreign-born rate has risen by two percentage points as immigrants replace baby boomers retiring from the labor force. University of Washington economist Jacob Vigdor estimates that immigrants own roughly 12.5% of the U.S. housing stock, worth about $3.7 billion in aggregate. Besides expelling home buyers from the market, Trump’s policies may well contract the homebuilding labor force. Both could exert downward pressure on home prices.
A number of other uncertainties accompany Trump’s presidency such as his ability to appoint a new Fed chair. Rising demand, gradual rise in values, a diversity of lenders and the strong performance of a recovered U.S. economy (that has distinctly entered an expansion phase) will serve the housing market well in the face of these unknowns.
Disclosure: No position in stocks mentioned in this article.
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