Bond yields end week almost the same as last Friday – The 10-year Treasury bond closed the week at 2.35%, down from 2.38% last week. The 30-year treasury yield ended the week at 2.68%, downfrom 2.77% last week
Mortgage Rates slightly higher – The December 14, 2017 Freddie Mac Primary Mortgage Survey reported that the 30-year fixed mortgage rate average was 3.93%, unchanged from 3.94% last week. The 15-year fixed was 3.36%, unchanged from 3.36% last week. The 5-year ARM was 3.36%, unchanged from last week’s 3.35%.
Tax reform clears another hurdle as the Senate and House reconcile their bills and agree on a compromise bill – There still needs a final vote in the Senate and House, followed by a signature by President Trump, but both chambers announced Friday that they had the votes and would vote next week. The final bill has a reduction in the corporate tax rate from 35% to 21%. It also reduces all individual tax bracket rates with the top rate capping out at 37%, a 2.7% reduction. It doubles the exempt amount for estate tax and it lowers the amount of AMT (alternative minimum tax). The standard deduction for people that don’t itemize has been almost doubled to $12,000 for individuals, and $24,000 for married couples. To pay for the tax cuts many deductions have been cut back or eliminated. As it relates to real estate some are: a reduction in the mortgage interest deduction from the interest paid on up to $1,100,000 in mortgage loan amount to the interest paid on up to a $750,000 loan. (This applies to new loans. An existing loan up to $1,000,000 is grandfathered in). The deduction on state and local tax paid, which includes property tax will be capped at $10,000 a year. This has been unlimited since congress approved an income tax in 1909. Currently the ability to get a $250,000 per individual, or $500,000 per married couple tax free gain forgiveness on a primary residence sale requires that you live in the home for 2 out of the last 5 years. This is proposed to go to 5 years out of 8 years. Realtor organizations are still trying to get this change eliminated before a final vote. Unfortunately, many in high tax rate states like California will actually pay more in federal income tax according to experts, because of the $10,000 cap on the state and local tax deduction.
Federal Reserve raises overnight rates – The Fed announced that it has raised their key interest rates for a third time this year, citing that a healthy economy called for another rate increase. The Fed dropped rates quickly beginning in 2007 to try to stimulate the economy before and during the Great Recession. By 2009 they had dropped the rate so many times it got to 0% for the first time in the history of the Fed. It remained at 0% until 2015 when the economy had picked up and it was raised 1/4%. It was raised 1/4% two more times in 2016, and three more times this year as the economy has rebounded. The Federal Funds and Discount Rate now stand at 1.5%, still a historic low. The 10-year and 30-year treasury bond yield and the 30-year fixed rate mortgage interest rate actually dropped after the announcement, as raising short term rates lowers the risk of inflation, which affects long term rates.