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Technology and Tax Reform

Greg McBride

Greg McBride is the SVP and Chief Financial Analyst for Bankrate.com, with over two decades' worth of experience in personal finance. A regular staple the cable news scene, McBride regularly provides insights on the financial landscape to networks such as CNN, CNBC, and Fox Business Network. He is also Treasurer for the Board of Directors of ClearPoint Credit Counseling Solutions, an Atlanta-based nonprofit credit counseling agency.

DS News recently spoke to McBride about the state of the mortgage and housing industry, the impacts of tax reform, and which emerging technologies have the chance to reshape the industry.

You’ve predicted that HELOC borrowers might see an increase of around 75 basis points during 2018. What sort of factors went into that prediction?

That is a reflection of the baseline assumption of three rate hikes from the Federal Reserve. The way HELOCs work is that the majority of them are pegged to the prime rate. And so any rate hike by the Federal Reserve is effectively passed directly through to HELOC borrowers. Usually in one to two statement cycles. So, with three rate hikes ... I'm forecasting three rate hikes from the Fed this year, that's going to translate into to a 75 basis point increase. Now, the other thing to keep in mind is, timing may come into play here, in the sense that there was a rate hike in mid-December. So, a lot of borrowers, when they get the January or February statement, they're going to see their rate going up a quarter percentage point by virtue of that December rate hike. So, depending on the timing, you might see your rate at the end of the year being 75 basis points higher, or it could be 100 basis points higher. Depending upon timing of when your lender adjusted for the December 2017 rate hike, and when in the calendar the rate hikes for 2018 occur.

Forecasts range from 0 to 5. There does seem to be a clustering around the three mark. But nonetheless, there are a lot of factors that could change that. I think the wild card, at this point, is inflation. Inflation could prompt them to be more aggressive, or it could give them the latitude to sit back and be less aggressive. Global developments, the performance of financial markets, the pathway the economy takes. All of those are relevant variables to when and how much the Federal Reserve moves on interest rates.

What are some of the bigger trends and challenges that you see on the horizon for the mortgage industry in 2018? Is there anything that really stands out, or anything ... even the sort of lessons that have carried over from 2017?

Well, I wouldn't put this as a huge challenge, just that I think it's a reflection of the reality, is that if mortgage rates trend higher during the year, that's going to put more of a damper on refinancing activity. And require lenders to have more of a focus on homebuying activity. And what has kind of been hamstringing the housing market is the lack of inventory of available homes for sale. You can't buy it if it's not for sale. So there are a lot more people that want to buy homes than are actually buying them. And that's nothing new, by the way. That is a continuation of what we saw in 2017, and even in 2016. But if you intersect that with rates going up by any measure, it further takes away the refinancing activity.

What do you foresee happening with that sort of interplay between buying and renting, during the next year?

I think occupancy rates will still be very high. For landlords, I think the demand for rentals will still be very strong, even if they're not in a position, necessarily, to raise rents. In some markets, I think there's likely to be price pressure that may limit the ability to raise rents. Whereas in other markets, it can continue to be really strong and be supportive of raising rents. But regardless of the local market dynamics regarding price, I think there's a fair chance that occupancy is going to be strong enough that it's a positive year for landlords.

Do you see the potential for local housing bubbles in certain markets in 2018?

There are certain markets where values are very stretched, and prices are just completely divorced from the pocketbook realities of what people can afford to pay. And so that's where I think the risk lies. On the national basis, no, the bubble is not in real estate. It may very well be in bitcoin, but it is not in real estate.

What are the emerging technologies you think will have a major impact on the housing and mortgage industry in 2018 and beyond?

Well, I think the future is blockchain. That's what is going to have a future, and will have a broad impact on the financial world in years to come and again, I don't know that that necessarily reaches a tipping point in 2018. I think that the water's going to continue to flow downhill, with regard to blockchain becoming more relevant, going forward. But as for specific cryptocurrencies [like bitcoin], I'm extremely skeptical of their viability and particular of the value that speculators have placed on it.

Do you think blockchain will mainly be useful just as far as easing communication and paperwork issues? Or do you see some other factor?

I think it kind of cuts down on the paperwork bureaucracy, over time, I think it cuts down on the paperwork intensiveness of mortgage transactions. And just financial transactions in general. Ultimately, it's something that reduces the cost of transactions. But again, I think that's sort of a continual evolution. It's not something that necessarily is on the cusp of a tipping point.

What do you foresee as being the biggest impacts as that goes forward, on the housing industry and the servicing industry?

You're certainly going to see a dampening of demand for home equity borrowing. And people just may increasingly resort to cash-out refinancing, for example, to tap equity. People will, to the extent that people may have been inclined to use home equity for big ticket purchases like automobiles, that will certainly be much less the case. Particularly with auto loan rates as low as they are. I think a couple of the limitations that have a particularly hard regional impact are limitations on mortgage interest deductibility, the reduction from $1,000,000 to $750,000. I think that disincentivizes somebody who's got a mortgage that's more than $750,000 from relocating.

So, I think there's a tendency that that could dilute people moving, within those high cost markets. Because they don't want to lose the bigger tax deduction. Unless they're trading down. I mean, they may do that. But if they have a $900,000 mortgage, and they're moving up to a $2,000,000 house, I think the tax deductibility may disincentivize that to some extent.

Also, the limitations on the deductibility of state and local taxes. I think that's something that could also have an impact on demand in high cost markets. Less incentive to move into the market, less incentive to move within the market. And I think it certainly does not provide any support for current price levels.

About Author: David Wharton

David Wharton, Online Editor at the Five Star Institute, is a graduate of the University of Texas at Arlington, where he received his B.A. in English and minored in Journalism. Wharton has over 15 years of experience in journalism and previously worked at Thomson Reuters, a multinational mass media and information firm, as Associate Content Editor, focusing on producing media content related to tax and accounting principles and government rules and regulations for accounting professionals. Wharton has an extensive and diversified portfolio of freelance material, with published contributions in both online and print media publications. Wharton and his family currently reside in Arlington, Texas. He can be reached at David.Wharton@theMReport.com.

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