VA Loan Limit Increases

The Veterans Administration has announced that its loan limits for 2018 will follow those recently published by the Federal Housing Finance Agency for conforming loans. The VA uses FHFA's limits to determine the amount a qualified Veteran with full entitlement may be able to borrow without making a down payment. 

For 2018, the maximum conforming loan limit established by the FHFA for mortgages acquired by Fannie Mae and Freddie Mac for one-unit properties will be $453,100 for most of the United States, an increase from the limit of $424,100 that was in effect for 2017.

For high-cost areas, the new ceiling loan limit for one-unit properties will be $679,650, but loan limits may be higher in some specific locations in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. 

VA loans closing on or after January 2, 2018 will be eligible for these higher loan amounts. 

The material provided here is intended as educational and informational only and for distribution to real estate or financial professionals.This material is not intended for distribution to consumers. 8z Mortgage is not endorsed by, nor acting on behalf of or at the direction of the U.S. Department of Housing and Urban Development, Federal Housing Administration, U.S. Department of Agriculture, Veterans Administration or the Federal Government. 


A two-month period of market calm will be at risk after the Fed’s meeting next Wednesday, and the tea leaves are forming an unusual pattern.

Wait a minute! How can you say “calm” when the stock market and Bitcoin have mad-tulip disease!?!

Because stocks frequently do odd things, for good reason and none. And regulators would prefer that markets teach the e-Ponzi yahoos another painful lesson, rather than to intervene. The barometer of global risk is the US 10-year T-note, and it has traded within a range 2.40% to 2.30% since the first of October. Even the crickets are asleep.

The bond market is home to the world’s anxious, depressed, and worry-warts. Everyone in it believes that a reliable sign of danger ahead is snoring crickets. In markets, overlong sound sleep has a sudden and unkind end.

And of course good news is the enemy of low bond and mortgage yields. Damned good news overnight: Theresa May, flayed by opponents and friends alike has cut a deal with the Euros which will let trade negotiations proceed. A favorite doom-scenario has been a Brexit implosion, and that’s off the table.

In more good news (this is painful), the US economy is just fine. GDP at 3.5% annualized growth is running nearly double the Fed’s speed limit. 228,000 net-new jobs in November, and despite hurricanes the average monthly gain in 2017 has been 174,000. New claims for unemployment insurance reached a 47-year low -- the US population then two-thirds of today. The twin ISM surveys of purchasing managers found sustained heat in November.

That’s the end of the list of things we can reasonably think that we understand.

If you’re outside the bond market, you may find pleasure in the following addendum, the things we don’t know, and confessions of the things about which we know less today than we used to think we did. Of course, bond-market people will find anxiety in anything.

In today’s report of the November job market, the unemployment rate is now 4.1%. But year-over-year growth in wages is stuck at 2.5%. A companion report of unit labor costs, a broad measure of compensation after an up-blip in the 2nd quarter fainted in the 3rd, again 2.8% annualized.

Back, say four years ago when unemployment was falling fast but wages declined to grow, the authorities could nod and say “These things happen.” The Fed assumed it would need to begin brisk rate hikes when unemployment fell to 6.5%. By two years ago, mainstream economists in and out of the Fed began professorial mumbling about analysis underway and possible causes of an anomaly. Now the honest ones admit that we do not have even a theoretical path to exploration of the impossible underway.

Robert Kaplan is the new president of the Dallas Fed, ex-Goldman (of course) and a ton of private-sector experience. When Kaplan has something to say, he is direct, and has a lovely sense for the obvious. He is listening to business managers, listening hard -- he says he consults with 30 CEOs each month. Everyone has a sense that technology is involved in the impossibilities unfolding, but Kaplan gave the NYT a specific: business operators feel that the effects of technology are intensifying, their “pricing power” deteriorating.

That’s the flat opposite of everything we thought we knew about wages and prices. No wonder business has not reacted to the tax bill -- it is irrelevant to what is taking place.

You’re the Fed... what are you going to do? One of Ben Bernanke’s gifts to us was clear thinking about a balance-of-risks approach. If the Fed proceeds with its quarter-point water torture, what’s the risk that it precipitates new deflation pressure or a recession or both? If it does not proceed, what’s the risk that labor scarcity at last produces a wage spiral?

If you guess wrong, which mistake is the more dangerous?

In the last decade global central banks to their astonishment demonstrated that they cannot create 2%-plus inflation in these circumstances (whatever we may one day understand these circumstances to have been). Previous to this last decade no one would have believed that money-printing on this scale could fail. Yet, the central banks did demonstrate that they could prevent a credit collapse from becoming a deflationary spiral.

Central banks do have a lot of experience with the counter-risk of wage-price spiral, and both theoretical and practical confidence that the only way to stop an inflationary spiral is to throw many millions of people out of work. This, the central banks have done many times and places.

On balance of risks, one risk I can meliorate with extraordinary but tested means and not a lot of pain. Just did that. The other risk I can fix only by inflicting fantastic pain and might end up by recreating risk #1. Therefore adopt policy to pre-empt the bigger risk of wage spiral.

Back to things we can know and measure. The Fed is not “tight” or even close to it. “Tight” refers to the availability of credit (from the old days of “disintermediation” as the intentional Fed cause of recessions). The upper end of the Fed’s cost of money (“Fed funds”) is 1.25% and will go on Wednesday to 1.50%. The Fed says it’s likely to be at 2.25% next Christmas, and 3.00% the one after that. Nothing in that progression will choke off the supply of credit, nor make credit painfully expensive. 

Boiled down farther, the Fed is in the process of raising the cost of money above the inflation rate (by next summer or fall). No one can know how far above the rate of inflation may become painful and slow the economy, but it’s not likely in 2018.

No insult intended to central banks, but it looks as though the global economy is less sensitive to them than to the nouveau brew of trade, technology, and price and wage suppression.

The US 10-year T-note, the narrow, post-October trading range clear. However, one possible signal: the ever-so-slight slope of increase within the range, bottoms ascending. Odds favor going out the top:


The 2-year T-note is the Fed’s telltale. You’ll hear a great deal of alleged alarm about a flattening yield curve, but this time is different. :-)


Fed funds history, back to the edge of the previously known universe:


Rates Improve Slightly on Weaker Economic Data

Mortgage interest rates improved slightly this past week as most economic data was weaker than expected.  Economic data weaker than expected included the October U.S. Trade Deficit, the November ISM Services Sector Index, November ADP Private Jobs, Q3 Productivity and Unit Labor Costs, November Average Hourly Earnings, October Wholesale Inventories, and the University of Michigan Consumer Sentiment Index.  Economic data stronger than expected included October Factory Orders, Jobless Claims, October Consumer Credit, November Non-Farm Payrolls and November Private Jobs.  Non-Farm Payrolls increased 228k on expectations that they would increase by 185k.  Private Jobs increased by 221k on expectations that they would increase by 183k.  Congress is still working on tax cuts.  Congress passed a temporary increase in the debt ceiling to avert a government shutdown that will expire on December 22nd.


The Dow Jones Industrial Average is currently at 24,287, down slightly on the week.  The crude oil spot price is currently at $57.66 per barrel, down slightly on the week.  The Dollar strengthened versus the Euro and Yen on the week.


Next week look toward Tuesday’s NFIB Small Business Optimism Index, and Producer Price Index (PPI), Wednesday’s Consumer Price Index (CPI) and FOMC Meeting Announcement, Thursday’s Jobless Claims, Retail Sales, Import and Export Prices, and Business Inventories, and Friday’s Empire State Manufacturing Survey and Industrial Production as potential market moving events.



The Republican tax bill is likely to pass, although we won’t know all that’s in it until it comes out of conference committee with the House.

But the tax bill is not the important part -- the Big Deal is how deep we are in a period of global economic change without precedent, but behaving as though old precedents still apply. That’s the important thread in the following.

Imminent passage of the bill goosed the stock market on Thursday and pushed up on long-term interest rates, but all of that is reversing this morning on Flynn’s plea and flipping to state’s evidence on Russia. In our whole history, only Nixon in 1968 after election but before taking office directly interfered with the foreign policy of a sitting president.

The tax bill is the worst single piece of legislation since... shoot, since Obamacare in 2010. There is no partisan monopoly on badly crafted law. One step further, this tax bill is easily the worst piece of domestic tax legislation since the modern era began with the income tax. Limiting criticism to “domestic” leaves room for the 1930 Smoot-Hawley tariff as worst-ever, period.

“Worst” defined as intentionally deceptive, anti-reform by complexity, opaque to taxpayers, wasteful by adding to national debt, and with little economic effect except a huge giveaway to large corporations. Here’s the deal: the primary intent of the bill is to cut corporate tax rates from 35% to 20%. Each percentage point is worth $10 billion per year, over ten years $100 billion, times fifteen percentage points the entire over-ten-years add to the deficit of $1.5 trillion is the corporate freebie. 

The rest of the bill is a con-man hustle, pretending there is a tax cut for anyone else. There are cuts for some people and situations, but for every one a countervailing increase. Except at the end of ten years, when the corporate cuts survive and all of the others will sunset. That poison-pill is designed so that if Republicans are tossed from office, Democrats will then either have to vote for tax increases or re-confirm the cuts. As-is, the personal tax cuts will be too small to notice and quickly overwhelmed by rising costs of health care, the bi-partisan flub. The provisions for pass-through entities are gibberish.

The court of politics will settle the tax bill’s partisan matters, and the higher court of economics will also issue a verdict. Try to separate the sleazy aspects of the bill from the underlying economic theory: we can reasonably believe that a faster economy raises most boats, although a faster economy derived from tax cuts will not generate replacement revenue. The question in this tax bill: will an immense cut for corporations produce a faster economy, new investment, increased productivity, higher wages, and at home instead of overseas?

Dropping US rates may make US investment preferable, but we have no way to know. Our competitors are adept. Not even the European Union, population 510 million has been able to stop the tax-competitiveness shenanigans of five million Irish. 

Will corporate tax cuts boost US wages? I was born at night, but not last night.
The one angle with theoretical merit: investment leading to productivity. Conceivably the corporate cuts will encourage more investments to earn more money because profits will be less-taxed. And the bill provides immediate expensing of capital investment, businesses no longer having to wait for the tax-sheltering of income by depreciation over time.

Investment linkage to productivity has been central to all Fed thinking. The non-inflationary speed limit of the economy is defined as population growth plus gains in productivity. Our population growth is slowing (may slow more if we refuse immigration, most of our growth), about 1% per year, and productivity has slowed as well, below 1%. That’s where the Fed gets its 2% current limit. Grow faster than that, and get inflation, not more “real” growth. Thus if we grow faster than the speed limit, the Fed will pull us over.

That thinking had observable merit in the days of heavy manufacturing. To enjoy productivity we had to build factories. Today, the most productive aspects of our economy involve groups of twenty-somethings in sparsely furnished offices, perhaps with a climbing wall and close to a Starbucks, capital investment limited to paying rent and salaries until revenue begins (all of the kids already had laptops).

We are also in a new era of inflation and wages. Both should be growing and are not and nobody knows for sure why not.

The Cleveland Fed this week posted a study of the long-term relationship between productivity and interest rates. Textbook theory holds that low productivity leads to low interest rates. The study says that since 1914 the opposite has been true, and in the modern segment since 1948 there is no relationship at all (“...The correlation... statistically indistinguishable from zero.”)

Interest rates are a near-perfect proxy also for inflation -- they never diverge for long. We must be careful with, if A is to B, then B is to C (Ambrose Bierce: “If one man can dig a post-hole in 60 seconds, then 60 men can dig a post-hole in one second”). However, there’s a growing chance that our thinking about investment, productivity, inflation, the speed limit, and the Fed’s neutral rate of interest (r*) is -- charitably -- obsolete. Thus, yet another moment to consider Richard Thaler’s 2017 Nobel Prize for Economics, whose work reveals that economies are not governed by rational expectations, but irrational ones.

Most likely, this tax bill will provide extended analytic and political entertainment but little economic effect except fatter bottom lines for big business.

Of all of the goofy things happening, the one this week worth keeping an eye on is Tillerson’s fate. He has been one of the real-world people insulating the outside world from the Trump era. Domestic effects can be upsetting, but not dangerous. If Tillerson is canned and replaced by Mike Pompeo (now safely at CIA), and Pompeo by senator Tom Cotton (R. Ark.), then the cautious and protective screen of Mattis-McMaster-Kelly will lose clout. A shift like that can have infinitely more impact on markets than this tax bill.

Chart: the 10-year US T-note in the last week. Cause and effect are clear in the reaction to Wednesday-Thursday elevated prospects for the tax bill, and today to Flynn’s plea:


The 10-year T-note one year back shows a great deal of trading near today’s levels, which tends to keep us here. Nobody knows whether Fed rate hikes to come will bulldoze long-term rates higher, or the if Fed’s cost of money alone will rise:


The 2-year T-note says the Fed will hike:


The Atlanta Fed’s GDP tracker is still hotter than all Fed forecasts, not needing a tax cut. However, if investment, productivity, rates, and inflation are not linked after all... oh, my.


Rates Increase Slightly on Strong Economic Data

Mortgage interest rates improved slightly this past week on strong economic data.  Economic data stronger than expected included Construction Spending, the ISM Manufacturing Index, Chicago PMI, Jobless Claims, the Pending Home Sales Index, GDP, Consumer Confidence, S&P Corelogic Case-Shiller Home Price Index and New Home Sales. Economic data weaker than expected included the PMI Manufacturing Index, the EIA Petroleum Status Report and the International Trade Deficit. Personal Income and Outlays came in right on track with slight increases to inflation making a rate ever more likely at this month’s FOMC meeting.


The Dow Jones Industrial Average is currently at 24,181, up over 800 points on the week.  The crude oil spot price is currently at $58.19 per barrel, up slightly on the week.  The Dollar strengthened versus the Euro and Yen on the week.


Next week look toward Monday’s Factory Orders, Tuesday’s International Trade Deficit and ISM Non-manufacturing Index, Wednesday’s ADP Employment Report, Productivity and Costs and the EIA petroleum Status Report, Thursday’s Jobless Claims and Friday’s Employment Situation and Consumer Sentiment as potential market moving events.

Maximum Conforming Loan Limits

Maximum conforming loan limits for Fannie Mae and Freddie Mac mortgages are increasing in 2018 from $424,100 to $453,100. Colorado has several counties that are considered “high-cost” areas and they will have higher limits. The chart below outlines several counties in Colorado with the previous limit next to the limit going into effect starting January 1st, 2018. 




Financial markets do react to changes in financial public policy. That’s a valid axiom. So, if markets do not move when new public policy arrives, does that mean that markets no longer care? Or that the particular new policy does not matter?

Strip away other things to which markets are not reacting: the economy is chugging along above forecast, in the second half of 2017 at or above 3% annualized GDP growth but still with no increase in the slope of inflation or wages. New trade policies are more hurtful than helpful, but can stay so for years without much economic effect. The same is true for geopolitical risk: our adversaries may steal a march or two in these years, but fundamental global strengths and weaknesses are deeply anchored. 

Which leaves the tax bill as the oversize turkey -- or ham, depending on your tastes -- arriving as early as next week. The Senate may pass its version before Thursday, which would then plunk that version along with the House one into conference committee, which usually assures passage of a final. We won’t know until then what’s in it (most of us have survived Thanksgivings with experimental stuffing), but the basic outline is clear now.

Thus, stick with that outline for now and work on perspective and overall effects.

First, it’s hard to tell how much attention the public is paying to the tax bill. A lot of the country seems more tuned-in to politics than usual, but a lot of politics now is at the level of circus and gossip, not substance. Our longstanding national tune-out of gridlock may explain markets’ non-response to the tax bill.

Second, the math. The trillion-this, trillion-that, biggest-ever, most in 30 years -- all of that is numbing. I’m not sure exactly when, but a couple of decades ago we began to discuss fiscal changes -- taxes, spending, deficit -- as “over ten years,” which makes the changes seem bigger than they are. Over-ten-years has also been convenient camouflage for bi-partisan Congressional fraud, as in years eight-nine-ten spending has always turned out bigger and revenue smaller.

With apologies to Everett Dirksen, $1.5 trillion used to be a lot of money. But, divide this proposed tax cut by ten, $150 billion per year, that’s barely 3.8% of annual federal spending (total FOUR trillion). As a percent of our $19.5 trillion GDP, an undetectable 0.8%. That’s an accounting error. In the same range as total repair costs of this year’s hurricanes.

The overall structure of the tax bill is clear. It is not “reform” in any sense of the word. It adds more complexity than it removes and opens many gates to new tax gaming. A better term would be tax “reallocation,” as nearly three-quarters of the tax cut will go to big business. Will this reallocation have positive effect on the economy?

At Tuesday’s gathering of the WSJ’s CEO Council (229 members), a WSJ editor on stage with the prideful and log-rolling Gary Cohn asked the CEOs how many intended to expand investments because of the tax bill. The WSJ’s own coverage says that only “a smattering” of hands rose. The YouTube video shows none raised above shoulder level. Cohn looked as though slapped with a mackerel and blurted “Why aren’t the other hands up?” No one answered.

The top risk in this tax bill has been that it might stimulate the economy. The Fed and other economists are in a running fight about the speed limit of our economy, but all non-political mainstreamers agree that if we’re not at growth capacity now, we’re going too fast. Any significant stimulus would force the Fed to react, raising rates and the risk of aborting growth altogether. Small magnitude aside, the bill would push chocolates to big businesses in a world already bloated with excess capacity (see “China”). Making an unneeded investment tax-deductible does not make it needed. Adding to corporate bottom lines has never added to wages, let alone in a world drowning in labor.

Thus, markets don’t care. Pass the turkey, or don’t.

The hardest part of true tax reform, especially if neutral to revenue and the deficit, is a good political balance between cutting taxes for some taxpayers and raising taxes on others to compensate. The great 1987 reform raised revenue by closing anti-productive loopholes and in exchange cutting tax brackets. Today’s bill does some of that for the middle class by increasing the standard deduction. However, the offsetting loopholes closed are not abusive ones, or non-productive. And the public has not noticed the things it will lose.

Example: both the House and Senate versions hurt the 20-year-old tax exemption for the sale of a primary residence. In current law, you get the exemption if you’ve lived in a primary home for two of the last five years; the new bill proposes five of the last eight. There is no economic benefit to this change, just stealing one of your few protections against inflation-boosted taxes. Acting like Democrats, the Republicans propose an expanded federal deficit, and reaching into your wallet for money to give to their buddies. 

Republicans desperate for revenue have also tacked on a repeal of the Obamacare individual mandate. I am biased, my judgment clouded. My wife and I have a disabled daughter, uninsurable, who will for life depend on Medicaid. This tax bill’s economic ineffectiveness aside, its small-minded and mean spirit trouble me.

This exchange in a Senate hearing this week: when senator Orrin Hatch, chair of the Senate Finance Committee said that there were no Medicaid “cuts” in the bill, just people choosing not to sign up for Medicaid, senator Claire McCaskill snapped, “Where do you think the $300 billion is coming from? Is there a fairy that’s dropping it on the Senate?”

Despite all of the political antics, and a Fed hike coming in December, the 10-year T-note (and mortgages) are holding a two-month range:


The 2-year T-note expresses the Fed’s intentions. The December hike is built-in, but not a bit of the three hikes due next year:


The Atlanta Fed GDP Tracker says Q4 will be hotter than anyone expected, although the consensus has slowly drifted upward during 2017: