Yesterday morning the NYSE opened to a raucous chorus of cheering and applause as the Dow Jones reached 20,000 for the first time in its 120-year history. While many of those in the finance industry were cheering and have been cheering the rally we’ve experienced since the election and inauguration of President Trump, those of us in the mortgage and real estate industries are left cringing as rates continue creeping higher and we are pressed with questions about what is on the horizon.
Ironically, although the new president made his fortune in real estate (and to quote himself, he is a “very rich man”) he hasn’t said much about his plans and thoughts on the very industry that catapulted him to billionaire status. Despite this, one of his first acts in office was to reverse the changes the Obama administration made to FHA mortgage premiums only a week earlier.
On January 9th, it was announced that the FHA would be decreasing premiums on FHA mortgages from 0.85 to 0.6. This followed a previous decrease in 2015 from 1.35 to 0.85 with former HUD secretary Julian Castro explaining the reasoning behind the cut as, “With sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families.” As lenders geared up to implement the changes, the prospect of bringing in new and even repeat business was short lived as President Trump suspended the rate cute indefinitely on January 20th citing concern that the rate cut could create an undue burden on taxpayers if FHA loans started going bad and FHA wasn’t able to cover the losses with less money from the premiums coming in. (E.g. a repeat of the conditions that necessitated their bailout in 2013) The new administration has cited the need for more research into the issue before making a determination on whether a reduction in premiums is viable and warranted but in the meantime have suspended the reduction indefinitely.
While some believe the reversal is a no harm, no foul as the Obama reduction wasn’t to take effect until January 27th, estimates from the California Association of Realtors indicates the premium reduction would have saved borrowers an average of $860 a year. Additionally, further estimates indicate this reversal is likely to prevent 30,000-40,000 would-be buyers from entering the market and has left many wondering if this is a sign of things to come.
Unfortunately, there is little solace about the possibility of what is to come. Because the new president hasn’t spoken much about the real estate and mortgage markets, our best guess as to the future of these markets lies in the platform he ran on. If we look at the 2016 Republican Platform we gather the following may (or may not) happen during the Trump presidency:
|Issue/Policy||What It Is||What Trump Wants To Do||What Does This Mean|
|Tax Reform||Changes in income tax structure||Lower income taxes across the board especially for working and middle income Americans. Ensure wealthy Americans pay their fair share but not so much it destroys jobs or inhibits competition.||In theory this could help buyers struggling to save for a down payment. The thought is less money spent paying taxes would be more money freed up to save for a down payment. The possible issue with this is whether or not potential borrowers would actually save the money and how much the tax break will be.|
|Fannie Mae & Freddie Mac||Government sponsored enterprises that purchase mortgages from the lenders who originate them. As government sponsored enterprises they are privately owned but receive support from the Federal Government and thus have some public responsibilities.||Do away with or substantially reduce both entities. President Trump has referred to them as “corrupt” entities that have allowed, “Shareholders and executives to reap huge profits while tax payers cover the losses.”||These entities would be taken out of government ownership, privatized, and restructured. Many of Trump’s top officials believe this would make them more stable. There is certainty that current shareholders of these companies would make fortunes off of their privatization. There is no current plan for a system to replace these entities should they be privatized. Additionally, the language on this is vague leading to great uncertainty about if it will happen and what will happen.|
|FHA (Federal Housing Administration)||Government agency that provides mortgage insurance on loans made by approved lenders. Currently the largest insurer of mortgages in the world.||Has already reversed insurance premium reduction instituted by Obama. Additionally wants to stop the FHA from providing taxpayer guaranteed mortgages to wealthy home buyers, and wants to refocus on loans the program was originally intended for ie: first time, low income, or buyers who don’t have enough for a 20% down payment||As noted previously the premium cut reversal is likely to be prohibitive to new market entrants additionally the premium cut could have saved the middle Americans the Trump campaign appealed to hundreds of dollars each year. Hopefully refocusing FHA will lead to more access for the constituents the Trump campaign appealed to, uncertain though as to what these changes may be and how they may help.|
|Dodd-Frank (The Dodd-Frank Wall Street Reform and Consumer Protection Act)||Federal law that puts regulation of the financial industry with the United States Government. Saw the creation of the CFPB (Consumer Financial Protection Bureau) and provides more oversight to financial institutions||Repeal or limit Dodd-Frank and get rid of the CFPB or subject it to congressional appropriation||According to the Republican platform Dodd-Frank and, “Its regulatory harassment of local and regional banks, the source of most home mortgages and small business loans, advantages big banks and makes it harder for Americans to buy a home.” Presumably repealing Dodd-Frank would make it easier for Americans to obtain mortgages and buy homes, however this comes with the caveat that loose regulations likely led to the Financial Crisis of 2008.|
While it is difficult to tell from the above exactly what will happen, the resounding fear echoed by the Co-Chair of the Fischer Center for Real Estate and Urban Economics at the University of California Berkeley, seems to be that, “It may be harder to get mortgages, and those that will be available will be less advantageous.” Additionally, he points out that, “The heart of Republican support—blue collar, middle aged workers—are the people who will be affected the most.” (Realtor.com) As much as we would like to attribute all the blame to any policies the new President may (or may not) enact, it is important to also consider the market forces already at work.
As Pat Zicarelli, the president of the California Association of Realtors notes, “Transitory political events such as presidential elections don’t drive the housing market…Market fundamentals such as housing inventory, affordability, interest rates, job growth, and consumer confidence are the real factors that influence the housing market.” Unfortunately, the ‘market fundamentals’ at work don’t paint a rosy picture either. Currently, one of the fundamental problems in the industry is housing affordability. Home prices have continued rising due in large part to constrained inventory. One of the issues cited is insufficient construction of new homes due to regulatory and cost burdens which have prevented builders from increasing production. Low inventory and increasing unaffordability will likely continue as homes sold 14% faster in 2016 than historic rates and will continue to sell even faster in 2017. Additionally, as the chief economist for the National Association of Realtors puts it, ever increasing rates means, “It isn’t getting any easier to be a first time buyer,” or any other kind of buyer for that matter.
The good news is (and yes there is some good news) rates are still relatively low. As illustrated by the graph below put out by the Mortgage Banker’s Association, historically speaking rates are still quite low. From their peak of close to 20% in the 1980’s we can see that rates have steadily declined but for the most part have still remained significantly higher than what we are currently experiencing. We are currently seeing rates for 30 year fixed mortgages oscillate between 4.125 on good days and 4.25 on bad days, which is still better than rates between 7% and 10% in the 90’s or 5% and 7.5% in the first decade of the 21st century.
Although we will likely see rates continue to increase throughout the beginning of the Trump administration, the rise will likely be gradual and experts predict they will settle somewhere between 3.75 and 4.6. We must also keep in mind that rising interest rates are not necessarily a bad thing. The government has been keeping interest rates artificially low to aid recovery since the crisis in 2008 and rising interest rates are a testimony that we are well on our way to economic recovery. Just last week Fed Chair Janet Yellen reported that jobless claims were at decades-low levels, housing starts (new residential housing units authorized by building permits and started) experienced an 11.3% jump, and mid-Atlantic manufacturing activity is at a two year high. Yellen seems to be so optimistic about economic growth in the coming year that analysts are predicting 3 quarter point rate hikes in the coming year rather than the 2 hikes that were initially projected.
For those who are concerned about the Trump administration it seems as though the new administration is most concerned with tax reform, infrastructure spending, trade and immigration policy, and repealing Obamacare. I think it will be some time before the new administration addresses policy changes that could impact the housing and real estate markets if they make any changes at all. Although there is no telling what may or may not happen with this new administration, we must keep in mind that with change comes opportunity and we must do the best we can to look for the positive and the opportunity with whatever changes come our way.