Barry is back! Each January, Barry Habib, Founder and CEO of MBS Highway and mortgage & real estate market expert shares his economic outlook for the year ahead.
Barry’s 2019 economic outlook explains what dynamics are in place for this year, where the stock and bond markets are headed and the future direction of interest rates and housing.
2018 In Review
Prediction: Stocks will be toppy and vulnerable and there will be a significant stock market pullback in 2018.
Actual: Stocks were toppy and they did pull back significantly at the end of the year.
Prediction: Inflation will be tame in 2018 and the fed will tighten by hiking rates 1-2 times and reduce their balance sheet.
Actual: Inflation did remain tame and the Fed stopped reinvestments and reduced the balance sheet. They hiked rates 4 times.
Prediction: The 10-year-2year yield curve will flatten in 2018.
Actual: The yield curve flattened from 0.51 to 0.11. This is important looking forward as an inverted curve in 2019 may become a self fulfilling prophecy where fears and concerns could hurt stocks and help bonds.
Prediction: The 10-year will trade between 2.65% and 3.04% most of the year and mortgage rates would be 0.375% to 0.5% higher on average.
Actual: The 10-year did trade between 2.65% and 3.04% for 10 months of the year and mortgage rates did rise for most of the year within our predicted range.
Prediction: Our forecast for appreciation was for housing to be up to 4.5% to 5.5%.
Actual: For most of the year, housing was up greater than that – to over 7% at times – but as the year came to an end home prices had risen nationally between 4.7% to 5.5% year over year.
2019 Economic Outlook Dynamics
- China – Could there be a trade war?
- US Economy – Is it slowing?
- The Stock Market Pullback – How much and what will the impact be?
- Rates Set to Rise – The Fed is indicating two rate hikes and is scheduled to further unwind its balance sheet. How much and what will the impact be?
- Housing – Housing appears to be slowing. Is this a bad thing or will it regain its footing?
- Inflation Rising with Oil Prices – We saw wages start to rise at the end of 2018 while oil prices took a big dip, helping inflation stay low overall. If they move back to more normal levels, will that pressure inflation?
Key Areas To Consider In 2019
1. Stocks
The 2019 economic outlook starts with a more normal market. With the Fed no longer artificially adding liquidity through the purchase of mortgage bonds and treasuries, we expect stocks to be choppy and volatile. The Feds are not the only ones draining liquidity – the European Central Bank is as well. This gives stocks a head wind at the start of 2019.
Although stocks will likely decline early in the year, they’ll find their footing with valuations coming down to realistic and sustainable levels. Barry thinks the stock market will reverse course after a very difficult 2018.
Barry’s Prediction: Stocks will end 2018 up 5% to 8%.
2. The Federal Reserve
Different this year, there will be a press conference at every Fed meeting. In the past, only every other meeting had press conference. Since the Fed historically has only changed interest rates where there was a press conference, this could add to increased speculation and volatility with the media covering every single detail and speculating what may or may not happen.
The 2019 Fed dot plot shows is showing that they are planning 2 hikes in the year ahead. The Fed will be concerned about rising inflation due to a combination of higher oil prices and wage pressures. These factors may influence the Fed to push interest rates higher unless we see a slowdown in the economy.
Barry’s Prediction: The Fed will hike 1 time to get the Fed Funds Rate (FFR) to 2.75% although they would love to get the FFR to 3%. The Fed stays on course to reduce the balance sheet.
3. Interest Rates
As we know, inflation is the main driver of rates, and inflation will likely tick higher with oil prices rebounding and increasing wages as 20 states are increasing their minimum wage in 2019. We think theses causes an uptick on the rate on inflation, Because of this, that pressures inflation a bit more – this is the enemy of interest rates.
Also pressuring the interest rate environment is the unwinding for the Fed’s balance sheet by $50 billion per month at the same time that our government has more borrowing needs due to the deficit. As our government puts out more paper (more supply) with less buying, bond prices will worsen which means an increase in interest rates.
Barry’s Prediction: The 10-year treasury note will trade between 2.75% and 3.25% for most of the year, with a high tick for the 10-Year at 3.5 percent. 30-year fixed mortgage rates will be in the 5% to 5.5% range for most of the year. This is slightly more than where we’re at now, but shouldn’t get out of hand.
4. Housing Market
The housing market has taken a beating in the media for a long time. It will have a rocky beginning with some areas doing well and some areas will do poorly. Overall we’ll see a slow start, but as the spring market starts to come around and stocks stabilize, folks will feel the wealth effect and be more confident about buying. Demographics are also favorable as there is more demand than supply. This points to a good housing market ahead.
Barry’s Prediction: Home appreciation in 2019 will fall in the 3.5% – 4% range. While less than last year, it will still create significant wealth.
We wish you and your families all the best for 2019. We wish you happiness, we wish you health and we wish you prosperity!
The information contained herein is general in nature and based on authorities that are subject to change. Churchill Mortgage guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Churchill Mortgage assumes no obligation to inform the reader of any changes that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or any other advice, and readers should consult their advisors concerning the application of tax laws to their particular situations.
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