He’s back! Each January, Barry Habib, Founder and CEO of MBS Highway and mortgage & real estate market expert returns to unveil his economic outlook for the year.
Barry’s newest economic outlook explains what dynamics are in place for 2018, where the stock and bond markets are headed, the future direction of interest rates and housing, and how the new composition of the Fed will affect the markets.
2018 Economic Outlook Dynamics
- Possible stock market pullback – How would this effect housing and rates? Housing will have a bit of a headwind. If people start to see their stocks investments dwindle some they’re less like to make big investments.
- The new look of the Fed – Fed officials have expressed a range of views about the frequency of rate hikes in 2018 – with opinions ranging from 2-4 hikes. They are also scheduled to further unwind their balance sheet. How will this impact mortgage rates?
- Rates are set to rise in year ahead – How much and what will the impact be?
- Housing & Tax Reform – Can housing continues its impressive run and will tax reform be a drag?
Key Areas To Consider This Year
Stocks appear toppy and a bit vulnerable. We’re entering 2018 with extremely high investor optimism, in fact the US is at a 30-year high in optimism. This is often a dangerous sign.
We’re in the most expensive stock market on a price of a stock to sales on the S&P ratio ever. The last time we saw a run this high was in 2000. While he’s not saying we’ll will experience the same type of downturn we did then, it’s something to be concerned about and we could see a cooling off period.
As we begin the new year, we have seen over a 100-month consecutive expansion without a recession. The current market cycle, started back in early 2009, is the 3rd longest expansionary stretch in history. The current market cycle started back in early 2009 and has been chugging along for over 8 years. (the first was 120 months ending in early 2000’s), so we may begin to see a slowing in this cycle.
Barry’s Prediction: There will be a significant stock market pullback during 2018 after such a big 2017.
2. The Fed: Changing Of The Guard
With a new sheriff in town and all the appointments that need to be made, this will be a very different Fed than we saw in 2017. Jerome Powell will succeed Janet Yellen as the new Fed Chairman when she steps down on February 3rd. Powell, viewed as a centralist, is expected to follow Yellen’s cautious approach to interest rates.
Trump may need to appoint up to 4 Fed Governors in 2018, including replacing Vice Chairman Stanley Fischer and NY Fed President, William Dudley. Also out are two of the monetary doves Neel Kashkari and Charles Evans.
The bigger impact to rates, however, will come from the unwinding of the Fed’s balance sheet. Last October they began to reduce their reinvestment of mortgage bonds by $4 billion/month. (Prior to that they were buying back $25 billion in mortgage bonds, and even more than that in treasuries.) They’ve been very active in bond market to keep yields lows. This month they’re doubling their curtailment to $8 billion, buying back $17 billion in bonds. Each quarter will see another $4 billion reduction – ending the year at a $5 billion buy back.
Without the Fed in the market to keep up that buying could make for an interesting 2018. The purchase of mortgage bonds needs to replaced somewhere, the question is, how much do rates need to move up to entice that? That’s the biggest reasons Barry thinks rates will move up slightly in 2018.
Barry’s Prediction: If we see a stock market pullback we expect 1-2 hikes. Probably with the first in March and the second in September. There may be another one in December, but unless Trump appoints a very hawkish Fed, we probably won’t see it.
The main driver of rates, inflation, should remain tame as the Fed won’t be as active. Rates will move higher, but not by too much.
As we discussed in the last section, the Fed reinvesting less in mortgage bonds less will be the main reason for an increase in rates.
On the opposite side, since both stocks and bonds compete for the same investment dollar, a pullback in the stock market could help rates.
Barry’s Prediction: The 10-year Treasury Note Yield will trade between 2.18% and 2.64% for most of the year. Mortgage rates will move .375% higher on average.
We closed out 2017 with incredible numbers both on new construction and existing and this is a market has an incredible amount of momentum and strength going forward. Some of the drivers are:
- Low Inventory
- Rents rising at 4% per year
- A modest move higher in rates won’t derail housing market
- Demand remains strong
Although tax reform did reduce the deductibility of a mortgage from $1 million to $750,000, that will hurt more on the high end. Since the standard deduction has been doubled, there’s a bit less of an inventing to buy to get the deduction, which makes renting more attractive from a tax perspective.
Barry’s Prediction: 4.5% – 5.5% Appreciation (U.S. Average)