Last week, we forwarded an argument on why we shouldn’t be so sure that multiple interest-rate increases are forthcoming. Our argument is based on considerable hemming and hawing on the Federal Reserve’s part when the subject turns to interest rates, as it invariably does.
To cut to the chase, Fed officials recently raised a number of risks that, if realized, could cause the Fed to change direction. That’s hedging 101.
This week, we were presented with another consideration to back our argument: President Trump said that he thought the dollar is too strong, suggesting that government officials could drop a two-decade policy of supporting a strong dollar. When Trump speaks on international trade, it’s not difficult to understand why he would favor a weaker dollar. (A strong dollar makes U.S. exports cheaper in foreign markets. Concurrently, it makes imports more expensive here.)
Rising U.S. interest rates lead to a stronger dollar. The dollar will rise vis-à-vis other currencies if the countries backing those currencies refuse to raise interest rates too. So far, no major Western country has followed the United States’ lead. Since Trump’s comment, the dollar has lost value against the euro, the pound, and the yen. (Though as we write, the dollar has regained some lost ground.)
Perhaps we babble too much on international finance, but international finance impacts lending here. Unlike real estate, which is mostly local, finance (which includes interest rates) is played on an international stage.
Since the start of the new year, we have seen mortgage rates drift lower. This past week, they reversed course bit. The average quote on a prime conventional 30-year loan falls between 4.125% and 4.25% as we write.
So, the question is, higher or lower?
After the Fed raised the fed funds rate in December and then chatted up the prospect of additional increases immediately after, we thought that a 4% (or higher) quote on a prime 30-year loan would hold for the relevant future (at least through the first quarter of 2017). Today, we are less sure.
You could say that our hemming and hawing makes us antithetical to Harry Truman’s coveted one-armed economist. (Truman quipped that he’d like to meet a one-armed economist because economists will give advice, but then dilute that advice by saying, “on the other hand.”) Economists and Fed officials aren’t the only ones to hedge. We still think a 4%-plus quote on a prime 30-year will hold through the first quarter, but if it doesn’t, we wouldn’t be surprised.
So, our skepticism grows concerning the Fed and the prospect of multiple interest-rate increases. Yes, if the other central banks start raising interest rates, then it’s game on. At this point, though, two rate increases would more than suffice. Possibly one would suffice. Don’t be surprised if 2017 plays out like 2015 and 2016: one fed funds rate increase at the end of the year.
Date and Time
Existing Home Sales
Tues., Jan. 24,
10:00 am, ET
5.55 Million (Annualized)
Important. Higher mortgage rates have slowed sales, but sales continue to trend higher year over year.
New Home Sales
Thurs., Jan. 26,
10:00 am, ET
Important. Higher starts and permits point to more single-family-home sales.
Gross Domestic Product
(4th Quarter 2016)
Fri., Jan. 27,
8:30 am, ET
3.5% (Annualized Growth)
Important. Higher economic growth bodes well for employment and wage growth, and the outlook for 2017 home sales.
Is the Mortgage Interest Tax Deduction in Danger?
We don’t see a direct repeal of the mortgage-interest deduction, but proposed changes to the federal income tax code could diminish its value. The proposal came to light in a recent Slate article, whose keys points we present below.
Slate tells us that Republican Congress members have revealed plans to increase the standard deduction for all taxpayers. The standard deduction for a married couple would increase to $24,000 from $12,600. (The proposed increase in the standard deduction would also eliminate other major deductions, including deductions for state and local taxes.)
The proposed increase would be a welcome tax break for many, but the tax advantage of owning a home would disappear for many as well. A think-tank called the Tax Policy Center estimates that 38 million of the 45 million filers who would itemize in 2017 would opt for the higher standard deduction, thus we’d see a large forfeiture of the mortgage-interest deduction. This could hurt real estate prices. One Federal Reserve economist estimates that home values nationwide would fall 6.9% on average if the mortgage-interest deduction were eliminated. (That said, “6.9%” can be only an estimate, and the mortgage-interest deduction isn’t being eliminated.)
Whether you think the higher standard deduction is a good thing or not, its impact on housing and mortgage lending could be immediate and far-reaching. How immediate and how far-reaching, we can only guess.
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