Archive for January, 2017

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Rising Interest Rates & Rising Cap Rates in 2017

In 2017, the Federal Reserve Board projects at least three interest rate hikes of 0.25% each; and cap rates are expected to increase by 100 basis points. Be careful with low cap rate investments!



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Trump’s Impact on Homes

The US real estate market anticipates at least two economic policies will occur as a result of the Trump election: (1) the lowering of corporate tax rates and (2) deregulation of the capital markets.  Beneficiaries of such changes include the banks, all incorporated businesses, and owners of high-priced homes.

The increase in after-tax earnings retention has already caused the stock market to rally since the election. Not surprisingly, mortgage applications have already declined by nearly 10%. As mortgage rates go up, home sales will decline. A 25% increase in mortgage rates from 4% to 5% translates into a 25% decline in sales volume. Interest rates will necessarily rise because, as Trump lowers corporate tax rates, but does not cut federal spending by a similar amount (he plans to spend at least one trillion dollars on infrastructure), the deficit will grow. This means the government must borrow more money at higher rates, or print more money, leading to increased inflation. Either way, mortgage rates must go up and the housing market will slow down. The contrary argument that increased corporate profits will lead to more investment and more employment, thereby stimulating housing demand and prices, ignores the fact that the US is already at full employment, and many jobs remain unfilled simply because the US lacks the skilled workers to fill them. US companies have previously hired programmers and engineers from abroad, but this seems unlikely to continue under the Trump administration.

The wealthy and poor will not be affected similarly by increasing interest rates.  The higher-priced home markets use less debt as a percentage of the home price, and those owners will benefit the most from rising stock prices – as a wealth-induced effect of owning stocks. But the lowest home price tiers have no stocks and use the most debt, especially the FHA and VA buyers, and these housing markets will be affected the most because those prices will necessarily decrease as rates rise.   … Another example of how the rich get richer and the poor get poorer as a result of government policies of the wealthy elite.  It’s noteworthy that Trump’s first executive order after the inauguration was to suspend “indefinitely” FHA premium rates, costing each low-income homeowner across the US about $1,000.


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