It’s January 3rd and 2017 has begun. The Inauguration will take place January 20th and the Mortgage Industry is hoping our newly elected politicians will provide us some relief from regulation. So, what do the experts think will happen in 2017?

Early forecasts by Economists expect that by December 2017:

• Inflation will continue to rise and hit 2.3%.
• Annual GDP growth will be 2.3%.
• Interest Rates will rise another half to one percent.
• Home Prices will be up another 5.0% – 6.0%.

December in Review

Recapping the major Economic Data releases that affect the Mortgage & Real Estate business:

• As everyone expected, the Fed raised the Federal Funds rate 0.25%.
• The Fed stated they may raise rates 2 or 3 times during 2017 – this was unexpected.
• The US Stock Markets hit all time highs again with the DOW topping out at 19,772.
• Saudi Arabia and Russia agreed on oil production cuts with a price target of $60 per barrel.
• The Conforming Loan Limit is now $424,100 for a Single Family Residence as of January 1st.

Net Net – 2016 Economic activity started out weak for the first 6 months but picked up nicely in the second half and we had a few surprises along the way. Overall, it was a very good year for the Mortgage Business thanks to record low interest rates and refinances.

Interest Rates and Fed Watch

Last month the Fed pulled the trigger and raised interest rates by 0.25% for the first time since December 2015. The market expected it but was surprised that the Fed forecast 2 or 3 additional rate hikes in 2017. So why is the Fed so anxious to raise rates? Apparently they think the Economy is going to grow at a nice clip with the important Economic Indicators approaching the magic 2-2-2 number – 2.0% Inflation – 2.0% GDP Growth – 2.0% Wage Growth. Watch the monthly Economic Data and we’ll see if the Labor Market, Inflation, and GDP growth support 3 rate hikes this year. At this point, Fed watchers think the next rate increase will come at the June FOMC Meeting – but that’s 6 months away and a lot can change.

Labor Markets

The Jobs Report was released and was in-line with expectations:

• The Economy added 178,000 new jobs in November (180,000 expected).
• The Unemployment Rate fell to 4.6% – the lowest rate since 2007. Why so low? More people have dropped out of the labor force due to retirement or they just gave up trying to find work.
• The Average Wage dropped 0.1% last month pegging annual wage growth at 2.5%.
• The Skills Gap is a problem for employers as they struggle to find workers with the necessary skills. Workers continue to be unemployed because they just don’t have the right skills.

Inflation

Inflation is slowly marching toward the Fed target of 2.0% with some things costing more and some less. What went up and what went down? You have seen the price changes at the gas pump. Energy, housing costs, dining out, and medical care have all increased while groceries, cars, clothing, and electronics have decreased slightly.

• CPI rose 0.2% in November (0.2 expected), up 1.7% in the last 12 months.
• Core CPI (ex-food & energy) rose 0.2% (0.2% expected), up 2.1% in the last 12 months.
• PPI rose 0.4% (0.1% expected), up 1.3% in the last 12 months.
• Core PPI (ex-food & energy) rose 0.2%, up 1.8% in the last 12 months.

Consumers

The Consumer continues to feel upbeat with Consumer Confidence and Sentiment hitting the highest numbers in years – and they are spending money. The final numbers for the 2016 Holiday buying Season aren’t in yet but early estimates show that retailers are happy with the results.

• Retail sales rose slightly 0.1% (0.3% expected) mostly due to slow auto sales last month, but for the year, Retail Sales are up a respectable 3.8%.
• The Consumer Sentiment Index rose to 98.2, up from 93.8 in November. This is the highest level in 13 years – since January 2004.
• Consumer Confidence climbed to 113.7 (109 expected) – the highest it’s been since 2001.
• Consumer Spending rose 0.2% exceeding expectations, but much of the increase can be attributed to deep discounts.

GDP

The 3rd and final revision for 3rd quarter GDP showed the economy grew at a 3.5% annualized rate (3.3% expected). This is a big improvement over the first 2 quarters when the economy grew at 1.4% and 0.8% respectively. The Atlanta Fed is forecasting 4th quarter GDP to be 2.6%. If that happens, 2017 annual GDP growth will be right at 2.0% – just where the Fed wants it. GDP is a notoriously hard number to pin down. That’s why each quarter has 3 revisions – it’s really a moving target so all the revisions are more like guesstimates.

International & Misc

The value of the dollar increased and hit a high of 1.03 against the Euro during December.
The world’s oldest bank, Monte dei Paschi, has been in peril of collapsing so the Italians approved a rescue that will cost 20 Billion Euro.
Crude oil prices surged after OPEC(Saudi Arabia) and Russia agreed to cut production. OPEC wants to get oil prices up to $60 a barrel and keep it there. Why $60 a barrel? If oil prices get too high, US shale oil producers will ramp up production and drive prices back down. Just another reason why we’ll see slightly higher inflation in 2017.

Housing Data

The outlook for Housing in 2017 is similar to 2016 – a slow steady rise of home prices of 5.0 % to 6.0%, and an increase in New Home construction as developers ramp up production to meet demand. Rising Interest Rates combined with a lack of inventory will further drive up prices and crimp affordability. The big question is: how much higher can interest rates AND homes prices go before they create a substantial drag on the housing market?

• Existing Home Sales (closed deals in November) rose 0.7% to an annual rate of 5,600,000 homes. The median home price for all types is now $234,900 – up 6.8% from a year ago. The median price for Single Family homes is $236,500 and condos is $222,600. 1st Time Buyers were 32%, Investors 12%, Cash Buyers 21%. Homes are on the market an average of 43 days and there are currently 1,850,000 million homes up for sale.
• New Home Sales (signed contracts in November) rose 5.2% to a seasonally adjusted annual rate of 592,000 units. The median price of a new home is $305,400, and the average sales price is $359,900, up 16.5% from last year. There are now 250,000 new homes for sale.
  Housing Starts (excavation began in November) dropped 18.7% (7.0% expected) to a seasonally adjusted annual rate of 1,090,000 units. This is mostly due to a whopping 45% drop in multifamily construction – but Single Family Housing Starts fell only 4.1% to an annual pace of 828,000 units.
• Building Permits declined 4.7% – Single Family permits actually rose 0.5% to an annual rate of 778,000 units, but Multifamily Permits dropped 13.0% which pulled the index down.
• Remember that New Home Sales, Housing Starts, and Building Permits, are notoriously volatile with a lot of statistical uncertainty from constant revisions and changes to the seasonal adjustment formula.
• FHFA Home Price Index rose 0.4% in October – home prices are now 6.2% higher than a year ago according to FHFA.
• S&P Core Logic Case Shiller Home Price Index – The 20 City Composite Index rose 0.6% from the previous month and is up 5.1% from October 2015. The Index has passed the 2006 Pre-Crisis level. Core Logic is predicting that home prices will continue to rise another 4.6% by October 2017.
• NAHB Housing Market Index rose to 70 from 63 – Home Builders are the most optimistic they have been about the housing market since 2005.
• Pending Home Sales Index (signed contracts in November) fell 2.5% to 107.3 (0.5% rise expected). Economists were surprised and disappointed with the poor showing. The combination of rising interest rates, higher home prices, and lack of inventory is hurting.

This month’s Economic Calendar for January 2017 is attached as a PDF so you can view it on your computer, iPad, or smartphone, or you can print it out and pin it to the wall of your desk/cubicle. Keep it in a visible spot so you won’t be surprised by changes in mortgage rates due to the release of economic information. The PDF also contains a brief description of the major Economic Indicators.

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Questions or comments contact:
Mark Paoletti, MPaoletti@MortgageElements.com
www.MortgageElements.com