Stocks end the year higher – Stocks dropped early in the year before rising in the third quarter and surging after the November 8 presidential election. Stocks got off to a terrible start in 2016. They dropped 11% from January first to the second week of February as oil prices plummeted, job growth stalled and some feared the U.S. was heading to a recession. In February, oil prices hit a 13 year low of $26 a barrel before recovering and ending the year at $53 a barrel.
Growth – The first quarter GDP showed the economy grew at just 0.8%, which marked the weakest first quarter in 2 years. The second quarter was also sluggish posting just a 1.4% increase in GDP, but the economy picked up and high job growth returned in the third quarter, the GDP rebounded to a 3.5%, and stocks began to rise.
The U.S. election caused markets to surge as investors speculated that a republican president, senate and congress would follow through on their pledge to lower taxes, reduce regulation, and increase both defense spending and infrastructure spending.
The Dow Jones Industrial Average closed the year at 19,762.60 up 13.4% from the 2015 close of 17,425.03. The S&P 500 closed the year at 2,238.83, up 9.5% from its 2014 close of 2,043.94. The NASDAQ closed at 5,383.12, up 7.5% from last year’s close of 5,007.41.
Treasury Bond yields increase in 2016 – Bond yields dropped throughout the year before rising sharply in the fourth quarter. Bond yields hit a low of 1.37% for the 10 year and 2.14% for the 30 year in July. They rose about .4% over the next 4 months. The day before the presidential election, on November 7 the 10 year was 1.83% and the 30 year was 2.60%. The U.S election was on November 8 and within a week the 10 year was 2.25% and by December 1 rates were about where they ended the year, up almost .75% in the month following the election on expectations that a better economy, increased spending, and tax cuts would lead to a higher deficit and more inflation. The 10-year Treasury bond closed the year at 2.45%, up from 2.27% at the close of 2015. The 30-year treasury yield was 3.08% on Dec. 31, up from 3.01% December 31, 2015.
Mortgage Rates – The December 29, 2016 Freddie Mac Primary Mortgage Survey reported that the 30 year fixed mortgage rate average was 4.32%, up from the 2015 year end where it stood at 4.01%. The 15 year fixed was 3.55%, also up from last year’s close of 3.24%. The 5-year ARM was 3.30%, up from 3.08% at end of 2015. While rates ended the year less than 1/2% above where they were at the start of the year, they are significantly higher than they were during the year. The 30 year dropped to about 3.5% in February and hovered in that range throughout the year, hitting a low of 3.25% in July, before surging in the weeks following the election.
California home sales and prices higher than last November – The California Association of Realtors announced that November home sales totaled 442,320 homes on a seasonally adjusted annualized rate. That was up just 0.1% from October, yet up 17.7% from last November when new closing disclosure delayed closings. The unsold inventory index dropped again to a 3.1 month supply of homes on the market. That’s an all time low and down from a 4.2 month supply last November. November’s statewide median price was $501,710, up 4.9% from November 2015 when the median price was $478,140. December prices won’t be out for a few weeks, so we won’t have a year end figure until then.
Nationwide home sales highest since February 2007 – November existing home sales rose 0.7% from October’s level and were 15.4% higher than last November, according to The National Association of Realtors. The median price for an existing home in The U.S. was 6.8% higher than November 2015. That marked the 57th consecutive month with a year over year price gain.
A more complete year end update will be sent in the next couple of weeks when we have final home sales, jobs figures, retail sales and other results.
My predictions for 2017
Home prices – I expect home prices to increase in 2017. There will be a higher percentage gain in the median price and below. I expect the median price to increase 10%. I’d expect homes below the median price range in each area to move up even more, while homes above the median price will move up less. As we get to the higher priced homes in each area I’d expect prices to move up just slightly. Up to now, the higher price ranges have moved up more than the median priced and lower homes, that’s beginning to change. The only structural risk I see is in the very high price ranges where we are seeing an oversupply. For example, at the $20 to $40 million range we have a 3 to 5 year supply of homes on the market and under construction. This is the case in the very high end price ranges in many parts of our market. These have been overbuilt, and while exciting to discuss, they really account to only a fraction of 1% of all sales.
Mortgage rates – I would expect rates to increase slightly hitting 5%. I would not be surprised if they bounced above and below the current 4.5% range throughout the year. I’d think we are leveling from the large increase we had in the weeks following the election. More inflation and economic growth is already built in. While 5% seems high to many, it’s really a low rate if you look at historical rates over the last 40 years.
Number of sales – We don’t have final figures for 2016 yet, but I’d expect total California resales to be in the 430,000 unit range. That’s a healthy figure and I’d expect sales to remain strong, increasing by about 5%.
Mortgage products – I would expect that we will once again see stated income loans, as the Trump administration and the republicans have promised to trim back the regulations in the Dodd Frank Bill passed after the mortgage market collapse.
I’m going to summarize how this affects stated income: A lender evaluates a loan with 3 main criteria. 1. Income 2. Credit 3. Loan to value. Except for the disastrous subprime era from 2003-2007 Lenders have always required 2 out of 3. For example: Strong credit and high income would be required for a low down payment. A large down payment and strong income would allow a lender to accept a lower credit score. Unfortunately, under Dodd Frank, great credit and a large down payment would not allow waiving the income requirement, as verifying income is required under Dodd Frank. The premise was that by not having high enough verifiable income borrowers either could not afford the loan or were cheating on their taxes. While the later may be the case the argument against it is that the law is to maintain the integrity of the mortgage market, not to enforce tax law. Stated income was allowed for decades with a large down payment and strong credit. Unfortunately, during the time of subprime mortgages lenders no longer required 2 out of the 3 criteria and gave loans to people without verifying income that also had poor credit and a low down payment. I hope that never comes back, but I do expect stated income to return this year for people that put down a large down payment and have great credit. There are many self-employed people that are aggressive with their deductions and have not been able to get a loan since 2008 when this legislation took effect. Many of those people would buy if they could. Many feel stuck and would sell their home and buy another if they could. I expect stated income to return and this to change this year. Many of these buyers are in the higher than median price range. This could cause these homes to jump more than I predicted above the median price range and could cause them to move up closer than the 10% that I’d expect at the median price level. The super high end is mostly cash transactions so stated income won’t affect those homes.
I wish you all a HAPPY, HEALTHY and PROSPEROUS NEW YEAR!
See you in 2017!