What Will 2017 Bring
to the U.S. Housing Markets?
It's that time of the year again when predictions run rampant about what's going to happen to the U.S. housing market in 2017 -- but rarely do following these predictions turn out to be the best advice.
Instead, I have always believed that the markets are the best indicator of the future.
Why? The reason is because markets represent the collective actions of buyers and sellers that are making decisions with their own money -- and the trends that emerge are the product of these market forces.
Thus, if you are intent on making the most prudent buying and selling decisions, it’s best to focus on the trends of my five key Vital Sign indicators that are well-correlated with price movement -- and to avoid the guessing games that are so common at the start of every new year.
Vital Sign Indicator #5: Interest Rates
Interest rates on 30-year fixed rate mortgages averaged 4.20% in the week ending Jan 5, 2017, according to Freddie Mac.
As shown in the chart below, after rising for nine straight weeks, this was the first weekly decline since Donald Trump won the U.S. presidential election on November 8th.
On December 28, 2016, 30-year mortgages were 4.32%, which was the highest since rates averaged 4.33% in April 2014.
As mortgage rates rise, home buyers are able to purchase less home with the same income. Based on a $250,000 mortgage at 4.20%, home buyers with no change in income can purchase 2.9% less home in January 2017 than they could 12 months ago when rates were 3.97% … and 10.1% less home than they could only three months ago, which is when rates hit 3-year low of 3.42% in October 2016.
How Interest Rates Fit into my Real Estate Timing Model
Interest rate trends do have a predictable impact on home values and affordability -- however research shows they do not impact the major trend of the U.S. housing market as significantly as my other four Vital Sign indicators.
Hence, even though trends in interest rates in gauging the potential strength - or weakness - that may be developing in the market, as a predictor of real estate trends, interest rate trends should not be judged alone.
As I explain in Chapter 4 of Timing the Real Estate Market, while there is always a dynamic and on-going interaction between interest rates and the other four Vital Sign indicators, please know that only indicators #1 through #4 can collectively be counted on to give buy and sell signals with a high degree of confidence -- and interest rates do not.
In general, interest rates trends should therefore be viewed as an accelerator - or brake - to what the other Vital Sign indicators are telling you about the general market trend.
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Comments/questions are always welcome - and you can send them to Robert@RealEstateTiming.com