The HSH Two-Month Forecast for Mortgage Rates
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May 29, 2009
Preface
Although there seems to be no imminent turnaround in the economy, the trajectory of the recession has flattened out and perhaps even lessened somewhat. Home sales — if not prices — have bottomed and mortgage markets are functioning in a more stable atmosphere. Capital-impaired lenders have found a fair response as they start to raise "stress-test" required capital, and financial markets have stabilized and perhaps are performing a bit better. It is in this trough, from this platform, which we will begin to build out the next growth phase of the economy.
That may yet be a while, since even getting back to even 0% GDP will require a much stronger bit of momentum than the economy seems to have at the moment. Still, an outlook for a recession with waning severity is far better than one where we're still peering into a dark abyss.
However, significant challenges yet remain. It appears that the worst may be over for job layoffs, at least as far as initial weekly claims go, but the ranks of those receiving benefits continue to grow. Real improvement in hiring may not happen for as long as six months to even a year from now, and a high jobless rate remains an impediment to any strong resumption of growth. After the cacophony of crashing markets during the last two, it seems that it is shaping up to be a considerably quieter Summer this year.
Recap
Overall, improving mortgage rates surprised us somewhat. We expected our overall market gauge — HSH's Fixed-Rate Mortgage Indicator — to wander between 5.55% and 6%, but actually got a lower and more muted 5.69% - 5.43% range instead. The FRMI's 5/1 hybrid counterpart actually improved rather more than that; we expected a 5.85% to 5.37% range, but got a 5.42% to 5.05% one instead. There's little activity in ARMs at the moment, but as at least some risk appetite by lenders returns, there may be better opportunities for borrowers who might want a shorter fixed rate period, particularly for jumbo borrowers.
While we didn't provide a specific forecast for conforming borrowers, we expected rates to remain below 5.5% — perhaps even as low as 5.18%. With the Fed weighing into the market with another $750 bilion in MBS purchases and additional supports for Fannie Mae during the forecast period, it's little wonder that rates moved past our supposed bottoms to hang right around the 5% mark. As we thought they might, Jumbos continued to improve, and have shed nearly 160 basis points (1.6%) from their late October 2008 highs amid better levels of liquidity.
Forecast Discussion
While many troubles remain in the economy, it seems to us that for the first time in a while, there is no emergency which needs addressing by the Congress or Federal regulators. That's not to say that substantive changes aren't coming to the financial markets, including sweeping changes for credit cards, RESPA reform enactment, and more, but rather that there doesn't appear a need any longer for a "drop everything to address this new crisis" mentality. The Fed's laundry list of liquidity programs continue to provide important support for the financial markets, "stimulus" is kicking in as we move forward, and consumer optimism, if still restrained, is again on the rise. It may just be that we're starting to move slowly away from the financial issues which triggered the downturn into a more 'traditional' kind of recessive environment... a more familiar path, perhaps.
Of course, the little bit of stability the economy is exhibiting could prove tenuous should new troubles emerge. While painful, the wrenching changes at Chrylser and GM may prove beneficial (or not) in the long run but seems unlikely to dent the economy to a greater degree than it already is dented. Cautious hiring by businesses unsure about demand may prolong the recession, and a lack of income and financing power may make any recovery more muted than it would be otherwise.
Those concerns will likely persist long after this forecast period, and the next... and possibly the one after that. In the interim, it is likely to be a "fits and starts" pattern of economic news which prevails, looking better one month, then not so good the next. For most mortgage shoppers, those typical market-moving numbers should have little effect as long as the Fed remains solidly in the marketplace. Provided they don't feel the need to increase their purchases of Treasuries or Mortgage-Backed Securities, the Fed's program of manipulating conforming rates to low levels should persist until year's end at the least. As well, Jumbo borrowers have enjoyed some beneficial (if indirect) effects of the Fed's conforming program, as conforming refinances have helped to re-liquify frozen books of loans, with at least some of that returned cash being put to work in the jumbo arena.
While the price of money should remain favorable during the forecast period, firmer underwriting standards in place are not expected to loosen to any great degree. Loose underwriting served to get us into this mess, and, once chastened, lenders will continue to err on the side of caution for the foreseeable future. Better underwritten loans promote profits, greater solvency, less need for taxpayer support and ongoing viability for lenders, and are, on balance, an economically good idea.
Forecast
Under what we think will be an economy featuring grudging, uneven improvement, mortgage rates should remain largely favorable. As we mentioned in our May 22 Market Trends: "As we move forward, and as the economy and markets improve, it may be possible to keep rates lower than they otherwise would be, but it is less likely that that will be at or near 50-year lows."
One interesting development since the last forecast period is that there has been some normalization of the "mortgage yield curve," especially in conforming loans. This is to say that shorter-term products are again carrying lower interest rates than are long-term rates, so at least some reward may be available to borrowers again interested in accepting some risk. Although ARMs are, and will remain, well out of favor (especially among those conforming borrowers), it may represent opportunity for jumbo borrowers, even if jumbo FRM rates are at about two-year lows today.
As far as trends go, overall, we think our FRMI will wander in a range of perhaps as high as 5.72% to as low as 5.30% over the next nine weeks. The FRMI's 5/1 hybrid counterpart should sport a high/low gap of perhaps 5.30% to 4.85%. Thirty-year fixed-rate jumbos have seen mild, gradual improvement over the past couple of months and should remain in the lower six percent range as we head deeper into Summer.
With regards to conforming 30-year FRMs, we've spent the better part of the last two months in a narrow band just over and under the 5% mark, and despite a rapid firming trend as we write this, it seems more likely that economic fundamentals will help rates to ease back somewhat, rather than foster any continued march higher.
It is worth noting, though, that as markets begin to move away from recent emergency (and even panicky) levels, that higher interest rates are a natural course of events and may even signal pending economic improvement.
Nine weeks from now it will be high Summer, with school and football season fast approaching. Stop back in early August to see how all this turns out!
March 6, 2009
Preface
Financial markets remain under duress, even as (or perhaps due to?) the government pledges trillions of dollars in economic supports for various facets of the economy. New programs have been unveiled one after the other, joining the expansion and/or resurrection of older ones. At this point, the success of exactly none of them can be predicted with any certainty, and the values of others remain unclear.
Several venerable financial institutions have required new infusions of cash; AIG and Citicorp are the latest, requiring more billions of dollars to keep them afloat. "Stress tests" are now underway for the collection of banks which hold the majority of the nation's assets, and it has become all too clear that "too big to fail" more likely means "too big to manage effectively and requiring government support no matter the price tag." For some institutions, some form of quasi-nationalization is surely on the way, if temporarily, but the long-term future is much less clear.
The markets — particularly the stock markets — have not reacted well to these incursions over the past few months. For example, the Dow Jones Industrial Average shed about 15% in the period between Election Day and Inauguration Day, and since the new team has taken over Washington another 18% decline has occurred. This is not sign of confidence in the new administration's plans or any inkling of optimism about the near-term prospects for recovery.
It would seem that a rough road lies ahead.
Recap
Our last forecast expected overall interest rates to wander in a range of perhaps 5.5% to 6% over the two-month period, and we came pretty close. The period's high-water market for HSH's FRMI was 5.94%, while this indicator's low was 5.66%. The FRMI's 5/1 Hybrid counterpart was forecast to trend between 5.6% to 5.95%, and we managed a 5.51% to 5.80% range instead, still fairly on target. During that time, rates for 30-year conforming loans moved upward off flight-to-quality panic levels to settle around 5.25%, while 30-year "true" jumbos have generally improved in price. In fact, rates for jumbos are holding at about one-year lows, a signal of somewhat improved liquidity for those products.
The "expanded conforming" program — designed to make jumbo mortgage money cheaper for certain borrowers in certain marketplaces — saw its "maximum maximum" loan amount re-lifted to $729,750, after the original end of the program (at the end of 2008) saw it reduced to $625,500. When talking about these products, the discussion often turns to how "high" true jumbo mortgage rates are, but it's difficult to buy argument that some of the wealthiest homeowners and homebuyers need interest rate subsidies to promote better affordability
After all, and irrespective of their relationship to government- influenced (read: artificially lowered) conforming interest rates, jumbo mortgage rates have been at or above — sometimes well above — present levels in the last nine years. These borrowers seem to have found those rates to be quite acceptable over time. Regardless, and for the most part, rates were pretty stable during the forecast period.
Forecast Discussion
As noted above, a slew of new spending initiatives are coming soon to an economy near you. A $787 billion stimulus plan — derided by many as nearly devoid of any actual private market stimulus incentives — will start hitting the streets fairly soon, as will the Fed's new $1 Trillion plan to goose auto, student and credit card lending (and perhaps other asset-backed markets) too. Then there's the regular Federal budget, bloated out to $3.55 Trillion dollars, plus the new HASP, with $200 billion in support for Fannie Mae and Freddie Mac, another $75 billion in refinancing chances and outlines to modify possibly millions of mortgages with certain tax-funded incentives to borrowers and homeowners alike.
With regards to the HASP, there is probably some value for borrowers who are lucky enough to have a Fannie/Freddie held mortgage to refinance even if they are mildly underwater. However, we think that claims of 4-5 million homeowners leaping at the chance to be put through today's mortgage underwriting wringer is wildly optimistic, even if a better interest rate can be obtained after all the "adder fees" and all the hurdles can be overcome to obtain financing.
As well, prospects for 3-4 million loan modifications also seem outlandish, even if there are new incentives to participate for various parties. We've heard too many claims already about how concept A or concept B will save the housing market: anyone remember last summer's much ballyhooed Housing and Economic Recovery Act (HERA)? Or how about the $300 billion Hope for Homeowners, which has only completed about 25 loans since it began in October? (We note that the Congressional cramdown bill will revise and extend the HOPE program.
We need to keep in mind that the actual, recent experience for loan mods isn't good at all, with some 55% re-failing after just six months. Call us skeptics, but we'd prefer proof — or at least some well-thought analysis — which shows that this is a better avenue to explore than previous attempts or even allowing foreclosure. Perhaps the only thing of actual value is that HASP allows innocent investors to have a chance to share their losses with the Federal government. Contrary to many reports, investors aren't all big, bad banks, but ordinary people putting money into bond funds, 401K and IRA plans who rightfully have been resistant to taking all the blame and all the loss, simply for having been nice enough to lend their money to people who wanted to buy homes. If anything, this is where the real value of HASP may lie.
The $787B stimulus plan may or may not provide much stimulus, and if it does it may be a ways down the road before its effect is felt. Many feel that its government-heavy spending program comes at the expense of private (especially small) business by removing immense amounts of capital that investors could otherwise use to spur new companies.
Still, the only program which can claim actual tangible benefit to a wide group of consumers is the Fed's and Treasury's program of buying Fannie and Freddie debt and mortgage-backed securities (MBS purchases are running at about $4B per day at the moment) which serves to keep interest rates low at a time when the government is literally flooding the market with new debt. Certain of their other programs — the commercial paper facility — are working to improve liquidity, but are well upstream of producing any direct consumer benefit. As these are interest-bearing investments, they may actually have no ultimate cost to the taxpayer... but the verdict for that may be years away.
With all the spending and grandiose plans of the new administration, we can help being struck by a line from Creedence Clearwater Revival's "Who'll Stop the Rain":
Caught up in the fable
I watched the tower grow
Five year plans and new deals
Wrapped in golden chains...
The plans and deals are coming, but the golden chains will be our tax obligations, as well as the continuing tax burdens of our descendants in the generations ahead. May they look with a favorable eye toward the decisions being made today.
Forecast
The country remains mired in recession, and we have a pretty deep hole to climb out of before we're in any recovery mode. Fourth-quarter 2008 GDP came in at an alarming -6.2%, the biggest contraction in about 27 years, so we're even a long way from breakeven at this point. Thankfully, inflation pressures have flattened out, even if a fair portion of the benefit of declining energy prices has already occurred.
We remain perhaps more optimistic than many with regards to housing.
Provided there are no more rumors to distort market activity (like those promising 4% or 4.5% mortgage money, or huge tax credits) the combination of low mortgage rates and low prices is creating perhaps the best buying opportunity in decades. To realize that opportunity, we'll need to see some firming in the labor market and consumer confidence, which will hopefully start to happen in time for the traditional spring homebuying season, now just weeks away. Certain markets — those with high volumes of foreclosures, and thus very low prices — are already responding (notably markets in California), and sales are firming.
Home prices have not yet stopped declining, according to the most widely published indicators, but that is serving to enhance affordability, if at the expense of the property's present owner (bank or individual). New home sales remain tepid, competing as they are against low cost (and often recently built) homes available. Builders still have too much hard-to-sell inventory on hand and few solid prospects for new developments to become viable anytime soon.
All that said, the current environment should again promote fairly stable mortgage rates. Overall, rates really shouldn't be expected to go too far, too fast, as the private mortgage market continues to try to crawl its way back to health, while the government-backed market is probably supported to extent its going to be, absent any new crisis. Prospects for economic recovery aren't yet coming into view, but at the same time, signs of _some_ solidifying in certain financial markets make a new panic somewhat less likely. The slew of debt supply coming into markets is of some concern, as it might serve to lift interest rates somewhat, but fortunately concerns about inflation are tomorrow's problem.
For the next nine weeks, we think the overall cost of mortgage money as gauged by HSH's FRMI should trend between 5.55% and 6%, while the overall 5/1 hybrid ARM should range between 5.37% and 5.85%. True (up to $417,00) conforming loans probably remain below 5.5% for the period, perhaps dipping to as low as 5.18%, while true jumbos seem likely to drift lower in a gap between perhaps 6.85% and 6.5%.
Check back mid-late May and we'll see where we're at.
January 9, 2009
Preface
It was quite a year.
Since our last forecast, significant portions of the residential mortgage market have been reshaped due to government intervention and — in some ways — due to a lack of government action. We've come through an election cycle, seen hundreds of billions of dollars spent trying to comfort financial markets, and heard the promise of hundreds of billions more dollars in various forms of 'stimulus' that may be on the way. For mortgages and real estate, at least one important support is in place; others may arrive under a new administration.
On November 25, the Federal Reserve announced a plan to support the good-credit-quality residential mortgage market like never before: the government offered to purchase up to $100 billion in Fannie Mae- and Freddie Mac-issued debt while purchasing up to a half-trillion dollars of agency MBS in the open marketplace. With a new, deep-pocketed player in the market — especially one unlikely to turn tail and run at the first sign of trouble — the mortgage market collectively found a plan it could rally behind and fully support. Conforming mortgage rates (notably 30-year FRMs) enjoyed a substantial drop in rates. At this writing, we're witnessing a real refinancing opportunity; home purchasers seem to be starting to take notice as well.
While this was going on, an ongoing rush to safety and security was fully in place, driving Treasury yields to historic lows. Those influential benchmark interest rates served to push mortgage rates somewhat lower on balance.
Recap
When we wrote our last forecast, we expected interest rates to trend downward. HSH's Fixed-Rate Mortgage Indicator (FRMI) — an average inclusive of conforming, jumbo and "expanded conforming" loans — was expected to trend in a range of 6.90% to as low as 6.40% over the forecast period. However, neither we nor anyone else could have foreseen the Fed's foray into the market, and the downward pressure for rates which ensued. The range for the FRMI over the nine-week period was 7.05% to 5.85%, an unusually wide swing. This was much the same for the FRMI's 5/1 Hybrid ARM counterpart; we expected a 6.70% - 6.25% range, but instead got a 6.80% to 5.80% one. Unlike the FRMI, much of the drop in rates here came in the last four weeks along with what seems to be some loosening in the credit markets for products other than 30-year FRMs.
Much of the FRMI's downdraft was due to the drop in conforming 30-year FRMs, which stood at 6.06% the day before the Fed's announcement. The daily national conforming average declined to a low of 5.06% in late December before bouncing off the bottom somewhat. Jumbo 30-year FRMs didn't fare quite as well, as those markets remain more viscous than the better-flowing agency market. Still, the improvement here was substantial; rates had moved down somewhat before the Fed's announcement but remained at a mid-7% level, but the last five weeks have seen some improvement in liquidity, easing to about a 7% level at this writing.
Forecast Discussion
The influence of the Fed's announcement cannot be overstated. The drop in conforming rates opens up a number of possibilities to help move several markets forward. It goes without saying (though many would-be borrowers are finding out the hard way) that the program is aimed only at solvent homeowners with equity and good credit (among other requirements), but a lender with a portfolio of first mortgages will see at least some of those now-illiquid holdings retired, and the resulting cash will allow for a more natural rebalancing of books over time. That's obviously preferable to resorting to a fire-sale-at-a-loss situation to raise desperately needed capital.
This process not only helps a lender to become more solvent, but can also allow for those returned funds to be used in other ways — perhaps to purchase jumbo mortgages, for example. We suspect that this is part of the reason for the drop in jumbo rates noted above, accompanied by the search for better-yielding investments, given that highly-safe Treasuries now yield virtually nothing.
Of course, the process of rebalancing portfolios will take some time, but that might prove to be a good thing, since that time can also be used to help unwind many of the impossibly complex debt instruments which have tied the markets into near-Gordian knots. As well, the fee income generated from refis produces profits and should help to support mortgage-related jobs. Of course, the layoffs in banking and mortgages over the past two years meant that the industry is quite unprepared for the onslaught of mortgage applications, and unlikely to want to re-hire experienced hands on a permanent basis, so we'll need to see what develops in this regard.
The chance to refinance — which helps a household to recast its own balance sheet — also promotes solvency, and may also potentially pump billions into the economy over the next year as lower debt burdens take hold. This is powerful stimulus of its own accord which costs present and future taxpayers nothing, even if investor returns may be lowered somewhat overall.
The Fed also took several occasions during the forecast period to lower short-term interest rates to historically low levels. With present-day interest rates near zero, the effects of traditional monetary policy using the Federal Funds and Discount Rates have fully run their course. The Fed's next moves must all come in the form of "quantitative easing," which is Fed-speak for various forms of direct market manipulation (such as the mortgage-support plan described above).
One influencing factor in the markets — the Troubled Assets Relief Program, or TARP — underwent a significant change during the forecast period. Originally slated as a fund to remove bad assets from lender and investor books, the Treasury ultimately abandoned that mission as far too complex and time-consuming. Instead, the Treasury opted for direct injections of capital into troubled institutions through the purchase of preferred (non-voting) equity positions. While this means that these firms still have bad loans on their books, they may now have adequate capital — and time — to manage those troubles more effectively.
Aside from those items, the economy continued to stagger along, and late October and early November's financial markets came to a virtual standstill. So deep were the troubles in obtaining capital that auto makers had to go to Washington hat in hand on two separate occasions to ask for assistance, some of which was provided by the outgoing administration.
After months of erratic performance, the economy was declared to be in a recession by the National Bureau of Economic Research. When the announcement came in December 2008, it was unsurprising that the NBER dated the beginning of the downturn to December 2007, since job losses have occurred in each month of 2008 (with perhaps the worst reading to close the year forthcoming in December's data).
In the midst of all this, a historic election took place, and a new administration is slated to hit the ground running in just a short while with as much as a trillion dollars in new spending to hopefully revive the economy. That spending may ultimately serve to bolster economic growth, but history teaches us that the effects of any such spending will come much later in the year at the earliest. More pronounced stimulus may come from the collapse of gasoline and heating oil prices and the loosing of cash through refinancing noted above.
It's expected that one of the new administration's priorities will be to slow the rate of foreclosures through a variety of measures. While this problem certainly does need to be addressed (provided a borrower has both the incentive and capability to remain in the home), we're of the mind that more important to the market would be support for those good-credit-quality homeowners who are now underwater in their loans.
Without equity, these borrowers cannot refinance and cannot sell without either losing money or costing the lender (investor) money though a short sale or foreclosure. Many millions of homeowners are in this situation, and as home prices keep sliding this problem worsens with each passing day. Brighter minds than ours will need to come up with a plan — grants, insurance contracts, subsidies, whatever — but with some $350 billion left in the TARP fund, at least some portion should be dedicated to this issue. Presently, the only market incentives for these homeowners are perverse ones; that is, they typically can't get help unless they begin to fail. In finance as in medicine, prevention is the best cure.
(There's also been little, if any, discussion of the effects of high property taxes on the nascent homebuyer movement. We'll have more to say about this, in time, on our blog.)
There is little doubt that the economy will remain highly challenged over the next nine weeks, but we think there is reason for at least cautious optimism.
Even though the job market is weakening, home affordability is rising due to the fall in interest rates combined with sliding home prices. Sooner or later this will begin to stabilize home sales; we are coming to believe that there will be a mild recovery as the spring approaches — provided no unforeseen economic event occurs.
Lower energy prices will add tens (if not hundreds) of billions of dollars back into the economy, should they hold at these levels. While that cash seems to be ending up in savings at the moment, Americans usually find a way to spend at least some of their holdings, so at least some economic boost should result. Added to what's shaping up to be a massive stimulus package from the new administration — expected at this writing to be a combination of fairly modest tax cuts and infrastructure outlays, among other ideas — the economy's decline should stop, even if real improvement may lie in the future. Just the announcement of a actual plan can have wide-ranging supportive effects.
The incredible wash of cash into the financial system with nowhere to go suggests that we should see at least some risk appetite forming. Ultra-safe Treasuries and bank obligations will probably continue to get the lion's share of those dollars, but mortgages do seem likely to get at least some increased interest.
Forecast
It's widely agreed that without the government's influence, the mortgage market would be an even messier place than it already has become. That durable support is crucial to stabilizing the market, at least until private capital again develops an appetite for investments with greater-than-zero risks. With a new administration coming in, any number of plans may come to manipulate interest rates still lower, but that could delay any resumption of private interest, since that paper would feature very low yields. In this way, we find ourselves in a tenuous situation, with one overarching question: Does the good-credit-quality mortgage market need more incentives than the near-50-year-low interest rates already in the market... and if so, who deserves that additional support? (If you've read this far, you already know our answer.)
The Fed's massive November plan moved conforming mortgage rates down to present levels, and it does seem unlikely that any new plan would be of comparable size and magnitude. That suggests that, absent any significant new government influence, there is limited downside for conforming interest rates over the forecast period. However, the refinancing/portfolio rebalancing detailed above could exert some continued downward influence on jumbo mortgage prices.
This being the case, we expect that HSH's FRMI should decline somewhat over the next nine-week period, likely wandering in a range from about 6% to perhaps 5.5% over that time. The overall average for 5/1 Hybrid ARMs will probably be stickier, though, as there's little demand for these ARMs in the market (especially since many are prices above their fixed-rate counterparts, particularly in the conforming market) so we think the rang for them might be 5.95% to perhaps 5.60% over the next couple of months.
If nothing else, it should be an interesting end of the winter. Check back in early-mid March and we'll see how this plays out.
October 20, 2008
Preface
We're a little later than expected with this forecast. Frankly, there's been so much going on in mortgage and financial markets, we forgot the self-imposed deadline of October 10. Oh well.
What's happened since the last forecast? Well, the sweeping housing bill signed back in July has just started to kick in, but has since been dwarfed by other efforts. Fannie Mae and Freddie Mac were put into conservatorship by their regulator, effectively nationalizing their function in the mortgage market (buying loans from lenders to produce liquidity).
The Federal Reserve instituted a new Troubled Asset Relief Program (TARP) to help lenders sell bad assets to the government and clear off their books, and a new Commercial Paper Funding Facility (CPFF) was created to allow the Fed to support asset-backed and unsecured short-term credit markets.
In exchange for equity stakes, regulators directly injected $125 billion in the nation's most significant banks, hoping to spur new lending.
Two global credit market spasms provided the impetus for a full-tilt run by investors to cash and cash-like investments, and central banks around the world have begun to pour cash into their own troubled institutions. Stock markets collapsed and revived (and are still in that sort of mode), oil prices have fallen by half compared to their recent peaks, and the Federal Reserve trimmed short-term interest rates in concert with other central banks around the globe.
And that's only a portion of the headlines. With hundreds of pages of bills signed into law, there are probably any number of nuances yet to reveal themselves.
Recap
In our last forecast, we expressed optimism that we might be seeing some signs of stability in many markets. We were encouraged by moves put into place by the government and lessening inflation threats. Home sales have been a mixed bag, with existing home sales bouncing back and forth over and under the five million (annualized) level, while new home sales continue to touch new lows. New Home inventories are being worked down, albeit slowly, and spending for new residential projects actually revealed a slight spark in August.
Fannie and Freddie's now-explicit backing by the government means that mortgage markets for good credit quality borrowers remain fully open, and there has been at least one signal that the tightening of credit for this audience has come to a halt.
For our last forecast, we thought that HSH's Fixed-Rate Mortgage Indicator ((FRMI)) would travel a range between 6.65% and 7.15%. The actual distance between the low and the high was 6.52% to 7.08% (without the extra week in the forecast period, the top would have been 7.04%). As well, we thought that overall average for 5/1 Hybrid ARMs would trend between 6.45% and 6.85%, and got 6.31% to 6.80% as a response. We'll call our late-July forecast "pretty good" and move on from there.
On a product-specific basis, conforming 30-year FRMs trended in a 63 basis point range, while their jumbo counterparts wandered in a 57 basis point gap.
Forecast Discussion
A year and a half into the credit market mess and new troubles keep emerging. Banks across the globe have exhibited new troubles in borrowing and lending; financial markets essentially slammed shut in August and September and have only recently been pried open a crack by extraordinary efforts. The complete lack of access to credit has taken a fairly mild economic downturn and suddenly made it severe, not only here but in major economies worldwide.
Oddly enough, American mortgage markets are among the best functioning financial markets at the moment, largely because so much effort was expended over the past 15 months (but especially in 2008) to ensure that their operation would continue. Other markets, such as overnight lending transactions, remain troubled, but seem to be responding to the unprecedented level of attention they've received over the past five or six weeks.
How fast they respond, and to what degree, is key to this forecast. Concerns over spiking LIBOR rates, for example, have re-aroused fears of ARMs resetting at less-affordable rates, with the potential for a new spate of mortgage failures as a result. If that spike in LIBOR proves short-lived, if government initiatives to influence overnight and near-term funding markets help them to perform more normally, the damage might be relegated to relatively few unlucky borrowers.
The Treasury's injection of capital into banking institutions and their plans to begin to purchase billions of dollars of mortgage-backed securities should serve to both foster new lending and produce liquidity over time, but again, the question remains "how fast will any impact be felt by borrowers?"
It's important to remember that there are two components of any financing deal: the availability of money, and the price of that money. Virtually all government efforts to date have been intended to ensure or improve the availability of money, but few (excepting the TAF) have been designed to influence any given price of money. For mortgages, and although volatile in this environment, the price of money remains at reasonable levels for borrowers who have access to it (good credit- quality borrowers). However, the availability of money for certain audiences (i.e., subprime) remains curtailed, perhaps severely so.
Risks, of course, influence the price of money. The risks of making a mortgage or investing in mortgages remain quite high (and perhaps rising) as none of the issues which have plagued the market have shown any signs of easing: foreclosures and delinquencies continue to rise, home prices continue to fall, credit quality continues to deteriorate and the economy is showing increasing signs of stress. All but the bravest investors have turned from this market, and those the do remain demand higher compensation to offset those risks.
Throughout these troubled times, access to mortgage money has been largely maintained, at least for the most creditworthy borrowers, but until and unless mortgages become a favored investment again, mortgage interest rates will have a tough time declining by much. Of course, Fannie and Freddie could use some of the $200 billion in capital they got to buy up mortgages at below-present-market rates, but they would probably be stuck with those low-yielding loans in their portfolio for some time since investors wouldn't be very eager to snap them up.
While there are any number of complicating factors which could affect this forecast, it seems to us that at least two considerable opposing forces are in play. On one side are the drags of the economy and falling inflation concerns, which typically serve to pull down interest rates; on the other, troubled property markets and a stumbling economy (especially declining employment) make the risks of investing in mortgages more pronounced, pressing rates higher. The government's backing of the markets means that mortgage money remains available — that is, liquidity is maintained, even improved — but the price of money will likely remains stubborn.
Forecast
We've argued for some time that a period of quiet would be of great benefit to the markets. With the whirlwind of new programs, policies and regulatory changes, this is probably even more the case now than before. Too much change, too soon and too broad, even while ultimately helpful, also serves to inject a certain level of anxiety into the market, and can also have unintended consequences (such as the mass-selling of Agency debt in favor of bank debt seen earlier this month).
An opportunity to review what's been done and already in place and what's coming on line now would likely allow for a less reactive marketplace, and perhaps a stabler, more proactive one. That could allow frazzled nerves a chance to calm, and could even foster lower mortgage rates as investors search for yield.
After spiking higher in mid-October, mortgage rates begin this forecast coming off elevated levels. Even though mortgage rates tend to decline much more slowly than they increase, the next nine weeks should feature somewhat lower rates on balance. We think that the overall average rate reflected in the 30-year FRMI should trend between 6.90% and 6.40% during the next nine weeks, and the overall 5/1 Hybrid ARM may travel between 6.70% and 6.25%. The Treasury's plan of purchasing MBS in the market could produce some additional downdraft in rates (we hope), but there's no way to know how much (if any) at this point.
We'll talk again after Christmas, and we'll review how close we were to reality.
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July 31, 2008
Preface
It's been a wild ride since our last forecast A new housing bill has been signed into law, producing new opportunities for lenders to rid their books of perhaps their worst-performing mortgages — that is, if they wish to realize those losses today, rather than 'bleeding' slowly over time. Fannie and Freddie's mission will continue unabated, and new regulatory frameworks are coming into place. The FHA program will enjoy new prominence in housing markets, and some incentives to buy homes are now available.
All this, plus billions in actual and potential spending, add up to continued pressure for mortgage rates on the upside. New Congressionally-mandated commitments for Fannie and Freddie for affordable housing will likely add 4.2 basis points to your next mortgage, and the need for more government-backed debt to finance these initiatives puts more bonds into a market — more supply during a period of uncertain demand. Of course, rising prices are evident almost everywhere you look, but the Fed cannot quickly act to quell inflation pressures for fear of upending fragile markets.
Recap
Our last forecast suggested that the downward pull of a slacking economy would prevail over rising price pressures, but the opposite turned out to be the case. The spiralling price of oil was largely to blame; it peaked at over $146 per barrel before backing off, which helped both the Producer and Consumer Price indexes to march higher. Coincident with that, the markets had to deal with new uncertainty about the solvency of Freddie and Fannie, prompting emergency offers of support. Home prices continued to slide, making even solid mortgage investments made over the past few years somewhat more risky. Demands for mortgage credit remained pretty stable, with home sales holding pretty steady during the period, but the supply of credit became somewhat more curtailed as investors extended their 'buyers strike' for mortgage-related assets.
All these pressures moved mortgage rates upward. Overall, we expected HSH's overall Fixed-Rate Mortgage Indicator (FRMI) to range between 6.37% and 6.72%, but instead saw a differential of 6.65% to 7.10% at the close of the forecast period. For 5/1 Hybrid ARMs, we expected to see the average travel between 5.85% to 6.25%, but it ranged from 6.25% to 6.82% during the period.
Interestingly, it was conforming rates which suffered the most from the difficult market conditions. Conforming 30-year FRMs wandered in a 52-basis-point range, compared with only 39 for private-market jumbos. Five-one conforming product trended in a 68-basis-point gap, with just a 45 basis point distance for jumbo 5/1 ARMs. As impaired as jumbo markets have been, they may already be about as impaired as they can get, what with nominal interest rates already well above conforming. Since they are mostly being originated and held by portfolio investors, only concerns about inflation and changes to actual costs of funds — rather than investors turning away — seem to be influencing their rates.
Forecast Discussion
As we approach the one-year anniversary of the mortgage crisis (markets first began to crumble in July 2007 before fully breaking in mid-August), we're still not out of the woods. Tighter access to credit has pulled all financially-marginal homebuyers out of the market, leaving a vacuum of demand. At the same time, record foreclosures have caused a swelling in the number of homes for sale. As Economics 101 taught us, too much supply combined with too little demand has pushed home prices lower. New home sales and home building seem likely to begin to show signs of improvement before long (perhaps a couple of quarters), but until then, rough times remain fully in play. Existing homes — the largest component of the market — are of course more affected by inventory increases due to foreclosures.
There are few players fully engaged in mortgages at the moment. Wachovia recently left the wholesale ranks, along with IndyMac Bank (which subsequently failed). Fewer players mean less competition among buyers for loans (less liquidity), and less competition means that demands for higher yields must be met in order to complete a sale.
But are we near bottom? Every time it seems reasonable to think that the worst of the financial losses are fading, along comes another announcement of billions of dollars of losses. Still, we are starting to be of the mind that conditions, if not actually improving measurably, have stabilized overall — or at least the rate or frequency of decline has lessened appreciably.
Our glimmer of optimism is derived from a few sources. Loan books are being improved though the origination of better quality mortgages; access to government-backed capital remains fully in force at near 0% real rates, and further substantial home price declines will probably be contained to a few deeply-troubled markets.
On the more technical side, the new ability for a lender to pull the worst performing loans off their books, refinance them into an FHA-backed loan, and take an immediate 'haircut' in terms of value — but be able to close out a troubled asset — could lead to lessened requirements to raise new capital and also reduce the need to hold additional loan-loss reserves.
The ability to shed bad assets means less of a need to raise new capital, which could lessen the considerable competition for those funds in the already-wary (and strained) credit and equity markets. A lessened need for new capital would serve to better balance the demand for those funds with the availability of them, and easing those pressures could help to lower market interest rates.
With less need to build and hold capital, more of the profits from operations can be used to buy and sell more loans, instead of being held as reserves.
As 'bad' loans are pulled off books, they can be replaced by 'good' loans; this will further improve loan books and may serve to increase (somewhat) demand for new mortgages by the firms whose loan books are improving.
The plan is, however, voluntary, and the process for deciding which loans to excise and which to allow to fail will be done on a one-by-one basis by lenders, so it will take time to produce any measurable results.
So we're somewhat more optimistic than many, perhaps. Lower oil prices will hopefully be more permanent than temporary, which would lessen upward pressure on inflation and its associated influence on interest rates. So far, there's been no corresponding increase in wage demands, and the stumbling economy and weak labor markets may serve to trim inflation pressures further.
We also think some of the pessimism surrounding housing will begin to fade once year-over-year comparisons of home sales no longer feature regular double-digit decreases. Failing any additional significant deterioration, we're looking for that to start around September or October.
Although certain things set in motion will take time to realize, and keeping in mind that energy costs could again flare higher at any time, it still lends some hope that we may have found tenuous stability for mortgage rates. Hoping for stability isn't the same thing as achieving it, of course.
Forecast
As we write this, conforming FRMs are near a year's high; fixed-rate jumbos are near eight-year highs. If inflation calms, if demands for capital are diminished somewhat, and if bad assets can be shed, mortgage rates should get no worse and have a good chance to improve, perhaps considerably, from these levels. As such, we're expecting a stable-to-downward trend for mortgage rates over the next nine-week period, where we forecast the overall average 30-year tracked by HSH's FRMI to range between 7.15% and 6.65%, while the erratic 5/1 ARMs (20-basis-point bounds have been all too common this year) should find a home somewhere between 6.85% and 6.45%.
Here's hoping we're right. Refinancing and home buying could use a boost, and cheaper mortgage money would help.
Our next forecast should come in early October. The third quarter will have come to a close, Autumn will be upon us, and we'll look back to see if our optimism was founded or unfounded.
May 30, 2008
Preface
So far, despite a continuing slow period, the US economy has skirted an actual recession. Housing markets remain moribund, as bloated inventory levels and stiffer underwriting standards for mortgages are the order of the day. At some point, perhaps even later this year, when lower home prices and fiscally-prepared borrowers intersect, sales will firm and housing inventories will begin a slow process of reduction. For their part, credit markets have largely stopped deteriorating and have achieved a shaky stability as the process of raising capital and rebuilding loan-loss reserves continues.
Recap
In our last forecast, we expected a much greater improvement in rates than that actually occurred. We called for rates to decline, and they did, but less than we hoped.
Back in mid-March, we forecast that the overall average for 30-year fixed-rate mortgages (HSH's FRMI) would slip from the 6.72% at the time the forecast was written to perhaps as low as 6.27% by the end of the period. The actual range was much narrower than that, with the 6.72% giving way to a bottom of 6.46% back in April. Rates have been slightly firmer than that on average since then, hovering around 6.5% or so.
We believed that lenders would show a greater appetite for Hybrid 5/1 ARMs as Spring rolled along; we anticipated a wide range for rates in the forecast, expecting a decline from 6.31% to perhaps as low as 5.75%. That demand never appeared, though, and rates were quite erratic, rising to 6.41% before slipping back to 6.11% at the end of the period.
At one point during the forecast period, the "mortgage yield curve" became quite flat, and all mortgage products were priced very close to or even above the 30-year FRMI. Since then, however, a steepening of that curve — short-term rates falling more than their fixed rate mortgage (FRM) counterparts — has largely been the case, making ARMs somewhat more viable for borrowers.
We also took a flier on a forecast for the 30-year Conforming FRM. We thought, given the right situation, that prices for those good-credit quality loans could plummet to perhaps 5.5%. We offered that item because, back in March, limits on how many mortgages the GSEs could retain in their investment portfolios were lifted, prompting us to speculate that Fannie and Freddie would be urged by legislators and regulators to pump mortgage money out to the markets, even if no investors could be found for the paper. Unbeholden to investors and pressured by Congress, the GSEs would fill their books with new lower rate mortgages.
Unfortunately, that didn't turn out to be true for "traditional" conforming loans, but this structure of support was actually announced to get new "agency jumbos" into the market at lower costs to borrowers. Perhaps it will yet occur for the rest of the market at some point; mortgage money in the mid-5% range would definitely spark a refinancing boomlet and serve to support home sales and house prices, too. Will it happen? We'll see. Conforming 30-year FRMs did decline, though, and presently stand at 5.89%.
Forecast Discussion
How best to characterize what we think will be the state of the market for the next nine weeks? If history is any guide, market players will spend some of that time jockeying to establish summer trading positions and then things will generally become quiet. This isn't always true (see last Summer, when the credit market completely broke in mid-August) but this has been the case over the years. Regular readers of these pages know that there isn't any reliable seasonality in mortgages, nor any to be expected amidst troubled markets.
As we discussed in the May 23 Market Trends, we think that we're at a juncture in the economy where rates are being pushed and pulled in two different directions: Upward, boosted by rising inflation and its return-eroding effects, and downward, where slumping economic growth produces additional 'resource slack'. Skyrocketing energy costs seem certain to pressure economic growth downward in the weeks and months ahead as consumer spending becomes concentrated into less-productive narrow streams for food, gasoline, electricity and such.
So far, despite dire forecasts, the economy has escaped recession. It is true that weak growth remains in place, but there should be some lift provided by stimulus checks hitting bank accounts and mailboxes as we close out the spring. That said, any boost from that will likely not only be muted but short-lived, as well, so a resumption of significantly stronger or more permanent growth isn't likely during the forecast period. Any revival of growth remains threatened by higher gasoline and food costs, so it's our opinion that this period of weak growth will persist.
Inflation remains a constant concern. How can it be otherwise when signs on every corner show ever-higher prices, or when the supermarket bill increases with each shopping trip? High and still-rising energy costs lift prices immediately and can also have lagged effects; for example, costs for petroleum-based fertilizer are kicking higher, so the next crop in place will start with a higher cost basis than did this one.
Amid these troubles, though, there are some signs that housing markets are trying to find a bottom. Housing starts, building permits, home sales, builder sentiment and other indicators all suggest a pattern of bouncing along the bottom — minor improvements one month giving way to minor declines the next. Actual inventory levels of new homes for sale continue to decline, but sales are falling faster as buyers who can obtain financing wait for lower prices before acting. For existing homes, inventory levels are rising as foreclosed properties are added back into the "for sale" ranks, but some of the hardest hit markets are starting to see some sales activity as "market-clearing" prices are discovered. Backing and filling for sales does seem likely, and even for those housing indicators which haven't shown improvement, at least the rate of decline seems to have slowed.
Some boost for sales and refinances may come in the form of GSE reform and FHA expansion. Bills have cleared the House and Senate Committees, and a floor vote is slated in the near future. Despite a strong push in Congress, it's not clear how many potential homebuyers will be helped (or how quickly), so despite big election-year pronouncements we expect only a limited boost this year.
All this being the case it does strike us that we will remain directionless over the next two months, with no sudden clarity, but rather a slow slog through a still-murky period.
Forecast
The question, of course, is what will exert the stronger pull during the forecast period: inflation or weak growth? It does seem likely to us that the upward pressure on underlying interest rates will remain, but mortgage rates should hold mostly steady or perhaps decline a little at times.
A year ago, the difference between the 10-year Treasury and the average Conforming 30-year FRM was 153 basis points (1.53%); it was 172 for TCM-Jumbo. Despite recent declines from historical highs, those spreads are presently 216 and 326 basis points, respectively. That suggests that with the crisis slowly passing, and as balance sheets are rebuilt and lender recapitalization continues, new loans should be able to be priced at less of a premium relative to other benchmarks.
In such a situation, even if comparable indicator rates do rise, mortgage rates would therefore rise less as lenders look to keep originating new, better-quality loans. These new originations serve to offset the poor loans already on books, or can be sold for needed cash. Of course, we won't return to normally-thin spreads anytime soon, but we should see thinner spreads as time rolls forward.
We're not going to venture a forecast for Conforming 30-FRMs this time around, and here's why: if the GSEs do suddenly decide to use their nearly-unlimited powers to help all "A-quality" borrowers instead of those only in "high-cost" areas, Conforming rates could ease, perhaps markedly, which would be good news overall. Jumbo markets seem to be creaking back to life, too.
For the next nine weeks, we expect that HSH's FRMI will range between 6.37% to 6.72%, while the overall 5/1 Hybrid ARM average might travel between 6.25% and 5.85%. It's most likely that both will exhibit choppy or erratic behavior.
When this forecast expires, we'll be coming up to the one-year anniversary of the big break in credit markets. No celebration is planned, but we will review the forecast here to see how we did.
March 21, 2008
Before you read our latest forecast, we recommend that you read this article,
which serves as a preface to the crazy markets we've been experiencing.
Recap
Erratic investor demand amid dysfunctional mortgage markets left our previous forecast in tatters. We expected that the 30-year FRM would range from perhaps 6.45% to as low as 6.10%, but the wide swings in pricing left the actual top and bottom for rates a wider span of 6.05% to 6.72%. Worse still was our expecation for average 5/1 Hybrid ARMs, as our forecast 6.08% - 5.75% gap was broken on both ends with in a range from 5.45% to 6.31%.
Much has been made over the difference in price between conforming and jumbo loans. That wide gap remains, but loans of both sizes traveled the same path during the forecast period. Each sported a 70 basis point high-to-low range, with 30-year conforming topping out at 6.31% and 30-year jumbos at 7.28%.
Forecast Discussion
It's hard to know which market to address for this forecast. It does seem that conforming (and some former jumbo) borrowers will become more well served in the spring of 2008, but markets still remain far from functional at this writing. Pricing for the new "expanded conforming" loans are just starting to make it to market, while short-term rates are low enough as to obviate the ARM reset problem for many homeowners, but concerns over falling home values have left many borrowers with insufficient equity to successfully refinance, even if they could meet today's tougher underwriting standards.
The economy may have slipped into negative territory during the first quarter of this year, and the Fed has lowered interest rates to try to address that. However, inflation concerns are standing front and center in the markets and at the Fed; two Fed Governors dissented at the March vote to lower interest rates. We'll not know the reason until the meeting's minutes are released in a few weeks, but presumably it was the size of the move which caused concern, not the direction. At the moment, the Fed's primary concern is preventing a broadening downturn in the economy, but firming inflation pressure means long-term rates generally have less space to decline.
At least a few indicators suggest that the fall in housing markets is slowing, if not at a bottom. New and existing home sales remain challenged, but signals such as builder optimism do seem to have plateaued, albeit at low levels. Before improvement can occur, a bottom must be found. If — a big if — news of lower mortgage rates can make it into the market just as the traditional Spring homebuying season gets underway (and hold, unlike January's refi flare), the combination of lower home prices and lower fixed mortgage rates might produce enough of an affordability mix to provide some support to flagging housing markets. Although enthusiasm will probably be muted, we think there may just be a spark of hope in housing this Spring. The old mortgage-lending machines — the ones which fostered such a huge housing financing market and the resulting bubble — remain broken and likely irreparable. However, with new market structures in place, there's a much better chance of measurable improvement.
Forecast
All the machinery put into place since our last forecast should get more fully up to speed during this one. There is no doubt that mortgage markets will remain challenged, or that the former subprime and Alt-A markets will continue to remain "former." True jumbo rates will likely remain elevated relative to their conforming counterparts, and the gap between them may widen more (as a result of a decline in conforming rates, not necessarily a rise in jumbo ones). The new "expanded conforming" loans should provide at least some new liquidity to parched jumbo markets, while FHA-backed lending should help those more on the fringes of traditional lending.
For the rest of the world, we think that mortgage money may become available at lower rates — perhaps much lower rates — as Fannie Mae's and Freddie Mac's newfound purchasing power begins to hit the markets.
The overall combined average for 30-year fixed rate mortgages should probably decline during the forecast period. We are presently at an average 6.72% for jumbo and conforming rates combined, and expect that this fixed-rate indicator will move down to as low as 6.27% during the period, dragged down by lower conforming interest rates. Hybrid 5/1 ARMs — in fact, all ARMs — have been suffering from even more erratic demand, bouncing up and down by sizable amounts. We start the forecast at 6.31%, and do expect rates to settle back but perhaps only to 5.75%.
We don't usually forecast conforming or jumbo loan price ranges, but if we're correct in that rates will decline, and if much of the decline is in conforming rates, we could see conforming 30-year FRMs with average rates close to 5.50% — low enough to spark a fair refinance boomlet.
It'll be mid-late May when this forecast comes to an end. Drop back by and we'll see if we're closer to the mark this time than last.
January 18, 2008
The meltdown of the subprime market dominated mortgage-market news over our forecast period. Accompanied by plans to "freeze" initial interest rates for some small percentage of subprime borrowers, regulators and central banks around the world invested a considerable amount of time, effort and money to stabilize and relubricate financial markets. So far, these moves seem to be doing some good for the mortgage market. Lenders continue to report losses from yesterday's loans, but tighter underwriting standards and cheaper costs of input funds make today's loans more profitable, a key element in keeping mortgage money flowing to the masses.
Although price spreads between conforming and jumbo mortgages remain wide, and there has been little discernable change in the availability of high-LTV, no-doc or subprime offerings (and probably won't be, for a while), lenders have stepped up their promotion of conforming and FHA loan offerings. Lenders in our editorial mortgage market surveys have even started to re-offer some jumbo products which couldn't be easily sold since last summer's credit market mess.
While the market mess isn't over by any means, there have been at least a few scattered signs of cautious hope. New and Existing Home sales have been mostly holding steady (albeit at low levels for the past few months) and with lower interest rates and home prices in the headlines, borrowers may begin to show some additional interest this spring.
Recap
Our November 9 forecast called for the overall (conforming and jumbo
combined) average for 30-year fixed rates to range between a high of 6.70%
and a low of 6.35%, and we were fairly close. The actual range for these
rates was a high of 6.60% and the low of 6.31% came at the end of the
period. For 5/1 Hybrid ARMs, we expected brackets of 6.40% to perhaps 6.08%,
and for the most part, the 6.37% to 5.92% we experienced was pretty close to
the mark. In fact, a 23 basis-point decline in the final week of the period
was responsible for breaking the bottom of the range.
Swings of pricing for 30-year conforming mortgages were again much wider than for jumbos. While conforming prices wandered in a 42 basis-point window over the nine-week period, jumbos meandered in a tight 14 basis-point range. Still, the 6.80% for the 30-year jumbo FRM noted at the end of the forecast period was the lowest such average rate since mid-June, when the market crisis began to first show itself.
Forecast Discussion
As we ponder the next forecast period, we'll note that the strident
calls for the Federal Reserve to again lower short-term interest rates have
been joined by stumping presidential candidates calling for various forms of
economic stimulus. For the Fed's part, they're in a bit of a tight spot:
although economic growth has measurably slowed, price pressures remain firm,
and lower interest rates can't fix the problems already on the books. Worse,
goosing growth could serve to exacerbate that inflation problem, and
persistently high energy costs are making their presence felt and will
probably continue to do so. It's a fair bet that the Fed will lower rates
during the forecast period, perhaps by a substantial 50 basis points (at
this writing, 25 seems a sure thing).
The Fed's Term Auction Facility auctions of cash have been going well, but liquidity at lower rates can only have so much effect. At present, mortgage-price spreads relative to underlying costs of funds and other benchmarks are very high, and we'd bet the Fed may begin to elbow lenders to lower prices on loans more quickly so that more borrowers can be served. Of course, for lenders, only time, the reassessment of the value of loans,and the continuing re- establishment of trusted trading relationships will rebuild these markets. We're now several years into the subprime mess, and there is still a sense among some that the other shoe has yet to drop. It yet may.
That being the case, we closed 2007 on a decidedly softer economic bent than the near-5% GDP we enjoyed in the third quarter. Some estimates put fourth quarter GDP in the low-to-mid-1% range, which seems about right to us. That means there's little energy to kick-start 2008, and a soft tenor for economic activity will probably hold through the forecast period. Whether inflation continues to present a troublesome stance is unknown, but the Federal Reserve's most recent signals suggest that spurring economic growth may be more important to them at present.
Employment growth seems likely to continue to be meager over the next nine weeks. The nation's unemployment rate gapped higher by 0.3% in December, landing at a multi-year high of 5%. Given the weeks of generally rising first-time unemployment claims prior to the December employment report, it shouldn't have been as big a surprise as it seemed to be, but it did startle the markets. We may see a minor improvement in hiring and a slight retreat from the 5% unemployment level during the forecast window, but uncertain times make it unlikely that employers will be adding to their payrolls.
The combination of slow economic growth, additional liquidity and lower interest rates between now and mid-March bodes very well for a don't-miss-it refinance opportunities — for good credit conforming borrowers with equity in their homes.
This forecast begins with rates for conforming loans at better than two-year lows, and barely a half-percentage point above the now 46-year-low of 5.24% seen back in June of 2003. Plenty of homeowners have enjoyed with rates above 5.75% in the past few years and may benefit from the lower payment provided by a lower rate and a new term. Borrowers with adjusting jumbo ARMs may need to consider a new jumbo ARM, as fixed-rate jumbo loans will probably remain elevated.
Forecast
While we do expect rates to be lower, on balance, through the forecast
period, we are starting at a fairly low level already. Rates could flare
higher on better economic news or worse inflation news. That being the case,
we think that the overall (combined) 30-year fixed-rate mortgage will wander
in a range from 6.45% to as low as 6.10%. We see 5/1 Hybrid ARMs ranging
between 6.08% and 5.75%.
At the end of the forecast period, it'll be mid-March and daylight savings time will be kicking in on the cusp of Spring. That sounds pretty good in the depths of Winter. Why not check back to see how we did, and we'll see if it will be another "silent spring" in the housing markets?