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2019 Economic Outlook

2019 Economic Outlook

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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How Your FICO Score Affects Your Interest Rate

Why Your FICO Score Matters to Lenders

Most of us know that you need to have “good credit” to get a mortgage loan. But, did you know that without a high credit score, you won’t be able to get the best mortgage rates available? Why is this the case?

This is because lenders would rather take a chance on borrowers who have established an on-time payment history. These borrowers are more likely to be serious about meeting their obligations, and are more likely to pay back their lenders. Someone with a spotty payment record is a higher risk, and the lender offsets this risk with higher rates.

Most of the time, your credit score is calculated using the FICO (Federal Insurance Contributions Act) scoring model. This combines information found on your credit reports, compiled by the credit reporting companies. These reports contain all the details of your past payment habits.

If your credit score could be a stumbling block for you, just keep in mind that while it’s one of the most important pieces, it’s still just part of your entire application. The additional elements your lender will consider? Sufficient assets, income, and credit.

Best FICO Scores For Conventional Loans

It’s still possible to qualify for certain kinds of loans if your FICO score is under 680. But if you’ve got a FICO score of 700+ (especially, say, 760 or above), you’re usually sitting pretty and can feel confident about getting a good interest rate.

For a little more perspective on the lower end of a FICO score: 680 is considered average, while 640 might put you in jeopardy of not securing a traditional loan (meaning a loan backed by Fannie Mae and Freddie Mac) from a bank or online lender.

The lending industry has created a credit score scale that’s laid out in 20-point increments. The rates offered to borrowers gets adjusted each time a credit score moves up or down by about 20 points. So a change in score from from 740 to 720, can increase you monthly mortgage interest expense and significantly increase the monthly cost of private mortgage insurance (PMI). It’s known as “loan-level pricing,” and every time you go down a level, your costs increase.

Example: How 60 Points Can Change Your Payment

The chart below shows the increased cost of a 30-year $400,000 mortgage with a 5% downpayment,* when the buyer has less than a 740 credit score.

What happens if your score was an “average” 680 instead of 740? You’d be looking at an extra $216 a month in interest and mortgage insurance ~ that’s $2,592 per year.

FICO Score Chart

Bottom line: you’d be paying an addition $77,760 over a 30-year period.

On the other hand, the impact of a 720 score vs. a 740 score isn’t so huge that you should derail your plans just so you can raise it – especially if it turns out that mortgage rates went up while you were scrambling to boost your FICO score.

What Other Loan Options Are Out There?

In the world of conventional loans, a lot is riding on your credit score. But what if this route just isn’t an option? It might not be the end of the road for you.

Government-Insured FHA & VA Mortgages
These may sometimes accept a score as low as 580. It’s certainly worth a try – with government loans, you’ll generally find more leniency when it comes to both your credit score and underwriting guidelines. The downside: the loan fees on FHA loans are usually considerably more expensive since you’ll need to pay both an upfront mortgage insurance premium and annual private mortgage insurance.

Don’t give up hope! If one lender says you’re not qualified, it may simply mean you’ll need to investigate and find someone willing to accept your credit situation on its face or someone to assist you with getting into a better credit situation.

Check Your Credit Ahead of Time

We highly recommend checking your FICO score at least 6-12 months before you’ll need it to apply for your mortgage. Your credit score is simply too important when it comes to both the mortgage rate you’ll receive and whether you’ll receive financing at all.

If you go shopping for a mortgage without knowing your credit score months in advance, you’ll feel stressed out as you rush to make the necessary changes – if you have time to make changes at all. Credit mistakes can sometimes take several months to complete.

Otherwise prepared buyers find mistakes on their credit all the time. Even if an item on your report is an error it can still decrease your credit score substantially, maybe even by a percentage point or more.

Wondering How To Fix Your FICO Score?

We’ve spent lots of time talking about the importance of your FICO score: why it matters to lenders, why it should matter to you, and what different scores might mean for your financing options.

If you’re ready to dedicate yourself to improving your low credit score, however, stay tuned – in an upcoming post we’ll make sure you know everything you can do to increase your FICO score.

When it comes to your dream of owning a home, it’s never the end of your story.

*Scenario assumes a 5% downpayment. Less than 20% down means you’d be paying PMI (Private Mortgage Insurance).

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US Economic Forecast for 2017

He’s back! Every January, Barry Habib, Founder and CEO of MBS Highway and mortgage and real estate market expert returns to unveil his predictions for the year.

Barry’s newest economic forecast will help explain what dynamics are in place for 2017, where the stock and bond markets are headed this year, the future direction of interest rates and housing, and how the new composition of the Fed will affect the markets.

But first, let’s take a look at how Barry’s 2016 predictions worked out.

Barry’s 2016 Economic Forecast

Prediction: The 10-year Treasury Note Yield would drop below 2%.
Actual: The 10-year began the year at 2.245%, then dropped down to 1.325% on July 6th, 2016.

Prediction: Home price appreciation would be 5% – 6%.
Actual: It was up 6.2%.

Prediction: Stocks, as measured by the S&P 500, would decline by 300 points.
Actual: Stocks indeed declined by 200 points in February from the start of the year, but then rebounded at the end of the year due to Trump Election optimism.

Prediction: The Fed would hike only once (everyone else forecasted 4 rate hikes).
Actual: Barry’s forecast of just one hike turned out to be right on the money.

Looking Ahead: Dynamics you’ll see affecting 2017

  • The effects of the new Trump Administration – anticipated changes to corporate tax reform and slowing down regulatory over site have businesses optimistic.
  • Inflation pressures may start to heat up – increases in wages and oil prices will move inflation higher, but may be tempered by a strong dollar.
  • Home inventory levels continue to be very low – only a 4 month supply and foreclosure inventory is gone.
  • Modestly higher rates – this won’t derail the housing market but will slow refinances.
  • The US manufacturing sector will continue to be flat – the US has become a service economy.
  • The Fed is planning three rate hikes.

Key Areas to Consider

1. Stocks

From a bird’s eye view, stocks appear a bit vulnerable this year. We’re entering the new year with extremely high investor optimism, which can actually turn out to be dangerous. If everyone is optimistic and in the stock market, where does the new money come from to fuel prices higher?

Prediction: There could be a potential for a Stock market correction.  20,000 on the Dow seems like a given, but there could be a pullback after breaking through it.

To put this in perspective, when the Dow broke above 1,000, stocks pulled back soon after—then it took 10 years to break above it again. When the Dow broke above 10,000, stocks pulled back and it took 9 years to break above it again.

It’s not at a guaranteed part of this year’s economic forecast, but often these milestone levels are tough ceilings. With the extreme optimism, the recent surge into the stock market and the achievement of this milestone, this may be a time to see stocks take a breather and that could benefit bonds.

2. The Fed

The make up of the voting members of the Federal Reserve (below) dictate whether or not they will raise rates. In 2016, the voting members were made up of 3 Hawks, 2 Centrist members and 5 Doves – creating a dovish Fed. Since Hawks are more likely to vote for a hike and Doves are less likely to hike, you can see why they only eked out one rate hike last year.

How about the make up for 2017? Now there is only 1 Hawk, we still have 5 Doves, but those 2 Hawks positions have become Centrists. With this make up, it will be even harder for the Feds to hike.

2017 Fed Reserve Voting Members

Barry’s prediction: With the new 2017 composition of the Fed, hiking 3 or 4 times will be pretty unlikely, especially considering how much the Fed likes to drag their feet when it comes to hiking.  Barry’s economic forecast comes in at 1-2 Fed Rate hikes.

3. Housing

The reality going into this year is low inventory, with rents rising at 4% per year. These increases add up quickly, motivating more people to buy. The housing market won’t be derailed by these modestly higher rates, especially when it comes to first time home buyers.

Meanwhile, incomes will be rising at a pace to easily support appreciation, while demand remains strong.

Barry’s prediction: 5% – 5.5% appreciation.

4. Rates

The main driver of rates? It’s inflation. And in 2017, rates will move higher, but it shouldn’t be anything to worry about. Global yields will rise and pressure US yields a tiny bit higher. Meanwhile, selling additional bonds will finance infrastructure projects under Trump. This excess supply is a negative for rates.

Barry’s prediction: The 10-year Treasury Note Yield will gradually rise towards 3%. This will push mortgage rates up above 4.5%. This won’t be enough to slow down purchases, but will likely slow refinances.

How did you feel about Barry’s economic forecast? How will it impact for plans for homeownership? You don’t have to figure this out all on your own! For a FREE review of your current mortgage or what you might qualify for if you’re looking to buy this year, contact us anytime, we will be happy to assist!

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