A WEEKLY GLIMPSE OF REAL ESTATE FINANCE NEWS
1/20/25
Market Comment: All attention has been on the change in Administrations and speculation of what we might expect (see next comment) going forward. In spite of predictions of from zero to four rate reductions this year, most expect the FED to make no change at their upcoming meeting on January 28-29. Most pundits expect rates to remain near their current level although some volatility might occur within a narrow range of adjustment. Instability results in hesitation while history indicates that buyers and sellers will adjust to whatever the perceived norm is.
Real estate professionals have proven to be resourceful in resolving challenges faced by both buyers and sellers. Last week I addressed the issue of waiting for market improvement is seldom a great strategy. Identifying and finding ways to satisfy consumer goals will require focusing on the now as opposed to hoping for change that might never occur.
Acquiring reliable information will be key for good decision making. Hesitant sellers might benefit from a review of the numbers should they sell and buy now. Buyers will need to make realistic decisions regarding their purchase potential by exploring the available loan options. Staying positive and patient are important as is obtaining the education with which to make the best decisions. Challenging times can be a lucrative time for scammers who prey upon desperate consumers. Be aware (see the last comment)
Seek guidance from your real estate agent and mortgage provider and act accordingly.
New Administration Worries: On this inauguration day there are concerns, according to a recent survey, regarding administration housing policy or lack thereof. All await to see if the rhetoric preceding inauguration will be enacted.
- Higher tariffs – could all keep prices high or even increase them while affecting construction costs with higher prices for building materials, including lumber from Canada.
- Deportation – a possible two-pronged affect wherein the loss of employees could cause production losses but also increase wages in an effort to attract employees for jobs that have mostly been unwanted by many would-be workers.
- Tax reform – that could favor higher earners while exacerbating the ability of others to qualify for home mortgages.
- Fanny Mae & Freddie Mac Privatized – seemingly far-fetched, investors are purchasing shares in both entities as if they expect privatization to occur along with the profits accompanying such action.
In other words, policy changes could increase the inequality represented by a two-tiered market, one that benefits some considerably (especially top incomers) while increasing the affordability
struggles for others. We should discover fairly soon how any new policy affects our real estate environment.
Insurance Dilemma: I mentioned last week that the recent wildfire disaster may have created a pause in bringing insurance companies back to the California market. Insurance commissioner Lara had negotiated an agreement whereby companies could raise rates to cover their re-insurance costs in exchange for providing wider coverage, especially in wildfire areas.
Re-insurance is the coverage that the companies acquire to protect themselves from massive payouts. The cost is expensive and California has been one of only a few states that prohibited this cost being paid via consumer premium fees. Consumer groups have criticized Lara for this decision as another hurdle for would-be home buyers’ affordability struggles. At the same time, these consumer groups are angry that more companies are not present to provide a more competitive insurance market. Clearly a dilemma with no good answers.
Add to all of this the concern about how future policies will adapt and we find that we are in a holding pattern with only one certainty, rising insurance costs. Although a challenge for current homeowners as well as prospective home buyers, solutions will emerge, hopefully in the near future.
Just an Off the Wall Thought: The lack of homes for sale supply is largely blamed on a “lock-in” effect of sellers with low current rates being reluctant to re-purchase with a higher rate. In spite of attempts to reduce regulations and provide tax incentives in promotion of home construction, most agree that new home construction is insufficient to meet the need. What if the capital gains rules were modified to encourage owners to sell rental homes? Current rules inhibit such sales and rewards owners to liquidate rental homes via inheritance by heirs. Many owners might welcome the opportunity to cease being a landlord. (Like all actions, there would be a positive and negative consequence – the available rental stock would be diminished in favor of providing available homes to purchase).
Caution – Help You Buy Your Home Offers: With the expected continuation of elevated interest rates, it is likely that affordability issues will continue to plague some would-be home buyers. Frustrated in their attempts to purchase buyers could become vulnerable to “let us help you buy” schemes. Promised assistance can take several forms:
- Offers to purchase a home that will later be deeded to a home buyer
- Offers to increase the down payment, usually to a 20% level in order to avoid mortgage insurance (most loans with less than a 20% down payment require some form of mortgage insurance)
- Assistance with paying closing costs or “buying down” the interest rate
Regardless of how wonderful the promotions sound, they are all a form of equity sharing. Read the fine print (big print giveth and fine print taketh away) and the homeowner is obligated to share (often from 25% or more) of the equity accumulation plus paying back the original supplement of cash. (this can eventually be a hefty penalty). Some agreements contain a time frame by which the homeowner must “settle” the bill, which can result in having to refinance or sell at less desirable market times. Be reminded of the adage that if something seems too good to be true, it usually is.
Until next week, be good to yourself and kind to others.
1/13/25
Looking Into the Future: Although my crystal ball is extremely cloudy and predicting the future is a fool’s game, here are a few personal thoughts as we look ahead in 2025.
- Rates might decline minimally but are likely to settle in the mid-6% range. The FED now indicates that only one rate reduction is likely to occur this year.
- Home values are expected to rise but the appreciation rate nationally is expected to be in the 2.5% range. Much depends on specific location, however.
- Some buyers, tired of waiting for lower rates, will move forward. While an influx of buyer competition could contribute to keeping home values elevated, the accompanying increased inventory from “need to sell” sellers may allow for price negotiation to continue. Home buyers are likely to remain cautious as they edge into purchasing.
- Lending Company Consolidations will increase as smaller lending entities are bought up by the giants. Fewer loan options seldom benefit consumers.
- Although negotiations continue between the State Insurance commissioner and Insurance Companies, homeowner insurance is likely to remain an issue for some.(see comment below)
- The number of real estate licensees might decline as annual fees become due. A shrinkage of mortgage personnel may face the same fate as most predict another lean year of real estate sales and loans.
- Artificial intelligence, while being promoted as a way to better serve loan applicants, will mostly focus on how to create office efficiency to save time and money. While some jobs may be lost, new jobs will also be created via the AI revolution.
- During hard times, lenders tend to become more risk averse, but as business declines qualifying guidelines may loosen a bit.
- Although recession will again become a frequent prediction, unless inflation skyrockets, employment worsens significantly or new Administration policy (i.e.; tariffs or deportation) interferes, expect the economy to remain more status quo.
- Volatility is the expected operational word whether it be regarding interest rates, consumer spending, available inventory or the new Administration’s housing policy uncertainty. Short of any major Administrative policy decisions, interest rate volatility is likely to be within a small adjustment range.
Employment Surge and FED Expectations: The December jobs created report was significantly higher than expected – 256,000 vs the expected 155,000 – and was accompanied by a slight increase in the average hourly earnings and the unemployment rate falling to 4.1%. This continued economic strength suggests that the FED is less likely to lower their short-term interest rates in the near term. Everything is speculation at the moment while waiting for the inauguration and a clearer picture of the new Administration’s housing policies.
Inflation Is a Personal Experience: While economists touted the economy as growing and strong, a majority of Americans expressed their experience as an erosion of their living standard. While inflation has declined from a high of 9 plus percent to today’s 2.7%, prices continue to decline and wages increased, a “sense of being worse off” permeated many households. Media played a role in emphasizing bad news, perhaps because incremental improvement of an economy is more difficult to convey.
Adding to the disconnect between economists and the public was the inability to distinguish between inflation caused high prices and growing wages. Although inflation was also responsible for much of the wage growth, most look at an increase in wages as having been “earned” whereas higher prices were the result of poor FED management or greedy corporate CEOs. This is not a criticism or a suggestion of right or wrong. It is instead an affirmation that perception trumps reality in most situations. Although income may be up, if one feels that it purchases less, one is most likely to feel deprived in some way.
One other thought – Our measurement of inflation is very imperfect. Without going into detail, we have no way of measuring inflation’s impact upon people of varying income levels. Inflation is experienced more acutely and for a longer period of time by those of lesser income than those in higher income brackets. So, while economists can tell us things are good, if we don’t feel it in our pocketbook or paycheck, our personal experience is not good. We look forward to the promises of an improved economy with reduced prices (groceries and energy), lower interest rates and continued reduction in overall inflation. Stay tuned!
Abandoning the “Waiting for Rates” Strategy: Ironically, home buyers waiting for interest rates to significantly decline could be disappointed. Expectations of future home interest rates from numerous lending sources point to a mid to high 6% for all of 2025. Thirteen sources, including Redfin (the highest at 6.8%) to Goldman Sachs (the lowest at 6.1%) predict rates will remain above 6% with the majority indicating slightly above mid 6% as most likely.
Although predictions can be unreliable, our past expectation for a mid-5% rate range does not now appear realistic. Traditionally, buyers purchased when they found the appropriate home at an affordable price and when they could qualify for appropriate financing. Buyers seldom waited for lower rates because they recognized the wealth-building value of home ownership. Today’s prospective buyer may need to answer the question of “what am I waiting for and what is the probability of it occurring”?
Discuss your purchase options with your real estate license and/or mortgage lender today. Waiting, especially for rates to drop”, may not be a good strategy today.
Insurance Check-up: The wildfire tragedy in southern California is a reminder that we should check our insurance coverage. Make sure your coverage is sufficient for today’s home values and determine just how you will be protected in any natural disaster. Just when it seemed that we had lured companies back to the State, this major wildfire may create a pause in their willingness to re-enter the California insurance market. . I will alert you to news as we receive it.
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.
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