A WEEKLY GLIMPSE OF REAL ESTATE FINANCE NEWS
2/17/25
FED Stance is to Stand Pat: Chairman Powell’s recent indication that “the FED is in no rush to lower interest rates” was a little disappointing to many would-be home buyers as we approach the typical Spring home buying surge. Some contend that the FED is waiting to determine the impact of the Administration’s housing policies. But the FED is balancing both inflation and the labor market in their policy decisions. Employment remains fairly stable and inflation seems to have stalled between 2.7% to 3%, still low but above the FED’s annual 2% goal. Waiting for lower rates may not be the wisest choice for prospective home buyers. FED watching as a way to determine future rates may be an over simplified economic measure.
10 Year Treasury Note as Barometer of Future Rates: Although no economic indicator is totally reliable, real estate professionals have, for a long time, looked at the 10-year Treasury Note as an interest rate predictor. Without getting into the economic weeds as to why, let it suffice to say that as the 10-year Treasury rises and falls, interest rates mostly move in sync. As the 10-Year has hovered around the 4.54% range, mortgage rates have stayed generally around 7%. (See below for other individual rate impacts). Expectations are that the Treasury note will decline as we get into mid-year to the 4.32 level. Translated to mortgage rates, the expected reduction is expected to lower to a 6.5% base rate (maybe slightly lower). If this plays out, it is another reason that waiting for significantly lower rates may not be the best strategy.
Waiting Out Volatility & Affordability: The optimism in mid-2024 of future mid 5% mortgage rates was stifled as we entered 2025. Although the suggestion that borrowers might consider buying now instead of waiting may seem like just so much real estate hype, this decision is truly more complicated today. The decision of when to purchase a home is not only very personal but can be very complicated. The likelihood of rates declining significantly is now less likely (as noted above) while home values continue to climb, albeit at a slower rate.
The fact that a half percent rate reduction can translate into nearly $150 a month payment difference is significant. But if property appreciates at an even slower 4.5%, the additional cost might negate the eventually lower rate. Those who are capable and able to qualify today have the hard decision. Many, because of affordability issues, may have little option but to wait. Terribly frustrating!
There are other considerations as well. Some think that home values may not appreciate but actually come down as pent up sellers increase the available for-sale inventory. Others are predicting rates to fall based on Washington housing policy decisions. Bottom line, any decision feels like a roll of the dice. It is likely to be a year or maybe two before one can know if any decision today was a good or bad one. Everyone’s crystal ball is very cloudy!
Home Affordability Revisited: While most borrowers are opting for fixed rate financing as a way to control their monthly mortgage expense, home affordability is increasingly impacted by other expenses. As was previously noted in past glimpse comments, flexible expenses, including taxes, home insurance and mortgage insurance, are playing an important role in qualifying prospective home buyers. If possible, it can be wise to check on acquiring home insurance in advance of making an offer to purchase. Do your calculations at a worst-case scenario regarding homeowner taxes and, if mortgage insurance is required, obtain an estimated quote. Weighing the full worst case monthly payment amount vs one’s payment comfort zone allows for better decision making. Information/knowledge accompanied by trusted counsel and lots of patience are likely to end up with a better result in our current environment.
Tariffs & Housing: As with most laws, hopefully most benefit but some are negatively impacted. The decision is usually made on a “greater good” basis. Some suggest that the President’s tariff policy is a negotiating ploy designed to improve trading benefits. Others are more pessimistic about a tariff battle with our closest and most significant trading partners. The real estate community estimates that the cost of a new home will increase approximately $20,000 via the increase in building supplies (lumber, steel, household appliances etc.). Additionally, home improvement projects, as an economic booster, will likely be significantly curtailed. All considered a disruption in efforts to close the gap in both housing supply and affordability. (Think of the need in Los Angeles and North Carolina as they recover from recent climate related disasters.) Tariff proponents suggest that the purchase of domestic products will occur but there seems to be significant limits on the ability of domestic production to meet any immediate need. This suggests elevated prices accompanying at least short-term deficiencies. Neither are viewed as practices to bring down inflation or control consumer prices.
Big Tech & Mortgages: There is an increased emphasis on the use of artificial intelligence in the mortgage arena. Although promoted as a benefit for borrowers, most of the effort so far is on how AI creates greater office efficiencies used in processing a loan and thus resulting in greater profitability. Efforts to expand AI to include more of the personal aspects (initial interviewing or determining loan options) have been met with some customer resistance. With the close relationship with the new Administration and the increased support of the big tech companies, it can seem inevitable that these same companies could one day enter the lending arena. Is it too far-fetched to envision at least a few large, extremely well-financed companies competing for loans? And then, could these big corporations, maybe with government support, drive smaller lending companies out of business (much like big box stores have done with small shops in too many neighborhoods). It probably won’t happen but MAYBE it could! If it did, exactly how would consumers benefit?
Just a Thought Regarding Climate Change: While many current leaders in Washingtondiscount climate change as a hoax, all insurance companies are claiming climate change risks as the major reason for premium cost hikes. There is little denying that weather related disasters are more frequent, larger in scale and cause greater damage. The elimination of all investment in “green energy” development could later be deemed tragic if climate change, as many scientists indicate, is real. If we elect to completely ignore even the possibility of climate change, future consequences could be dire. Would it not be a good idea to invest and prepare, just in case the scientists are right?
Until next week, be good to yourself and kind to others.
2/10/25
Note: While some may view the bulk of this Glimpse’s comments as some kind of political statement, I have attempted to simply address the real and possible impacts of current and maybe future Washington decisions on our real estate environment.
Contradictions Abound: Neutrality is the preferred position of most businesspeople as we do not wish to annoy any current or future customers. At the same time there is an obligation to be -informative to those who put their trust in us. I therefore present my concerns in as an apolitical format as possible while emphasizing that these are my observations from nearly 50 years in the real estate arena. From my perspective many of the current and proposed actions seem incongruent or contradictory to what we would normally view as responsible business practices.
Weakening and/or Dissolving the Consumer Finance Protection Bureau (CFPB): This has been a controversial agency since its inception. Many of us in the finance community were initially concerned but the bureau has become a significant watchdog over predatory financial behavior. Diluting or removing its influence COULD have some serious consequences:
- The lending environment would be less regulated. Large banking entities would be more capable of manipulating the industry, perhaps even in edging out or buying up smaller competing entities (i.e.; much like big box stores dominating smaller surrounding stores) to the detriment of consumers. Limiting funding sources for home loans is generally not a consumer benefit.
- The CFPB, whoise name includes “consumer protection” has recovered nearly 17 billion dollars from abusive behavior of various, mostly major entities. The elimination of this agency could be interpreted as a government more invested in big business than protecting consumers from nefarious business behavior.
Fannie Mae & Freddie Mac Privatized: Fannie and Freddie are the Government sponsored Enterprises (GSE), known as the secondary market. While privatization may not occur, conversations have reemerged from the first Trump administration.
- When a loan is made via a local lender, the loan is quickly “sold” to one of these secondary market entities, returning the funds and allowing the local lender to continue to make additional loans. Without this liquidity home loan funding would stall and be seriously limited.
- Privatizing usually means an emphasis on profits (return to shareholders) with the result higher rates and/or pricing – not usually a benefit to consumers.
Risk Aversion: The financial market seeks stability and lenders, specifically, become more risk adverse in an unsettled market resulting in consumers, especially prospective home buyers, finding it more difficult to purchase.
- One example – The recission of the CFPB rule eliminating medical bills as a credit determiner was widely anticipated to improve credit scores. The roll back of the rule seems too many to be a gift to the medical field and debt collectors rather than promoting home buying.
- Chaos promotes a focus from individuals and businesses alike seeking safety. The market protects itself via keeping interest rates high, tightening qualifying guidelines, resulting in investment return decline and a wavering economy.
Uncertainty Reigns : Financial markets especially dislike uncertainty (noted above). The on again, off again rhetoric results in uneasiness among the investment community as well as the lending entities. Unintended consequences can and do accompany any strategy that is not well planned and implemented.
- Tariff Possibility: Tariffs are viewed in the financial world as inflationary and just the threat of them generally results in keeping prices and interest rates high. If the desire is to lower prices, tariffs seem contradictory to this goal.
- Laying off hundreds or thousands of Federal workers increases unemployment and anxiety in consumer spending. While controlling spending might be good as an assist in controlling inflation, unemployment is more often viewed as a stimulant to recession. When laid off workers can eventually find or go back to work, they can again pay bills but for many it is impossible to catch up. the use of all savings and/or the accumulation of unwanted debt during unemployment ruins credit ratings, threatens eviction, eliminates emergency savings and worsens the overall economy. Contradictory to the desire for a thriving economy.
- In addition to dismissal of personnel, disruption of government agency functions may seem great to some but to many it is viewed as chaotic. Worry about receipt of social security checks, cancellation of child support programs that allow mothers to work, possible elimination of support systems can sow more doubt and confusion than enthusiasm and comfort. Contradictory to the goal of supporting all people and providing a sense of well-being for all.
How one feels about the current political environment is personal. I have attempted to keep my comments brief and focused on the impact current events might have on our real estate arena, While recognizing that change is inevitable, I believe that without careful consideration & well-conceived plans, unintended consequences are inevitable and are then merely disruptive without much in the way of positive results. I am not necessarily seeking agreement but the thoughts are offered from one person’s perspective who has been in the real estate arena for a long time.
Note: Since writing the above, all actions of the CFPB have been halted and the agency mostly dismantled. It cannot be completely dissolved without Congressional action but is now without personnel and generally inactive.
Avoid the Supplemental Tax Surprise: Last week we addressed avoiding surprises related to the flexible mortgage expenses of home ownership. There is another often overlooked or misunderstood expense accompanying a home purchase. Depending upon the seller’s tax bill (potentially low if they have owned the home for a long period) the buyer may have a substantial increase in their new tax bill. Called “supplemental taxes” and based on the value difference between the seller’s tax base and the new higher value tax base, this difference can be substantial. Avoid a surprise as a new buyer and discuss current and future homeowner tax obligations. More information can be found on the tipsheet section of our webpage. Go to www.humboldthomeloans.com and scroll down the tipsheets to Supplement Taxes.
I will resume a more varied information format next week with a comment on affordability revisited, a view of big tech and real estate as well as an update on trigger leads.
Until next week, be good to yourself and kind to others.
We at Humboldt Home Loans are always available to answer any of your real estate finance questions.
EXPERIENCE EXCELLENCE