The HSH Two-Month Forecast for Mortgage Rates
Read the latest HSH Market Trends - and get it via email.
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-manded 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?
November 9, 2007
Significant market turbulence is now behind us, but unsettled financial markets will be the rule for a while yet. The Fed has made measurable moves, but may be "two and done" as the economy outside of housing and mortgages holds up OK. That has been the case, but inflation and slower growth both seem to be headed our way -- the result of near $100 per barrel oil and rising commodity costs.
Although mortgage rates declined during the last forecast period, little of the decline could be attributed to any influence by the Fed. In the period just after the Sept. 18 cut in the Federal Funds and Discount Rates, mortgage rates largely trended upward before settling back mildly. In late October, a spate of poor economic news related to housing and reinforced by some softer factory orders spread economic disappointment, driving money out from stocks and into Treasury bonds, pushing up prices and dragging down yield and mortgage rates.
Recap
Our September 7 forecast looked for the overall
30-year fixed-rate mortgage (FRM) to trend between 7.02% and 6.70%
during the nine-week period. We did track as high as 6.82% and eased
only slightly before a 14-basis point drop during the week ending
October 26 put us below our bottom limit. The actual bottom for rates
was 6.55%, which came during the last week of the period. Our expected
range of movement (about 32 basis points; actual move, 27) was good,
even if our scale of rates was not. For five-one Hybrid ARMs, we
forecast 7.00% to 6.60%, but rates fell and ended in the lower range of
6.61% to 6.26%.
It's worth noting that the greatest influence in that 5/1 number came from jumbo mortgage pricing. At one point during the forecast period, 5/1 jumbos had shed nearly 60 basis points from their forecast-period starting level. We attribute this to the return of at least some jumbo mortgage buyers and portfolio lenders to the markets during the past nine weeks. By comparison, conforming 5/1s moved about half that much.
This was also the case for FRMs: conforming rates moved down by about 22 basis points, while jumbos declined by more than double that. All that said, while improving, the gap between conforming and jumbo markets remains abnormally wide, a condition which seems likely to persist well into next year.
Follow daily numbers here and weekly numbers on this page.
Forecast Discussion
While the economy has performed
remarkably well over the second and third quarters -- averaging about 4%
GDP growth during that time -- we can't help being struck by a sense of
fading momentum. Housing markets remain in terrible and perhaps
worsening shape; exports may be gaining momentum, but measures of
factory activity don't seem to reflect any sort of enthusiasm for
growth. Consumers may already be retrenching their spending habits, if
the October news from prominent retailers is any indication. Gasoline
and heating oil prices are rising and will rise more, and if recent
history is any indication, those increases tend to slow economic
activity and put upward pressure on prices. Employment levels remain
fair, even good, once recent revisions to hiring are taken into account,
but the nation's unemployment rate has slowly but steadily ticked higher
since March, rising from 4.4% to the present 4.7%.
Presently, the best guesstimates are that we will skirt a recession absent any new or unforeseen economic shock, but a period of slower growth and perhaps rising prices does seem to be forming. As it is usually accompanied by a declining inflationary threat, waning growth generally brings lower long-term interest rates, and that is largely the case, particularly to risk-free investments such as Treasuries. Mortgages, however, are not risk free, and may not benefit as much from any declines in underlying interest rates brought on by economic disappointment.
Providing some tempering to any downdraft in rates are inflation concerns. Price pressures do seem on the increase, and it is reasonable to expect that our weak dollar at some point will serve to firm up the prices of imported goods. Should inflation does move higher, interest rates will have trouble declining, soft economic growth or not.
In this environment, both good and bad news can be found for refinancers and homebuyers. For good-quality conforming borrowers, interest rates are close to 2007 lows as we write this -- providing a real opportunity for refinancers to escape from resetting ARMs to manageable fixed rate mortgages. Jumbo borrowers, especially homebuyers, will mostly find improving conditions and access to credit. Although the price of that money remains elevated, a jumbo borrower with an adjusting ARM may be able to trade in that ARM for a fixed rate for virtually the same rate, presently in the mid-to upper six percent range.
For all other borrowers -- those with no equity, those with no ability to document their income or assets, those with high debt loads, and those who can cover little or no increase in their monthly payment from present levels, those with poor credit -- lending windows remain closed, particularly where any combination of these issues intersect.
Forecast
Downward pressure for interest rates seems to be the dominant theme
for the end of the year and into the new. However, it's our guess that
the downtrend will be limited due to rising concerns about inflation and
a ongoing low level of investor demand for new mortgages. The Fed
trimmed interest rates twice in our last forecast period to modest
effect, and there are some expectations of another cut in December. As
is often the case, fixed rate mortgages can rise even as the Fed is
trimming short-term rates, particularly if inflation isn't subdued.
We think that the overall average for the 30-year FRM will run in a range from about 6.70% to perhaps as low as 6.35% as we finish 2007 and wander into 2008. For Hybrid 5/1 ARMs, we think that 6.40% to as low as 6.08% is a likely gap.
Have a happy and healthy holiday season. If you're inclined, refinance! Come back and see us again in early 2008.
September 7, 2007
The Summer of 2007 can be described in a number of ways, but you can be certain that 'tranquil' isn't among them. Increasing signs of credit trouble in fringe lending markets spilled over into good credit quality non-conforming markets. Subprime mortgage troubles have begun to show up more regularly in investor holdings around the world. More mortgage lenders suddenly shut their doors, and overall, the shunning of risk by investors caused a once-mighty river of mortgage money to dry to barely a trickle, leaving some borrowers with more expensive financing options, and others with no recourse at all.
While the housing boom recedes in the rearview mirror, the housing bust continues to roll along in front of us, and no one can tell how wide the valley is. Dire predictions about the effects on the economy abound, but at this writing it seems to be holding its own, with the latest estimate of GDP growth above 4% (Q207). How much additional drag we'll experience from housing's falloff has yet to be seen, and the earliest estimate of broad economic growth in the present quarter isn't due for about eight weeks yet.
No matter what the response by regulators, Congress, or even the Fed, housing markets are going to take a bit of time to straighten out and improve, and will likely have to do so minus all of the budget-stretching mortgage products which served to artificially inflate it.
Recap
Forecasting is among the most humbling endeavors, so
we're always happy when we're more right than wrong. Back in June, we
offered an extended two-month forecast (this one actually covered about
eleven weeks instead of the usual nine), where we expected the average
30-year FRM to range from 6.70%
to about 7.02%. At the same time, we thought that 5/1 ARMs would wander between 6.36%
to 6.60%.
The actual range of rates for the 30-year FRM covered a 6.80% to 7.02% spread, which was skewed higher by leaping prices for Jumbo mortgages; Hybrid 5/1 ARMs, a "riskier" product, blew past the top end of our expectation, covering a range of 6.47% to 6.85% during the eleven week period as investors turned away from anything but plain-vanilla loans.
Let's call it a split decision for the last forecast.
Forecast Discussion
Although the broad economy seems to be
OK at the moment, there's a fairly loud drumbeat from many credit-market
players for the Federal Reserve to trim short-term interest rates, with
some strong expectation that this will occur at the next FOMC meeting
later this month. The summer flight-to-quality buy of risk-free
Treasuries drove yields for all instruments down to very low levels,
with even the 10-year Treasury far below the 5.25% stated Federal Funds
Rate. With lower rates already in place, pushed there by the market,
this begs the question: "What good will a lower Fed Funds Rate do?"
It's a valid question. For first mortgage rates, the answer is very little, if anything; despite marked declines in the yields which influence mortgage rates, mortgage rates have remained pretty steady. For fixed-rate mortgages, the difference (spread) between the 30-year FRM and the 10-year Treasury has widened to five-year highs, and is running some 80 basis points (.80%) above normal. The increase in differential represents the investor demand for higher returns for investing in mortgages, as all mortgages are being tarred with the same "risky" brush at the moment. Even lower input costs for capital may or may not translate into lower mortgage costs for borrowers, especially those outside the rigid boundaries for conforming loans. Pricing for ARMs is even more distorted at the moment, but in differing ways; while Jumbo ARMs are priced lower relative to their fixed rate counterparts, Conforming ARMs are back into a mostly-inverted pricing curve, at least partially due to balky Wall Street conduits.
Economically, we'll probably come though the forecast period in OK shape, but the number of housing-related job losses from the construction and financial services sectors does seem to be finally showing in employment reports. The Fed has all but explicitly stated that a higher unemployment rate will be required to relieve inflationary pressures in a more meaningful way, and downgrades to hiring (a net 4,000 jobs lost in August) seem to have us setting our feet on that path. Of course, inflation remains the Fed's top priority, and in that regard, signs point to a gentle cooling of price increases, but inflation generally remains above the Fed's implicit targets for now, making a cut in short-term rates less of a likelihood.
To be sure, it is a very tenuous time for the economy, the markets and the Fed. Summer's market maelstrom seems to have quieted a little, and the same could be said for both inflation and the economy. Lower rates are here, Fed moves or not, but mortgage and other debt markets remain in a largely dysfunctional stance at present. As well, the global reassessment of risk continues to keep investors on edge.
While we don't forecast what the Fed will do, we still think that despite all the credit market troubles, there is a reasonable likelihood that investors hoping for a cut in short-term interest rates will be disappointed. The economy is performing, even if segments of it are not. Tightening access to capital does seem likely to trim growth somewhat, but a 4% GDP rating is already above what is thought to be the economy's "potential" (ability to grow without generating inflationary pressure) so some additional slowing could be endured. At 4.6%, the unemployment rate remains low as we hold near what could be considered "full employment". In this way, if a quarter-percentage point cut will do little to loosen the credit market logjam - at its core, a disconnect between holders, buyers and sellers of debt rather than an issue of the price of money - and if the economy is growing above potential, and if such a move could increase the potential for inflation, where is an overarching benefit that the Fed could cite as a reason for such a move?
Forecast
For this forecast, our accuracy level will likely
be dictated by where you look. After spending a fair chunk of the
summer traveling in different directions, conforming and jumbo mortgage
prices finally moved in the same direction again during the week ending
August 31. While they didn't move with the same velocity - jumbos fell
less than conforming - this is the first glimpse that markets are
beginning to function somewhat more normally again, even if there were
disparate improvements. We think that during the next nine weeks, the
overall 30-year fixed rate mortgage will run in about the same space we
expected last time, covering 6.70% to our recent high of 7.02%. For 5/1
Hybrid ARMs, that range will probably be about 6.60% to 7.00%; of late,
hybrids have had more volatility to the upside, so perhaps they will
exhibit some to the downside during our forecast period, as well.
It'll be well into November for our next forecast. Drop by and we'll see how this all played out.