Macro-economics is a volatile field. Any little thing can take a wrong turn and move the world economy in ways no one has predicted. These days we are truly talking about a world economy, too. When a beggar lights himself on fire in Bangladesh, our stock market takes notice.
But, we keep trying to make sense of it all. Here’s my take on the next few months, narrowing the focus down to real estate here in the south bay. Barring socio-political disasters, this is roughly where I see the market going.
Last year was all about interest rates. Buyer reaction to mortgage rate increases in 2018 holds some lessons for the coming year. We watched the Federal Reserve Bank raise the Fed prime rate four times through 2018, a quarter of a point each time. The first couple times, the number of home sales dropped off for about a month, then swung back to almost where it was before the rate increase. The September increase provoked a different reaction.
Keep in mind that in the weeks ahead of a Fed rate meeting, lenders typically nudge their published rates in the direction the Fed is anticipated to move. As lenders gradually adjusted rates up in September buyers started walking away from the marketplace. Loan applications slowed and lenders watched September profits drop. Then October dropped some more and November some more. Buyers were staying home, and lenders noticed. In December, lenders started dropping rates despite knowing the Fed planned to raise the prime rate another quarter percent.
It worked. Buyers saw the rates drop and wrote offers. December transactions were up 16% over Nov and a tiny 1% over October. Lenders have seen where buyers stop and, for now anyway, are keeping mortgage loan rates down, as well as lobbying to keep Fed rates down. The Fed has already agreed to only two prime rate increases instead of three for the year. Current rate forecasts show the average 30 year mortgage actually declining until May of 2019. Presumably, the Fed will make their first increase for the year in June and we’ll see how the market responds.