Barry Habib, Founder and CEO of MBS Highway and well known TV commentator on the Mortgage and Real Estate markets talks about his outlook for stocks, interest rates and the US housing market in 2016. But before we dig into that, let’s look at how his 2015 predictions fared…
Prediction: A drop in the 10-year Treasury Note Yield to 1.5%
Actual: 2015 began with 10-year Treasury Note Yield at 2.10% declining to 1.62%. Although slightly missing his target, it was still a significant decline of 25%
Prediction: Forecasted home price appreciation to be up 4%
Actual: Price appreciation was 5%
Prediction: Volatile but modest change in Stock prices
Actual: Markets were volatile, but only saw modest change in Stock prices
Prediction: Forecasted just one small hike at the year end. Everyone else was predicting 4-5 hikes & were 100% sure the Fed would hike in June.
Actual: One small hike in December
Prediction: US Dollar could strengthen towards parity (equal) with the Euro
Actual: We came very close, as the Dollar topped at 1.05. Not quite reaching parity, but still a close prediction.
Prediction: Oil prices to drop from $80 to $40
Actual: Prices actually declined from $80 to $36/barrel for WTI (West Texas Intermediate)
Dynamics for 2016
- Inflation pressure will remain very tame – remember interest rates are driven by inflation.
- Home inventory levels will stay low – this bodes well for US housing market as demand continues to be strong.
- Geopolitical fears are heightened – whether it’s nuclear bomb testing in Korea, the Chinese markets under extreme pressure or the ugly specter of potential terrorism, we know that this can add a lot of market volatility.
- US Manufacturing sector is lackluster – the service sector, which represents most of our economy, will do well.
- Corporate profits are declining – perhaps due to stronger dollar, making our exports more expensive with large corporations feeling the pinch of that.
- The Fed is indicating four rate hikes – but we don’t think it will be as much as that.
Let’s dive a bit deeper into each of these areas…
The stock market is vulnerable this year with declining corporate profits. This could be the biggest potential problem for housing in general because if the stock market takes a big fall, people will be less inclined to purchase homes.
Barry’s Prediction: While the vast majority of experts are calling for a 10% gain in the Stock market, Barry says there could be the potential for a significant decline in Stock prices during 2016. Perhaps as big as a 300-250 point decline on the S&P 500 from the beginning of the year, which equates to a 15% decline. The equivalent for the Dow would be somewhere in the neighborhood of 2,500 points.
2. The Fed
There is a bit of the “Changing of the Guard” in 2016…let’s look at the image below. On top is the 2015 makeup of the voting members of the Fed, as you can see many of the members were considered doves. Doves are considered hesitant to increase interest rates and very accommodative. In 2015, there was only one hawk that wanted to increase rates – Richmond Fed President Jeffrey Lacker. In 2016, we are losing one of the doves, and we lose a couple centrists and the hawk. They are replaced with another dove (so status quo here). But instead of two centrists, and one hawk, we get three more hawks. This tells us that the fed may be more inclined to hike rates if the economic data suggests so.
While Fed Members are forecasting four rate hikes, the financial markets which has a Fed Futures contract, that bets on what the fed will do according to the financial markets, is predicting two rate hikes.
Barry’s Prediction: 1-2 Fed Rate hikes.
Even though there are more hawks in the Fed, he believes the lack of inflation combined with low energy prices will make it difficult for the Fed to hike rates even with some job gains, as were will not be seeing job growth in the way of wages.
3. Housing Inventory
Inventory is a big story in the US housing market. Currently inventory levels are matching the lows of 2012. Prior to that we have to go all the way back to 1994 to see levels this low. The low inventory levels should not be confused with a weak housing market from a price standpoint. While these levels are hurting the amount of transactions out there, it is very supportive of home prices. When inventory is low, home prices tend to do very well. It’s when inventory is high like we saw in 2006 and 2007, (or in 1986-87) that it’s a little worrisome for the US housing market.
Barry’s Prediction: Inventory will remain low nationally, and indicated continued strength of home prices.
4. US Housing Market
Low inventory and rental rates will be strong fundamental drivers of home price appreciation. With rental rates estimated to rise at 4% per year, home ownership will continue to look very attractive. Additionally, we’ll see a continued low rate environment, with income rising at a pace to easily support 10% appreciation. We’re not estimating 10% appreciation, but we want to make the distinguishing point that if home price appreciate at 5-6% a year (which is our prediction) that this does not also necessitate a 5-6% rise income. Only about 20% of an individual’s monthly income goes toward principal and interest, making the ration of income to payment 5:1. This means if home prices goes up 5%, and if interest rates stay stable, a person’s income doesn’t need to go up 5%, it only needs to go up by 1% to match it.
Barry’s Prediction: 5-6% Home Appreciation (nationally)
As inflation is main driver of interest rates and there are not any inflationary pressures out there to speak of, inflation should remain low. This should keep long term interest rates favorable, even if the fed does decide to hike rates. As we’ve seen in the past, Fed rate hikes do not translate into higher interest rates. In fact, history tells us that we could see interest rates decline if the fed hikes rates. The Fed will continue to invest in Mortgage Bonds, which help the mortgage rate environment as well. We should see a drop in mortgage rates throughout this year, especially when the stock market has some difficulties.
Barry’s Prediction: 10-year Treasury Note Yield dips below 2% again, with 30-year mortgage rates below 4% for parts of 2016.
The Denver Metro area has had a nice run in home appreciation for the past couple of years; averaging around 10%. We also top the charts with personal income coming in at almost 2% more the the national average. We should see similar percentages in 2016, however year over year appreciation might drop in the single digits, closer to 6-7%. As Barry predicts above, and we agree, interest rates should stay the course; 30 year fixed rates being the most popular with adjustable rate mortgages getting more attention.
Overall, those considering purchasing, selling or refinancing in 2016 should do well and set themselves up for good gains in the near future. For a FREE review of your current mortgage or what you could qualify for if you’re looking to buy this year, contact us anytime, we will be happy to assist!