As this year comes to a close, we reflect on market-moving events in the housing industry and offer some forward-looking insights as we approach the new year. One unknown is the impact the newly elected administration may have on monetary policy, the housing market and the mortgage marketplace. However, we anticipate that many of the trends we're seeing at the end of this year will continue to affect home lending in 2017.
First, let's take a look at the landscape of the mortgage sector over the past year. 2016 kicked off with the Federal Reserve's first rate increase in nearly 10 years—a quarter of a percentage point—in December of 2015 and a projection of four additional increases on a quarterly basis over the course of the year. The Fed quickly dialed back the four projected rate increases to two by March of 2016, and continued to hold rates at a low level due to jobs and inflationary data that did not indicate a strong enough economic recovery.
It's important to note that since the housing crisis, these rates have been held at historic lows, with the quarter point increase at the end of last year having little bearing on the overall trajectory of rates. In turn, homeowners in 2016 have shifted from adjustable to fixed rates to take advantage of the opportunity to guarantee their mortgage terms while rates are still low.
All Eyes on the Federal Funds Rate
Since last December, the economy has been gradually recovering. As such, the federal funds rate remains at the same point as the beginning of the year, but there is talk of an increase on the horizon. As short-term movements in the federal funds rate typically affect the long-term interest rates that mortgage lenders charge borrowers, current and prospective homeowners should keep an eye on the federal funds rate going into 2017.
Recently, the combination of historically low fixed rates with rising home values has encouraged homeowners to leverage the equity they've gained in their homes through cash out refinances. While the volume of cash out refinancing is nowhere near the levels we observed prior to the housing crisis, homeowners are refinancing and taking cash out of their homes to pay off second mortgages and consolidate or pay off debt. According to a recent report by CoreLogic, home prices have increased 6.3 percent over the past year. Hypothetically speaking, a home valued at $200,000 one year ago has risen to a current value of $212,600. Overall, the average American has doubled their home equity in the past year, gaining more than $11,000 in home value.
Projected Slowdown in Refinancing
Now that we've discussed this year in review, what are we anticipating in the short- and long-term for 2017? Mortgage rates have gone up some since the election, and all indications point to additional movement in December. Recent jobs data supports steady hiring and a slight decline in jobless claims.
In terms of long-term movements, rates have been held at historic lows since the downturn in 2007-2009, which is unsustainable. While we don't anticipate a dramatic increase in rates, we foresee additional upticks. So, what does this mean for homeowners?
Given the recent trend among homeowners taking advantage of low rates and appreciating housing values, we can anticipate a slowdown on the refinancing front. Houses cannot continue to appreciate at the current pace without becoming overvalued, and rates are expected to increase. Rates have been held low for so long that many borrowers who wanted to refinance have done so already. Additionally, some prospective buyers have taken advantage of the low-rate environment by purchasing new homes. However, some are struggling with affordability given high home prices and low inventory in certain markets.
It's important to remember that the Fed's potential decision to raise rates would be an indication of a healthy economy. This should spur increased consumer confidence and spending, including prospective homebuyers looking to purchase homes.
Evaluating the Full Picture
The bottom line is that homeowners should be mindful of decisions regarding their mortgage. We can use the last cycle correction as a barometer to learn from. Even though interest rates have gone up, they're still low—making it a good time to obtain a mortgage. If there's anything we've learned from the crisis during which many Americans became financially overextended, such decisions should fit into a homeowner's personal financial plan.
It's important for homeowners to take into account affordability as well as their specific housing market and whether home prices are valued appropriately. Houses in some regions are showing signs of over-appreciation, which points to a pullback in value and should be watched closely. Looking at the full picture and speaking with your lender about your options is a smart first step to ensure your mortgage is in check.