The fluctuations on the mortgage market are a by-product of an array of political, economical and psychological factors. Performing on this stage is an act of courage and long term engagement; therefore it should only be done after considering the most important trends for the years to come, after putting the problem in historical context in order to avoid irrational decisions, dictated by panic.
The main influences on the mortgage rates and house prices come from political changes, generation replacement, effects of the economical cycle, the supply and demand on the housing market and a herding instinct.
1. The housing market is slowly increasing
This year is expected to bring a slight improvement related to the number of new houses built, a continuation of the upward trend started in 2010. It will still be a seller’s market, the demand for low priced and medium priced homes exceeding the supply. The most interesting prediction in this department is related to the speed of the market; most likely 2017 will set a new record of under 52 days on sale for the average property. The growth rate projected is no more that 4% a month and is expected to be correlated with a slight rise in the prices.
For the clients looking for affordable options, the mid-west suburbs start to look promising, offering the lowest rates. Clients looking for a mix of big city life and value for money could choose the “surbs” a concept that enhances existing suburban communities with urban amenities, including excellent public schools, sports venues and shopping spots, making them attractive for middle class buyers with lower incomes.
There is still room for improvement from the buyer’s perspective and 2017 does not look like a transitional moment yet, as builders are not ready to serve the lower end of the market, they still focus their efforts on the top end, greedily aiming a higher return on investment.
2. Interest rates at a historical low
By looking at the economic data we can say we are slowly escalating towards the peak of the current business cycle expansion and this has a positive impact on the credit availability and the price of the mortgages.
The even better news is that mortgage rates are at historical minimum, even if they are slightly volatile around the 4% value. Comparing the current rates to the historical rates starting in the 80’s and even the rates before the economic meltdown of 2008 we can say that this is one of the best times in history to get a mortgage or refinance, as there is little hope that the interest rate will even get lower than this.
From this point on, it is safe to assume that rates could rise slightly, but that is no reason to panic, as experts advise to take into consideration the adjustable rates, especially for first home-owners who tend to outgrow their home choice in about five years and aim for a bigger and better arrangement, usually refinancing.
3. Millennials are in charge, Gen Z is coming strong
One of the most financially potent groups, apart from baby boomers, is the millennials. Now in their late 20’s and 30’s, they are becoming homeowners and even renters. The main characteristic of this group is carefulness as they have seen the effects of careless home buying in the bubble of 2006-2007 and try to avoid mistakes of the Generation X. Since the young homeowners are aiming for high end finishes and even smart-home features, they save on positioning, choosing second-tier cities located near good universities. This group is helping smaller mid-west cities become vibrant, growing communities. The trend is also to have smaller homes, near public transportation to eliminate other costs, including cars.
Most millennials are still in debt, as a result of student loans, but being one of the most financially educated generations, they are embracing ways to repay debt and even find financial resources for a down payment. The interesting trend here is that those who have ended their student debt are aiming high, not choosing the starter home, but a full scale property.
As Generation Z comes of age, they are thinking of becoming homeowners and are valuing this sufficient enough to fulfill their dream faster than previous generations.
4. Political changes & volatility
The new president elect has a great deal of changes in mind for the economic landscape. The proposed growth plan that won the elections has the potential of triggering some inflation spikes that could result in higher interest rates. On the other hand, the Trump mandate seems committed to offer some regulatory relief, making credit more available to different categories that have been locked out so far, as a preventive measure after the 2008 meltdown.
As noted by USA Today, the mortgage rate seems to fluctuate with the 10 Year Treasury note, dropping with Brexit and rising again above after the election of Trump. The political changes made in the first few days of the new administration will impact first time home owners and are regarded with skepticism, as the act impacts middle class families by almost $500.
The most controversial idea so far is to privatize Fannie Mae and Freddie Mac, momentarily government owned entities that provide the bulk of the mortgages, especially the workhorse product, the 30 year, fixed rate pre-payable mortgage, an item that is highly popular among clients, but would be considered unattractive by private investors who see it too risky on such a long term, and only viable due to large volumes.
5. The herding instinct is strong
Behavioral economics highlights the fact that people tend to act in sync, when it comes to mortgages and buying a house.
There is a clear tendency of flocking in the West coast, especially North California due to an increase in good jobs, a phenomenon also visible around the New York and Chicago areas. The demand triggered a high enough price rise that in connection with the rise of the mortgage rate would put clients reconsider the decision between buying and renting, leaning towards the second option for these areas.
The other tendency that affects large populations is keeping up with the Joneses, materialized in rising mortgage debt for the average consumer, as the borrowers tend to be in a competition with peers for the size and location of the homes.
If the current trends seems to be in favor of accessing a mortgage to buy a home, it might be a good idea to act as fast as possible, since the general tendency is for prices and interest rates to go up, as a result of a boost in economy. This might be the moment to secure a low rate mortgage for the next 30 years, a product that might become a relic soon.