November Reporting Roundup: Let’s Predict Interest Rates

It’s time once again for the monthly reporting roundup, where you can read my wry commentary about the news instead of subjecting yourself to boring rehashes of the NWMLS press release (or in addition to, if that’s what floats your boat).

To kick things off, here’s an excerpt from the NWMLS press release:

Real estate brokers say showings, offers "still going strong" despite "seasonally adjusted" inventory

Buyer interest remains high and many good values exist for those whose holiday wish list includes a new home, according to brokers with Northwest Multiple Listing Service. A new report from the MLS summarizing November activity shows year-over-year gains in pending sales, closed sales and median prices.

“The holiday season is in full swing and the most special gift this year is that interest rates have dropped down to touch the upper 3 percent range. Interest rates at this low level are considered unbelievable,” said J. Lennox Scott, chairman and CEO of John L. Scott Real Estate.

Unbelievable indeed. Let’s see what NWMLS press releases earlier this year were saying about interest rates, and where those rates were at the time…

March, rates at 4.28%

For sellers on the fence, [MLS director George Moorhead of Bentley Properties in Bothell] recommends “stepping forward,” saying “interest rates will rise this year.”

April, rates at 4.41%

“There are many reasons potential sellers should consider selling now,” said Mike Gain, CEO and president of Berkshire Hathaway HomeServices Northwest Real Estate in Seattle. …interest rates are still very low but will likely rise, he noted.

July, rates at 4.12%

Stenvers, the office managing broker at John L. Scott in Bellingham, said buyers would be “well advised” to monitor interest rates, since they have a tendency to move up as summer winds down.

As of last week average interest rates on a 30-year fixed-rate mortgage are at 3.97%. Here’s some free advice to the NWMLS PR team: Maybe don’t let your brokers make predictions about where interest rates will go.

Read on for my take on this month’s local news reports.

Seattle Times

Sanjay Bhatt: King County median home price up 6.3 percent over year ago

Over the past 12 months, the median price of single-family homes in King County has risen 6.3 percent. The steepest increase has been in North King County, where the median price is $390,000, up 13 percent. Southwest King County’s median price of $255,000 was down 2 percent over the year, the only submarket to post an annual price decline.

This month’s article in the Times is fairly brief and matter-of-fact. Nothing much to comment on.

Seattle P-I

Aubrey Cohen: Still few homes for sale, many buyers in Seattle area

Prospective Seattle-area homebuyers hoping for more selection won’t find any hope in the latest market data.

King County had just 1.96 months worth of homes on the market at the current sales pace in November, the Northwest Multiple Listing Service reported Thursday. That’s down from 2.15 months of inventory a year earlier and 2.01 months this October, and well below the four to six months considered balanced between buyers and sellers.

Similar story in the P-I. Short and to the point.

Tacoma News Tribune / The Olympian

John Gillie: Home prices moving upward in the Puget Sound area

November saw double digit increases in home and condo median sale prices in both Pierce and Kitsap counties and healthy single-digit increases in King and Thurston counties, new figures from the Northwest Multiple Listing Service show.

In the South Sound, said Dick Beeson, principal managing broker at RE/MAX Professionals in Tacoma, broker interest is brisk because of concern that interest rates could jump.

“Broker interest remains high partially because many buyers feel interest rates could rise next year, and they realize now is a good time to take advantage of rates under 4 percent,” he said.

Yeah, those darn interest rates. Gonna rise any day now. Better jump in quick.

Puget Sound Business Journal

Marc Stiles: Housing prices climb as inventory drops in Puget Sound area

People are still hot to buy houses and condos in the Seattle metro area, where pending sales last month reached a nearly eight-year high for November. But for now buyers have fewer options because the number of residences on the market is dropping.

Pretty much everyone barely did more than drop in a few stats and quote the press release this month. Overall not a very exciting or interesting set of articles.

(Sanjay Bhatt, Seattle Times, 12.04.2014)
(Aubrey Cohen, Seattle P-I, 12.04.2014)
(John Gillie, Tacoma News Tribune, 12.04.2014)
(John Gillie, The Olympian, 12.04.2014)
(Marc Stiles, Puget Sound Business Journal, 12.04.2014)

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

41 comments:

  1. 1

    C’mon, Tim, you’re not being fair. Prognosticating is what RE brokers do!! Interest rates, prices – everyone expects us to weigh in on the future. We gotta deliver! :-)

  2. 2

    RE: Craig Blackmon @ 1 – Unfortunately Craig is right. I’ve taken some grief for not predicting things: “Clients will expect predictions! How can you not tell them what you think will happen?”

    The bigger question I have though is not so much where interest rates are headed, but why they are so low. With QE wrapping up it’s starting to seem less and less like government manipulation, and the alternatives are not necessarily good.

  3. 3
    boater says:

    RE: Kary L. Krismer @ 2

    There’s a ton of cash floating around looking for something reasonably safe to invest in. Europe looks like its going to dip again. The US has equity markets that seem on the high side of valuation. Commodities are crashing. I can’t fault anyone for saying the safest place to park money is in U.S. mortgages given the current underwriting standards.

  4. 4

    RE: boater @ 3 – Except if interest rates do rise, the last thing you would want to own would be a long term debt instrument. The value would plummet.

  5. 5

    Market performance of most all markets will be greatly influenced as soon as the Presidential Campaigns start heating up. Most often this leads to a steep decline as we get closer to election day. The 8 year vs 4 year Presidential Election cycle always wreaks the most havoc on financial markets. A potential female President will likely create as much chaos as first black president did back in 2007 and 2008.

  6. 6
    Dave says:

    To understand these rates look at one of the feds favorite metrics, the velocity of money.

    https://confoundedinterest.wordpress.com/2014/12/05/us-loan-reserve-multiplier-declines-back-to-nixon-era-levels-m2-money-velocity-at-all-time-low/

    This has been disturbing for quite some time.

    http://raynoreport.com/13/07/shocking-collapse-in-money-velocity-might-be-scaring-fed/

    So my guess would be that rates will go nowhere until the fed finds/builds a way out of the trap we’re all in.

  7. 7
  8. 8

    RE: Ardell DellaLoggia @ 5 – Ahhh, now that’s what I’m talking about… ;-)

  9. 9
    boater says:

    By Kary L. Krismer @ 4:

    RE: boater @ 3 – Except if interest rates do rise, the last thing you would want to own would be a long term debt instrument. The value would plummet.

    And yet people buy 30 year government bonds or they did. There is no investment with zero risk. Even cash has risk. Hell if you’re an overseas investor you might buy US mortgages because when you compare the currency risk to the interest rate risk you might decide its a wash.

    I think the velocity of money has been so poorly understood by most people. People complained that the Fed was inflating money when in fact they were only trying to keep a lid on the velocity decline.

  10. 10
    Erik says:

    Rates may go up 1% this year, but I don’t think that will affect home values since inventory is still so low. Hopefully inventory keeps following the 2013 curve and prices continue heading higher for another year.

  11. 11
    ARDELLd says:

    RE: Craig Blackmon @ 8 – actually that forecasting comes from my days as a stock and bond portfolio manager prior to real estate. Or do you think that’s inappropriate too? Just buy stock whenever with no regard for market expectations? What’s with the desire for everyone to act stupid? Except lawyers of course.

  12. 12
    Blurtman says:

    Most Americans know that the US financial system is a fraud of such an epic scale that it can bring down the US economy. How can anyone have confidence is such a system that rewards criminal behavior and that can crash the entire economy, taking innocent bystanders with it again? Why take risk under such a regime? Hoarding money and not extending oneself are quite prudent behaviors.

  13. 13

    RE: Craig Blackmon @ 8

    I’d love to lay claim to Presidential Election Cycle Theory…but it’s been around since 1928. True I did not train for that in real estate, but my 20 years in investment banking and training at the Wharton School didn’t leak out of my brain when I switched to real estate in 1990. Why do you want everyone to pretend to be dumb? I’ll never get that about lawyers in WA. Never saw that in any other State.

    https://www.tradingview.com/v/mIqv2QYY/

    http://gbr.pepperdine.edu/2010/08/presidential-elections-and-stock-market-cycles/

    http://www.capitalhubs.com/2012/08/the-connection-between-stock-market-and.html

    Not everyone interprets the impact the same as me or as each other. But to suggest there is no basis for correlation is just a bit silly.

  14. 14
    Erik says:

    RE: Blurtman @ 11
    If you can’t beat them, join them. Lessons were learned from Ray pepper. He got rich feeding the system their own sh!t. I hope to get that same opportunity someday.

    If you wanna be the man, you gotta beat the man.

  15. 15
    Mike says:

    By Ardell DellaLoggia @ 5:

    Market performance of most all markets will be greatly influenced as soon as the Presidential Campaigns start heating up. Most often this leads to a steep decline as we get closer to election day. The 8 year vs 4 year Presidential Election cycle always wreaks the most havoc on financial markets. A potential female President will likely create as much chaos as first black president did back in 2007 and 2008.

    I’m reasonably sure George Bush was white. Though there was a half-black guy that took the office in 2009, roughly 2 years after the chaos started.

    Senior moment?

  16. 16
    boater says:

    RE: Blurtman @ 11
    Wall Street has been fast and loose since its inception. It’s a reasonably regulated market. The last crash had a lot fewer innocent people than people like to admit. It did have at its core far to few people looking at some of the underlying theory especially the assumption that the whole US real estate market couldn’t collapse at once since it never had before. That and Greenspan’s unwavering belief in laissez faire market regulation meant when he was given warning he ignored it.

  17. 17

    By boater @ 9:

    By Kary L. Krismer @ 4:

    RE: boater @ 3 – Except if interest rates do rise, the last thing you would want to own would be a long term debt instrument. The value would plummet.

    And yet people buy 30 year government bonds or they did. There is no investment with zero risk. Even cash has risk.

    I would agree with that, but the risk of buying a long term debt instrument in a historic low interest rate environment is huge. Of course, that only matters if you want to sell the instrument–the dollars will still be the same when paid. And you can minimize that risk by buying instruments of different maturities, so that you lessen the chance that you have to sell prematurely, taking a huge discount.

    One advantage the home mortgage instruments might have over 30 year government debt is they effectively self-ladder–people pay them off early all the time. Although that effect would likely lessen if interest rates went up greatly, and it would lessen even more if they eliminated the GARN Act.

  18. 18
  19. 19
    Blurtman says:

    RE: boater @ 16 – Perhaps, but look at how the attitudes of Americans changed after the Great Depression. Information (and disinformation) transmission has logarithmically increased since then.

  20. 20

    RE: Mike @ 15

    No, not a senior moment. The chaos ensues long before election day, during the campaign, and then often though not always reverses immediately after the election. Look at the DOW during that period toward the lowest point of the decline and then the rise. As soon as Hilary announces, which is expected in January 2015, the game begins.

    The normal trend is to provoke a party shift by the opposite party throwing the Country under the bus. That is when you have two fairly equal candidates. When one is black or a woman, or whatever may cause a greater determination, the impact is heightened. The Trading View link in my previous comment gives you a good tracking graph.

  21. 21
    Shoeguy says:

    Mortgage applications are in the toilet even though interest rates are at 4%. They’re still at early 1990’s levels! That can’t be good.

    With such a low rate, shouldn’t demand be through the roof right now?

  22. 22

    RE: Shoeguy @ 21 – Not necessarily. Rates have been low a long time, and you don’t refinance just because the rate is slightly lower than what you have. Not only are their loan costs to consider, but also the fact that you start your 30 years over again.

  23. 23
    Dave says:

    RE: Kary @17.

    Thanks, I had forgotten about the Garn-St. Germain Law that bars the mortgage lender from calling the loan due except under unique circumstance. This does place the 30yr mortgage far above the 30yr bond in portfolio terms. More fuel for the hypothesis that rates may not rise very quickly. As far as property values are concerned I agree with Erik@10 that the local ridiculously low inventory levels will keep prices in line or rising for quite some time.

    Oh and there’s always the Arcadia factor.
    https://www.youtube.com/watch?v=aoeUxzUR4ec

  24. 24
    wreckingbull says:

    By ARDELLd @ 11:

    RE: Craig Blackmon @ 8 – actually that forecasting comes from my days as a stock and bond portfolio manager prior to real estate. Or do you think that’s inappropriate too? Just buy stock whenever with no regard for market expectations? What’s with the desire for everyone to act stupid? Except lawyers of course.

    You may not be aware, but many studies have shown passive investing in low cost, broad funds (i.e. the three fund model) outperforms active investing, in the long run. Picking based on market expectations is a fool’s errand.

  25. 25

    RE: wreckingbull @ 24

    Given that fund style was limited only to my field of trust investing due to The Glass Steagall Act back in the day, yes, I am aware. However I do not believe in bond funds except for those who cannot afford a staggered portfolio of individual bonds.

    Full shifts to capitalize on Presidential Election Cycle Theory or any other theory I agree is unwarranted. However Stock vs Bond vs Cash position is clearly re-balanced based on market expectations in the near term vs long term. It is a misnomer to think that being in managed funds relieves you of the personal duty to manage your overall portfolio. If you put 60% in stock and 35% in bonds and 5% in cash, you still have to choose when to re-balance as that stock position grows to 80/20 vs 60/40 or when to reduce cash position to 1% or greater than 5%.

    NOW is the time to expect future decline and take some of those gains and move it to cash. Bond position should not be increased with those gains…only the cash position. This tells us the expectation is for higher rates in the near term of 18 mos to 24 mos. The market sometimes performs to expectation and sometimes above or below expectation. But that does not mean, Craig, that we should consequently have NO expectation. Whether or not the market is up or down is not the issue. Whether it exceeds or under-performs expectation is what makes it a “market” vs a product for sale as to housing “market”.

  26. 26

    RE: Ardell DellaLoggia @ 13 – Two consecutive responses? I must have struck a nerve! ;-)

    Since you’re not joking, I won’t any further either. In all seriousness: You’re absolutely right, of course, part of a professional’s job is to assist a client in planning for future events. Which necessitates having an informed opinion about the future. So RE brokers, investment advisers, accountants, all of them are expected to and should provide their clients with their insight on the future.

    I think Tim’s point – and it is a solid one – is that RE brokers in particular seem the most eager to fire off future predictions, without any real accountability for whether or not those predictions come to pass. I believe this stems largely from the reality that RE brokers have such a strong “sales” tradition and culture. And RE broker, more so than a stock broker and obviously much more than an accountant, have a large personal financial interest in getting the client to act, i.e. purchase or sell a home. And that decision, in turn, is a whole lot easier if the future looks rosy.

    So no, of course I don’t think everyone should be stupid. C’mon, Ardell, we’ve crossed swords for 8 years now, give me a little credit. You and I both are driven by the consumer’s best interest.

    Finally, rest assured that when I post under Quill Realty (per the link in my name) I am posting as real estate broker and not as an attorney. I act as one or the other in any instance, never as both.

  27. 27
    Erik says:

    RE: Craig Blackmon @ 26
    You provoked Ardell and she delivered. Then you folded. I feel like you owe Ardell and readers a little more. After all, you started it.

  28. 28

    :-)!! Never too old to learn…

  29. 29
    Erik says:

    RE: Craig Blackmon @ 28
    I was hoping you’d try and fight back like Kary does. This was a good conversation. I learned something by reading these comments. I haven’t seen a good debate on here in a longtime and I was really wanting to see a little more from you. It’s the internet, you don’t have to be professional… Fight back!

  30. 30
    Saffy The Pook says:

    Actually, Eric, true professionals act professionally everywhere.

  31. 31
    Saffy The Pook says:

    Actually, Erik, true professionals act professionally everywhere.

  32. 32
    Deerhawke says:

    This has been an interesting thread, but a little too theoretical. Let’s talk actual numbers and say why.

    Currently mortgage rates are just under 4%. This is nothing short of astounding for those of us who lived through the 1980’s and double digit mortgage rates. I distinctly remember saying of my parents’ 4.5% rate written in 1958 “Ha! We’ll never see that again in our lifetime.” Wrong!

    I think this Fed is seeing really positive news in the jobs and wage numbers that came out last week. I think this trend will continue (with some ups and downs) next year. But this Fed is more concerned about employment growth than inflation (especially with energy prices down) and won’t be too quick about taking the punch bowl away from this party.

    The Fed will raise rates but not by that much– probably a quarter of a point. Later in the year, if things are really moving strongly, they will tack on another quarter of a point. Wall Street has already factored this in but will still over-react a bit and drive up rates beyond the quarter point.

    By spring, we will be back to 4.5% and maybe by the end of the year, we will be at 4.875%. Realistically this is the same range as the late 1950’s and early 1960’s. If you can find something that is a good value to buy, you sure shouldn’t be dissuaded by the interest rate.

    In fact, a little bump in the interest rate may very well make buyers feel that they have to act now before rates go higher. I think that is going to make buyers even more motivated. In the face of continuing inventory constraints, that is going to be reflected in substantially higher prices in 2015.

  33. 33
    Erik says:

    RE: Saffy The Pook @ 31
    Thank you for that definition Big Pook. I am looking for some long needed excitement on this website. I want to see 2 real estate bulls go head to head.

  34. 34
    Blurtman says:

    The concept of the issuance of a mortgage is obviously absurd, moreso than ever. Banks are lending money that they do not have, and that they expect the borrower to repay with the very real fruits of their labor. The same banks commit securities fraud for which they will not be prosecuted, and when such fraud gets them in trouble, are bailed out by departments of the US government headed up by former employees of the very same banks. Of course, this ridiculous system does employ parasitic salespeople, useless bureaucrats, and others who would be first on the B-Ark spaceship along with other Golgafrinchan rejects. But let’s pretend the system is legitimate, as money depends on it.

  35. 35

    RE: Blurtman @ 34
    Whaddya got against the Golgafrinchans?
    I’m not sure when this all got started, but how many Secretaries of the Treasury or Fed Chairmen have been former CEOs of very large investment firms? Like all of them. Is it because , after a lifetime of making huge amounts of money from sucking blood, they now just want to give back?

  36. 36
    Dave says:

    Final point since I’m a believer in what Lance Roberts calls the “Japan Syndrome.”

    http://www.zerohedge.com/news/2014-12-09/interest-rates-have-nowhere-go-right

    My former career involved working with this long term data so pardon my excess postage ;)

  37. 37
    Mike says:

    By Ardell DellaLoggia @ 20:

    RE: Mike @ 15

    No, not a senior moment. The chaos ensues long before election day, during the campaign, and then often though not always reverses immediately after the election. Look at the DOW during that period toward the lowest point of the decline and then the rise. As soon as Hilary announces, which is expected in January 2015, the game begins.

    The normal trend is to provoke a party shift by the opposite party throwing the Country under the bus. That is when you have two fairly equal candidates. When one is black or a woman, or whatever may cause a greater determination, the impact is heightened. The Trading View link in my previous comment gives you a good tracking graph.

    It’s quite a reach to say that the house price declines, which for the US as a whole started in 2006, and which precipitated the financial crisis were in any way tied to the outcome of the 2008 election. With that broad of a brush, nearly any event is likely to overlap an election cycle. However if you’re just talking about stock market corrections, what does that have to do with the housing market?

  38. 38
    Deerhawke says:

    By Dave @ 36:

    I’m a believer in what Lance Roberts calls the “Japan Syndrome.”
    http://www.zerohedge.com/news/2014-12-09/interest-rates-have-nowhere-go-right

    This is a really interesting posting that takes the tack that in fact interest rates may just stay the same because the real threat remains not inflation but deflation.

    Right on cue, this morning, I heard a commentator on NPR say that with rapidly falling oil and gas prices, there was no way that the Fed would be cutting interest rates this next year. That is a real break from the received wisdom of the past several months.

  39. 39
    ChrisM says:

    How could the Fed raise interest rates? The impact on US govt interest payments means any significant increase in interest rates is not possible.

    Run the numbers at http://treasurydirect.gov/govt/reports/ir/ir_expense.htm

    An interesting story on Japan at http://bigstory.ap.org/article/74075fe6647240bba3dbaabf7b9185e9/scarecrows-outnumber-people-dying-japan-town
    I thought about how much money Abe has thrown away defending the Yen. Instead, he could have given the money to the Japanese people to offset any income lost by switching to a mandated 32 hour work week. In my little thought experiment, the current 60+ hour work week could be almost halved. I imagine this would dramatically increase the quality of life, and so foster an environment where 2+ children would be possible.

    Regarding predicting interest rates, I’m reminded of this ancient joke:
    http://www.the-jokes.com/joke-621.html

    Einstein dies and goes to heaven only to be informed that his room is not yet ready.

    “I hope you will not mind waiting in a dormitory. We are very sorry, but it’s the best we can do and you will have to share the room with others”, he is told by the doorman.

    Einstein says that this is no problem at all and that there is no need to make such a great fuss. So the doorman leads him to the dorm. They enter and Albert is introduced to all of the present inhabitants.

    “See, Here is your first room mate. He has an IQ of 180!”

    “Why that’s wonderful!” Says Albert. “We can discuss mathematics!”

    “And here is your second room mate. His IQ is 150!”

    “Why that’s wonderful!” Says Albert. “We can discuss physics!”

    “And here is your third room mate. His IQ is 100!”

    “That’s Wonderful! We can discuss the latest plays at the theater!” Just then another man moves out to capture Albert’s hand and shake it. “I’m your last room mate and I’m sorry, but my IQ is only 80.”

    Albert smiles back at him and says, “So, where do you think interest rates are headed?”

  40. 40

    By Deerhawke @ 38:

    Right on cue, this morning, I heard a commentator on NPR say that with rapidly falling oil and gas prices, there was no way that the Fed would be cutting interest rates this next year. That is a real break from the received wisdom of the past several months.

    The only problem with that analysis is that the falling prices are based on increased supply, and maybe not at all on reduced demand. As I said last week, California used more gasoline than the prior year for the first time in a very long time.

    Also, inflation (or deflation) is never ever ever about the change in price of one commodity.

  41. 41

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