HOUSINGNEWS REPORT
PERSISTENT HOME PRICE APPRECIATION PRESSURES MARKET ORTHODOXIES
MORTGAGE INTEREST DEDUCTION CAP: IMPACT BY COUNTY SHARE OF HOME PURCHASE LOANS OVER $750K IN 2017 YTD
more times in 2018 in an effort to fend off the prospect of excess inflation. However, if those bank rate increases actually occur it’s not certain that mortgage rates will follow. The reason is that while the Fed has been able to increase the prime rate charged by banks, mortgage rates have barely budged. • 2015 – The Fed raised the federal funds target rate in December from .25 percent to .50 percent, the first increase since 2008. In 2015 the • 2016 – The Fed again raised the federal funds target by .25 percent in December. The new target was now .75 percent. The average annual mortgage rate was 3.65 percent according to Freddie Mac, the lowest annual rate going back to 1972. • 2017 – The Fed raised the federal funds target rate by .25 percent in March, June, and December, closing the year with a 1.50 target rate. The average mortgage rate for the year was 3.99 percent. Between the start of 2015 and the end of 2017 the Fed’s federal funds target rate increased from .25 percent to 1.50 percent, a hike of 1.25 percentage points. During the same period annual mortgage rates increased by just .14 percentage points. Why are Fed rate hikes not causing material increases in mortgage rates and thus affordability and home sales? average annual interest rate was 3.85 percent according to Freddie Mac.
-8.1%
63.8%
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What If The Fed Is Wrong? A great worry for 2018 is that the Fed will act one way or another and in doing so will slow the economy. Unfortunately, the Fed, despite vast resources, has systematically been wrong. As The New York Times explained last October, “the Fed aims to keep inflation at an annual pace of about 2 percent, but it has undershot that goal consistently since the financial crisis, and the Fed says it expects to miss the target again this year.” It may be that the Fed is off the mark because in a changing economy, traditional economic models may not be telling us what’s really happening.
While the Fed reigns supreme over the banking industry a large percentage of mortgages are today made by non- banks, mortgage originators who are not part of the Federal Reserve system. Being new they don’t have the legacy costs associated with traditional banks. Being non-banks they don’t collect deposits, have ATMs or tellers, or borrow from the Fed. Non-banks get their funding from Wall Street, overseas capital, and bank loans. Combine their ability to get funding from the cheap sources worldwide with their low operating costs and they’re well-positioned to grab substantial market share in a competition where the question of price is supreme. The result is that when the Fed raises bank rates the impact in the mortgage sector has been minimal, a situation unlikely to change in 2018.
As an example, it’s hard to miss the huge number of retail closures that
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FEBRUARY 2018 | ATTOM DATA SOLUTIONS
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