Teton Realty Blog

Teton Region Real Estate Market Stats, Articles & News

Election Volatility (2024 Edition)

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Back in 2016, I wrote an article about what the election might mean for your real estate. After reviewing some interesting articles and data points, my conclusion was that real estate is much more impacted by market cycles than it is by election cycles. That being said, I did note some short-term volatility leading up to, and shortly after that election. This was true at that time, and here we are once again. In fact, the article was published at about this same time in 2016.

Having been through multiple election cycles over my years in real estate, I know this to be the case, but I was reminded of my 2016 article and talking points after receiving a market trends article written by Jordan Teicher for Zillow. As Brokers, we receive “market insider” information from the real estate giant. Despite my mixed feelings about Zillow, I still participate in advertising and follow their data points, trends and articles.

Jordan’s article dissected many common claims about reports of market volatility during election seasons and the claim that people are reluctant to move during these times. He was able to crunch some of the numbers using data from the US Census Bureau which confirmed a typical November slowdown following five of the last six presidential election years. The average month over month change during those six election cycles was -3.7% with only 2012 capturing a positive net change in the November following that election.

He went on to note that comparatively, in years without presidential elections, home sales increased an average of 0.6% between October and November. Over the past 20 years, he notes that transactions actually increased by an average of more than double all other years in December following presidential elections, “suggesting there may have been pent-up demand returning from those who were waiting to see how the election would play out.”

While none of this data may be surprising (it certainly is not to me) it does confirm what we think will continue to happen, a stabilizing market and likely an increase in sales as we move into the Winter peak season here in Teton Valley. As mentioned back in 2016, I believe the market will continue to be shaped by market supply and demand (and interest rates). 2020 threw us for a loop with diminishing supply and overwhelming demand, now with National trends pointing towards continued lack of supply with respect to housing starts. This broad dilemma and the theories behind it are further reinforced by micro factors in our own market including building costs and development challenges associated with growing pains and the continued challenges associated with a new Zoning and Land Development Code throughout Teton County.

Interested in a few associated articles? Don’t forget to check out the following links:

Driving Factors behind Interest Rates (2022)

Teton County Land Development Code

Sources:
– https://www.zillow.com/agent-resources/blog/presidential-election-housing-market/
– U.S. Census Bureau

How are Mortgage Interest Rates Determined?

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If you read the same news articles I do, they are filled with terms like basis point increases by the Fed (the Federal Reserve), the MBS market, inflation, treasury bond yields, blah, blah, blah. What does it all mean, and how does it affect mortgage interest rates?

Disclaimer: I didn’t even get through college, like hardly. Take this with a grain of salt, but I had to try to make sense of this in my own mind, and wanted to share that journey with you.

Micro
In the loan world, interest rates are affected by a number of internal factors. These include whether the loan is a government loan (ie FHA, VA or USDA), if it’s a primary home mortgage (people tend to default less with respect to their primary home), the equity or down payment amount, credit scores and property types.

Macro
From 30,000 feet, there’s a lot more going on. This is where you’re going to hear about “the Fed”, Treasury Bonds and the MBS Market, aka the Mortgage Backed Securities market.

The Fed
The Federal Reserve does not set mortgage interest rates. However, and despite a number of direct factors that determine mortgage interest rates, there is a strong correlation between the two when comparing the Federal Reserve’s rates with mortgage interest rates. The Federal Reserve meets about every 6 weeks to look at economic factors, primarily making sure that prices are stable and inflation is low, as well as the strength of the jobs market. Their primary goal when adjusting rates is to control inflation. The Fed’s rate was lowered to almost zero at the beginning of the 2020 pandemic to stimulate the economy. Now, the Fed is reacting (as opposed to being proactive, another discussion) by raising the rate to make borrowing more expensive and therefore cooling down the economy by reducing spending and thus inflation. Regardless, the Fed’s rate will directly affect other consumer loans like auto loans and credit cards.

Treasury Bond Rates
Government bonds are usually considered very safe investments issued by and backed by the National government to support government spending. Mortgage rates are more closely tied to Treasury Bond rates (T-Bonds if ya want to sound cool), usually issued with a maturity date between 10 and 30 years. They pay interest to the investor until the bond matures. When bond interest rates are high, the bond is considered less valuable in the secondary market as it is paying out more in interest. This causes mortgage lenders to lower rates and vice versa. A bond’s yield refers to the return on investment for the purchaser of the bond.

(Unrelated), for those of you that want to go down this rabbit hole, here’s a quote from Investopedia on yield curves, something we talk about when predicting recessions;
A yield curve inverts when long-term interest rates drop below short-term rates, indicating that investors are moving money away from short-term bonds and into long-term ones. This suggests that the market as a whole is becoming more pessimistic about the economic prospects for the near future.

Mortgage-Backed Securities (MBS)
Mortgage-backed securities are kind of like a bond that is made up of a bundle of home loans. These pools of loans can be millions or even billions of dollars worth of home loans. Essentially, Local Bank sells your loan to>Larger Bank for the original cost of the loan, (so they can get their capital back to make more loans) and they usually make their profit with a small loan fee paid by the borrower. Larger Bank sells your loan and many others to>A Corporation (or more likely Fannie Mae or Freddie Mac) for a small portion of the interest paid by you, and the other loans. They then sell shares to shareholders for a small portion of the interest. The banks get their Capital back to make new loans and everyone makes money, assuming none of the loans are paid off and none default, but that’s built into the overall investment analysis for the shareholders. Anyway… As the demand for mortgage bonds increase, Fannie and Freddie can also demand a higher price with a lower yield to shareholders. As the demand decreases, they have to reduce the price and offer a larger yield. More simply, when MBS prices drop, lenders rise their interest rates to compensate. Inversely, the more MBSs investors buy, the lower the rates drop. Here again, the MBS market is largely influenced by The Fed raising rates.

Conclusion
So… How are mortgage interest rates determined in Teton Valley? (<— gotta add some SEO here) My best (and totally crude and heavily opinionated conclusion) is that they are influenced by the supply and demand of bonds like Treasury Bonds and Mortgage Backed Securities, which are in-turn influenced by the Federal Reserve and it’s rate, intended to keep the inflation rate in check, the housing market in check, and the jobs market in the best position possible.

Helpful Resources:
The Fed:
Here’s a great video explaining this process in more detail.
https://youtu.be/AkMsMDk_brU
MBS
Here’s the video from Concerning Reality that does a great job explaining mortgage-backed securities: https://youtu.be/feDw649zekw
And another from First Integrity Mortgage: https://youtu.be/JRvSDV-C33w
Treasury Bonds
Here’s another video, this one does a good job explaining Treasury Bonds.
https://youtu.be/P2tpRnDO_U0

Financing Options, Let’s Get Creative!

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Usual disclaimer: I am not a lender. Always verify information and available programs with your lender. I recently wrote an article similar to this one, but I’m going to try to use this article just to get down to brass tacks on financing options and ways to get creative to get the best rate, and to lock that rate in the event you are purchasing new construction and are in a holding pattern.

Rate Locks & Extended Rate Locks

Many people don’t realize that you can lock rates for an extended period of time. This is an excellent tool when purchasing real estate that is under construction. Lenders usually carry products to lock rates for 6, 9 or even 12 months. While these products may come with a slightly higher rate, they often have options to “float down” the rate in the event rates begin to decrease. This is the best of both worlds.

Temporary Buy Downs

Temporary buy Downs can be a great way to secure a loan for someone that might be pushing their limits in terms of a debt to income ratio, and need to get their payment a little lower for the first couple of years. This buy down can sometimes be negotiated with the seller to be paid at closing, and provides the buyer with a payment that is a little more manageable for the first two or three years.

Permanent Buy Downs

Nothing new with buying your interest rate down up front, but it is important to look at the payback depending on how long you intend to hold the loan. Typically a buying “point” (1% of the purchase price amount) will get you a 1/8% to 1/4% lower rate, but it’s always great to get a quote because sometimes a point can get you an even greater discount.

Adjustable Rate Mortgages An adjustable rate mortgage can be a scary thought, basically it’s fixed for a certain amount of time and can adjust up after the initial fixed rate period expires. However, below is an example of a comparison between a 10-1 adjustable rate mortgage and a 30-Yr fixed mortgage, roughly it today’s rates. Considering the average homeowner holds their mortgage or loan far less than 10 years, there’s quite a bit of protection as well as opportunity to refinance that loan during a decade long time span.

Interest Rates, Ideas for Buyers and Market Impacts

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It’s no secret, interest rates are definitely on the rise, and likely will continue to do so. It’s interesting hearing about all of the potential impacts. A lender friend of mine provided some good insight recently. Interest rates are still very low from a historical standpoint, and there are still some great ways to minimize the impacts of rising rates. These include mortgage points that come with a variety of options and the ability to have these points negotiated into a transaction or even paid by the seller. A mortgage point is effectively a way to buy down the interest rate up front. This can be a great tool to help buyers keep up with today’s real estate prices, which don’t seem to be going down despite interest rates creeping up. Buying mortgage points can also work well for buyers that intend to keep their loans long-term. Typically a “point” is equivalent to 1% of the purchase price and that will usually reduce the interest rate anywhere from 1/8 to 3/8 of a percent. Other options include a 2-1 (or even a 3-2-1) buy down which reduces the first year by 2 points in the second year by one point, which is where the highest amount of interest is paid on a loan while the principal of balance is still high.

Obviously interest increases are coming as a way to combat inflation, and it’s probably the lesser of two evils. Interestingly, supply chain issues, high building costs and other factors on the supply side are keeping new inventory at bay. Whereas real estate is primarily supply and demand based, this has created an interesting dynamic for both buyers and sellers. Personally, I do believe that the cumulative total of these issues will have an impact on the market, but without the increase of supply, I’m interested to see how much (if any, I should add).

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