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2017 year-end economic update and predictions for 2018

Posted by Haft Group on 01/02/2018

This 2017 year end is preliminary. I will prepare a more detailed year end report on the third week of January when we have final housing sales figures for 2017, employment figures, and GDP numbers. 

Stocks had a banner year –  U.S. stock markets closed the year with 2017 achieving the highest percentage gains since 2013. The big difference is that in 2013 stocks were recovering from huge drops during the recession, while in 2017 stock markets gained from record highs reached in 2016, which makes the 2017 gains even more remarkable. As the worldwide economy improved, international stocks fared even better, outperformed U.S. stock market gains for the first time since 2012. U.S. markets were helped by hopes of a massive corporate tax rate cut, which was finalized at the end of the year, loosening regulation, and a turnaround in the worldwide economy, which was sluggish in 2015 and 2016. The Dow Jones Industrial Average closed the year at 24,719.22, up 25.1% from 19,762.60 at the close of 2016. The Dow closed at 17,425.03 in 2015. The S&P 500 closed the year at 2,673.51, up 19.4% from  2,238.83 at the end of 2016. It was 2,043.94 at the end of 2015.  The NASDAQ closed at 6,903.39, up 28.2% from 5,383.12 on December 31, 2016. It was 5,007.41 at the end of 2015. 

The 10-year Treasury bond closed the year at 2.40%, down from 2.45% December 31, 2016. It was 2.27% at the end of 2015. The 30-year treasury yield ended the year at 2.74%, down from 3.08% on Dec. 31, 2016. It was 3.01% on December 31, 2015.

Mortgage Rates mixed in 2017 – The 30-year and 15-year fixed rate mortgages were lower this year than at the end of 2016. The short them ARM rates were higher. The Federal Reserve raises overnight rates banks pay three times in 2017, a .75% increase. That caused short term rates to rise, but did not cause long term rates to rise. That is because long term rates are tied to inflation, not short term rates. In fact, higher short term rates lower the risk of inflation. The December 28, 2017 Freddie Mac Primary Mortgage Survey reported that the 30 year fixed mortgage rate average was 3.99%, down from 4.32% on December 29, 2016. It was 4.01% at the end of 2015. The 15-year fixed was 3.44%, down from last December 28’s 3.55%. It was 3.24% at the end of 2015. The 5-year ARM was 3.47%, up from 3.30% at the close of 2016. It was 3.08% at end of 2015. 

U.S. Retail Holiday sales up 4.9% – MasterCard reported that holiday retail sales, which compares retail sales from November 1 to December 24, increased 4.9% from the same period last year. Online retail shopping similarly increased 18.1%, while overall consumer buying during the holiday period set a record for dollars spent, according to the sales report issued by Mastercard SpendingPulse.

The number of California home sales and prices increase in November – The California Association of Realtors reported that existing single-family home sales totaled 440,340 in November on a seasonally adjusted annualized rate. That marked an increase of 2.1%  from October, yet down down 0.8% from November 2016. Year to date sales are 1.1% higher than the same period last year.  The median price paid for a home in California was $546,820, in November, up 8.8% from last November. Housing inventory which had been at historically low levels dropped even further. The unsold inventory index revealed that there was just a 2.9 month supply of homes in the market in November.  The number of homes for sale in November was 11.5% below last November’s number.

My predictions for 2018.

Tax reform – Many people have contacted me about how I feel about the new tax reform and how will it affect the real estate market.

Most of the concern is over the $10,000 deduction cap on SALT, which stands for state and local taxes. These state and local taxes include: state income tax, property tax, sales tax, DMV fees, etc. Many fear what this limit will do to the real estate market, especially the upper end of the market. I think we were all blindsided by this. Nobody would have expected state and local tax deductions, which were unlimited before, to be capped. It is something that has never been proposed before. As a real estate broker, I’m against anything that takes away benefits of home ownership, but I think the housing market has so much momentum that prices and sales numbers will continue to rise. The reduction in the mortgage interest deduction from the interest on a $750,000 from a $1,000,000 loan also is unfortunate, but I don’t expect that to have much affect either. (Interest deduction on mortgages up to $1,000,000 originated before December 14, 2017, and the refinance of those loans will still remain deductible). I do expect the $10,000 combined limit on state and local taxes, and the reduction in the mortgage interest deduction to affect us in times of real estate recessions. It could make those periods more severe.

Home prices – I expect home prices to increase in 2018. Conservatively, I expect prices to increase 5%-10%.  Homes near median price range in each area will move up more than homes above the median price range.  As we get to the higher priced homes in each area I’d expect prices to move up more slightly.  Since 2012 the higher price ranges have moved up more than the median priced and lower homes, that’s beginning to change. We see some homes sitting in the very highest price ranges in each area. On those high priced homes we are seeing an oversupply due to lots of new construction.  I would expect those homes to increase in prices at a very low percentage. Many of those homes are triple where they would have been at the 2006 peak near the end of the last cycle, while homes at the median price are just now about 15% above their 2006 peak.

Mortgage rates – I would expect the 30-year fixed interest rate to remain between the 4% and 4.75%. Tame inflation should keep these rates near historic lows. I would not be surprised to see an inverted yield where short term adjustable rate mortgages rise to almost the same rate as a 30-year fixed.

Number of sales – We don’t have final figures for 2017 yet, but the total California resales will be above 440,000 units.  2017 will be the the second highest number of sales in the state ever. Only below 2006 when subprime made everyone qualified to buy. I’d expect 2018 sales to be about the same number, possibly a little more. 

Home inventory levels – 2016 marked the lowest inventory levels since The California Association of Realtors began keeping records. 2017 was even lower and averaged about 11% fewer homes for sale each month compared to the same month in 2016. Most months saw under a 3 month supply of housing for sale. That’s an unheard of number. It gave the appearance that there was nothing to buy, but that is just not the case. There were enough homes listed for 2017 to be almost the highest number of sales ever. Buyers just had no time because homes were selling so quickly. I think inventory levels will tick up a little. Perhaps more sellers will begin to think we are closer to the top of the market and put their home up for sale. A normal market has a 6-7 month supply. In a normal market prices are stable. I don’t expect to get to a 6-7 month supply anytime soon. That’s why I fully expect prices to continue to rise.

Easier to qualify – Loans in 2017 were easier to qualify for than they have been since anytime after the financial crisis. Loans required lower down-payments and lower credit scores than anytime since 2007.  With a new head of The Consumer Financial Protection Board, who has promised to roll back some regulations and loosen up requirements, qualifying for a mortgage will get even easier.

I wish you a happy, healthy, and prosperous new year!


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