Originally posted on Windermere Blog.
75 million Baby Boomers control nearly 80% of all U.S. wealth, and as this generation ages, retires, and inevitably downsizes, they will have a significant impact on the housing market. Windermere’s Chief Economist, Matthew Gardner, explains when we can expect to see Boomers start to sell, opening much-needed inventory and making home ownership available to younger generations.
Matthew Gardner, chief economist for Windermere Real Estate, was one of the presenters at this year’s Eastside Windermere Real Estate Kick Off I attended. I eagerly look forward to his forecast, because it is always so packed with useful information. And I love sharing it with you!
He covered our local economy – which is experiencing remarkable growth. The economies of the metros located in the western United States have been strong, and Washington State metro areas are currently at the top of this group. Mr. Gardner expects this economic trend to continue in 2017, along with low unemployment. The Seattle region should maintain a robust influx of people relocating here during 2017 to fill jobs in the tech sector, and escape higher priced real estate in California, especially the Bay area.
Mr. Gardner showed an interesting chart detailing the most successful spin-off companies that derived from Microsoft. He expects the same thing to occur from the talent being hired by Amazon. He said that Amazon hires more MBAs than any other company in the world, which translates into positive economic implications for our regional business environment.
Any slowdowns reported on the employment front have been due to everyone who wants a job are already employed, a trend that will continue this year with the projected generation of new jobs. Post-recession sectors in our area seeing noteworthy growth, in addition to the tech industry, are retail and leisure. With our low unemployment numbers, Mr. Gardner said that when unemployment drops under 4% (King County’s unemployment rate in November 2016 was at 3.9%), we start seeing pay increase to retain employees. He projected a 4.5% growth in income during 2017.
Two sectors he noted as slower growing are manufacturing and construction. We’re seeing that trend play out in lower numbers of single family residential permits being issued. The lack of new construction places pressure on our regional resale market, which will contribute to our housing market’s continued low inventory in 2017.
Western Washington home prices will experience continued growth this year. Mr. Gardner did stress that housing affordability is an issue that needs to be addressed. King County homes are not affordable for many first time home buyers, which is driving homebuyers to purchase outside of larger King Country cities. He mentioned the trend of people communting from bedroom communities like Marysville and Cle Elum to their jobs in Seattle and Bellevue. Some commuters are even opting to purchase homes in Spokane, where real estate is much more affordable than in Western Washington, and then bulk buying airplane tickets to fly back and forth weekly from their jobs on the west side of the mountains to their homes in Spokane.
The change in the presidential administration was also discussed. Mr. Gardner forecast that this change won’t affect our housing market in 2017. He stated it takes time for rhetoric to become policy. In the Seattle area we should see a seller’s market persist this year, increases in home prices, and continual job growth in the next 12 months.
Photo credit: Frances Gaul
We’ve seen some volatility in mortgage interest rates since the presidential election. When Freddie Mac released the fixed and adjustable rates on Thursday, November 17th, they had gone up considerably. 30-year fixed rate mortgages jumped from 3.57% the week before to 3.94%. 15-year fixed rate mortgages climbed from 2.88% to 3.14%. 5-year adjustable rate mortgages followed suit, jumping from 2.88% to 3.07%.
However, we need to keep things in perspective. At this time a year ago, 30-year fixed rate mortgages were 3.97%.
When the Federal Reserve meets December 14th, it would not be surprising to see an increase in short-term rates. It’s projected they will increase them a quarter of an interest point at this meeting. If the Federal Reserve does move forward with a rate increase, there’s talk of slowly increasing mortgage rates to follow. The uptrend is expected to be modest, until we see stronger inflation, or until the Fed decided to move the 10-year Treasury Bond Rate closer to a “norm” of 3%.
On November 11th, Kiplinger mentioned in their Economic Forecast for 2017 that they projected the 10-year Treasury Bond Rate would remain at 2.1%, until the end of 2016. However, this past week we saw it rise to 2.34%. Erin Lantz, vice president of mortgages for Zillow Group, is quoted as saying, “There is a flight to safety of assets outside the U.S.,” in response to the jump in yields for the 10-year Treasury Bonds. Kiplinger had projected in their economic forecast we should see the 10-year Treasury note yielding around 2.5 by the end of 2017, with the average 30-year fixed rate mortgage moving upward toward 4.3%, and 15-year fixed rates around 3.6%. These are economic indicators we will need to monitor closely in upcoming days.
Until we know more know about the policy proposals President-Elect Trump will bring to the table, there may be a sustained increase level of uncertainty mirrored in interest rate levels. Erin Lantz stressed patience for home buyers, “Consumers considering buying or refinancing now should stay patient, as we’ll likely see rates stabilize once markets find a new equilibrium.” Freddie Mac’s chief economist, Sean Becketti, surmised that those who were waiting to see what interest rates were going to do will jump off the fence, under certain circumstances, “If rates stick at these levels, expect a final burst of home sales and refinances as ‘fence sitters’ try to beat further increases, then a marked slowdown in housing activity.”
The Wall Street Journal surveyed 57 economists between November 9th and 11th, asking for their forecast for 2017 and beyond. The average forecasts delivered by this group for growth, inflation and interest rates – in both 2017 and 2018 – all reported slight upward movement, when compared to their survey responses given before the election in October. Many of the responding economists added the caveat that their estimates were tentative. “Anyone who tells you they absolutely know what will happen under a Trump presidency is probably lying,” said Megan Greene, chief economist at Manulife Asset Management. There is definite concern regarding White House missteps, and the potential for trade wars to erupt. A number of economists continue to worry about a decline in business investment. Robert Dietz, chief economist at the National Association of Home Builders shared, “Uncertainty on major policy issues limits hiring and investment decisions.” Across the board, however, the economist respondents to the WSJ survey estimate about a 1 in 5 chance of dipping into recession within the next 12 months. These replies are a slight decline when compared to data collected over the past three months, but are up from 14% a year ago.
We’ll have to be patient, as Erin Lantz suggested, until we see more concrete policy language from the Trump transition team. Continue to keep in mind how low our interest rates are now – they are historically low, and on par year-over-year. If you have any questions regarding interest rates, and the current state of our housing market, let’s schedule a time to talk. Please email me at firstname.lastname@example.org.
photo credit: pixabay
The decision of the British public to leave the European Union is a historic one for many reasons, not least of which was the almost uniform belief that there was absolutely no way that the public would vote to dissolve a partnership that had been in existence since the UK became a member nation back in 1973. However, rightly or not, the people decided that it was time to leave.
As both an economist, and native of the UK, I’ve been bombarded with questions from people about what impact Brexit will have on the global economy and U.S. housing market. I’ll start with the economy.
Since last Thursday’s announcement, there have been exceptional ripples around the global economy that were felt here in the U.S. too. This isn’t all that surprising given that the vast majority of us believed that the UK would vote to remain in the EU; however, I believe things will start to settle down as soon as the smoke clears. The only problem is that the smoke remains remarkably dense.
The British government does not appear to be in any hurry to invoke Article 50 of the Lisbon Treaty, which allows a member country to leave the conglomerate. Additionally, nobody appears able to provide any definitive data as to what the effect of the UK leaving will really have on the European or global economies.
As a result, you have those who suggest that it will lead to a “modest” recession in the UK, as well as extremists who are forecasting a return of the 4-horsemen of the apocalypse. But in reality, no one really knows, and it is that type of uncertainty that feeds on itself and can cause wild fluctuations in the market.
It’s important to understand that last Thursday’s vote does not confirm an actual exit from the European Union. There is a prolonged process of leaving that is set out in the EU Treaty which requires a “cooling off” period. And during this time, even confident political leaders, such as Boris Johnson who championed the exit campaign, might be tempted by reforms that would see Great Britain actually remaining in the EU.
The EU itself has been shaken by the vote, and there are already signs that many of its leaders are talking about moving away from the Federal structure of the Union in favor of a looser, intergovernmental agreement, that would allow greater sovereignty for its member states.
This is clearly an obvious attempt to accommodate what is already a groundswell of opposition to the Union that is much wider than just Britain, and now includes France, Spain, Greece and Portugal, all of whom are considering their own exits.
So what does this mean for the U.S.?
As far as any direct impact of the Brexit on the U.S. economy is concerned, I foresee a continued period of volatility given the aforementioned uncertainty. That said, any predictable effects on the U.S. will be limited to a “headwind” to growth, but not enough to drive us into a recession. Our financial system is solid and U.S. exposure to European debt is still limited. I wouldn’t be surprised to see a slowdown in U.S. exports as the dollar continues to gain strength against European currencies, but those effects will be fairly modest.
As for the impact on housing, U.S. real estate markets could actually benefit. Uncertain economic times almost always lead to a “flight to safety”, which means global capital could pour into the United States bond market at an aggressive rate. With this capital injection, the interest rate on bonds would be driven down, resulting in a drop on mortgage rates. And a drop in mortgage rates makes it cheaper to borrow money to buy a home.
On the flip side, one thing that concerns me about lower interest rates is that it could draw more buyers into the market, compounding already competitive conditions, and driving up home prices. And housing affordability would inevitably take yet another hit.
Let’s not fool ourselves; what we’re seeing is a divorce between the UK and a majority of Europe. And like most divorces, there are no good decisions that will make everybody happy. We need to be prepared for the fact that it is going to be a very ugly, nasty, brutal, lawyer-riddled, expensive divorce.
My biggest concern for the U.S. is that the Federal Reserve must now pause in its desire to raise interest rates (I now believe that we will not see another increase this year as a result of Brexit). This is troubling because we need to normalize rates in preparation for a recession that is surely on the way in the next couple of years. The longer we put that off, the less prepared we will be when our economy eventually turns down.