Outlook 2018
2018 Dynamics •
Possible Stock Market pullback – how will this affect housing and rates?
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The new outlook: Fed is indicating three rate hikes and is scheduled to further unwind balance sheet – what happens to mortgage rates?
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Can Housing continue its impressive run and how will Tax Reform be a drag?
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Rates set to rise in year ahead – How much and what will the impact be?
Stocks • Stocks appear toppy and a bit vulnerable. We are entering the new year with extremely high investor optimism. This is often a dangerous sign. • Most expensive Stock market on a price to sales ratio ever
Stocks •
Stocks appear toppy and a bit vulnerable. We are entering the new year with extremely high investor optimism. This is often a dangerous sign.
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Most expensive Stock market on a price to sales ratio ever
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3rd longest stretch of expansion in history
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Flattening of the Yield Curve
Stocks •
Stocks appear toppy and a bit vulnerable. We are entering the new year with extremely high investor optimism. This is often a dangerous sign.
•
Most expensive Stock market on a price to sales ratio ever
•
3rd longest stretch of expansion in history
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Flattening of the Yield Curve
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Prediction: It’s likely there will be a significant Stock market pullback during 2018 after such a big 2017
Changing of the Guard •
The old Fed is out, Jerome Powell is new Fed Chair
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Vice Chair, Stanley Fischer, and NY Fed President, William Dudley, resign
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Trump may need to appoint up to 4 Fed Governors in 2018
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More Hawkish Fed – The two dissenters, Super Dove Neel Kashkari and Perma-Dove Charles Evans are out. Hawk, Loretta Mester, is in.
Changing of the Guard 2018 Voting Members: – – – – – – – – – – – –
Board of Governors: Chair: Jerome Powell Board of Governors: Vice Chair: ? Board of Governors: Lael Brainard Board of Governors: Randal Quarles Board of Governors: ? Board of Governors: ? Board of Governors: ? New York: William Dudley (Resigns mid-2018) Cleveland: Loretta Mester Richmond: Mark Mullinix (Interim, Lacker resigned) Atlanta: Raphael Bostic San Francisco: John Williams.
The Fed • Fed Members forecasting three rate hikes
The Fed • Inflation should remain tame • Stock correction could limit number of hikes • Fed continues ramp up of Quantitative tightening (Fed reinvesting less)
Approx. Monthly MBS Reinvestment Purchases
Reduction Before Reduction Plan
0
25 Billion
October
4 Billion
21 Billion
January
8 Billion
17 Billion
April
12 Billion
13 Billion
July
16 Billion
9 Billion
October
20 Billion
5 Billion
The Fed’s Balance Sheet Yearly Reduction Before Reduction Plan 2018
MBS Balance Sheet
0
1.8 Trillion
120 Billion
1.68 Trillion
(12B Q1, 25B Q2, 36B Q4, 48B Q4) 2019
240 Billion
1.44 Trillion
2020
240 Billion
1.2 Trillion
2021
240 Billion
960 Billion
2022
240 Billion
720 Billion
2023
240 Billion
480 Billion
2024
240 Billion
240 Billion
2025
240 Billion
0
The Fed Prediction: 1-2 hikes because Stock market pullback
Rates •
Inflation is main driver of rates, and inflation should remain tame – Rates will move higher, but not too bad
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Fed QT ramp up = Fed reinvesting less
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Stock pullback could help rates
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Prediction: The 10-year Treasury Note Yield will trade between 2.18% and 2.64% for most of the year.
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Mortgage Rates .375% higher on average
Housing • • • • •
Low inventory Rents rising at 4% per year Rates modestly higher won’t derail the housing market Demand remains strong Tax Implications on Real Estate – 2/5 exclusion remains – Double standard deduction = just 4% of filers take Mortgage Deduction
Prediction: 4.5% - 5.5% Appreciation
Albert Einstein “Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it.� Just a 4.5% annual rate of appreciation on a $300,000 home would result in a value of $466,000, or $166,000 gain in 10 years.
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