HSH Market Trends

Preface

A stumbling economy, the continued influence of euro-zone troubles, and no signs of significant improvement on the horizon have helped mortgage rates drift to 50-plus-year lows. A world awash in capital (and too afraid of financial risk to do much with it) has had some beneficial effect, but still-tight underwriting standards and a largely sated pool of potential borrowers means that even these record-low interest rates can offer only limited benefits.

Housing markets and demand dynamics remain distorted, due to the end of federal tax incentives and existing loan failures. With financial-market overhaul now the law of the land, we are about to enter a new age of re-regulation which promises to muddy up the already-murky waters of calculating risk and receiving reward. Until new clarity about the structure of finance and mortgage markets comes, it will be hard to expect any improvement beyond those at the fringes of the market.

More »

Popularity: 1% [?]

Preface

Even though explicit Federal supports for the housing and mortgage markets are now behind us, euro-zone financial troubles combined with a slow recovery are serving to keep underlying interest rates low. Coupled with residual benefits of the Fed MBS and Fannie and Freddie buyback program, mortgage rates — which were already low — have been driven even lower, and are comparable to the lowest levels the economic downturn produced.

But are low rates durable at these levels? How long can the economy grow before the Federal Reserve feels compelled to begin to raise short-term rates above the emergency levels at which they still stand? How quickly and permanently will the European Central Bank (ECB)’s trillion-dollar support package solve Greece and other countries’ debt troubles? Will the austerity measures sure to follow in these economies curtail economic growth here, lengthening the return to a full recovery?

There are always a number of questions which need answering when we write each forecast. The ones above are trickier and more complex than most, and most of the answers are likely to be murky, at best. At the same time, American housing and mortgage markets are in a transitional phase from fully Federally-backed to more private-market oriented, and the uncertainty of financial market reform overhangs everything.

Recap

Back in March, we speculated that rates might move up somewhat as the Fed program came to an end, but that there wouldn’t be major effects. As such, we forecast that HSH’s FRMI would wander between 5.25% and 5.60%, and we hit the range pretty well, as that overall indicator of fixed-rate mortgages trended between 5.27% and 5.49% during the period.

For followers of 5/1 ARMs, we must offer an apology. Due to an editing glitch, we inadvertently repeated the range for the 30-year FRMI in the slot for the 5/1 ARM. If that was the actual forecast, the 5/1 would have had to rise by nearly a full percentage point! According to our notes, the range expressed should have been 4.25% to 4.60% — and rates bounced between a low of 4.30% and a high of 4.52% over the nine week period.

We also offered a 30-year conforming-only outlook, expecting a 5% to 5.40% gap between high and low. We got a 5.27% high and a 5.03% low for the period, so we were pretty good in our estimation.

Overall, we’ll call the last forecast a success.

Forecast Discussion

We’ll try to answer the questions we posed above, starting with the Federal Reserve. Up until the Greek economic crisis exploded onto the world financial stage, we were pretty convinced (if in the minority) that the Fed would lift interest rates mildly as soon as the late June meeting. We believed that this would be the case since June would represent the end of the fourth quarter of positive GDP readings, some of which have been very solid. If the economy is no longer performing at very sub-par levels, there is little need to continue emergency-level interest rates. In fact, doing so carries risks of its own, and the Fed could make an easy case that improving conditions warranted the change. As the Fed Funds target is now between 0% and 0.25%, they could simply formalize the target as a quarter-percentage point, a subtle but clear change in policy. However, in light of the troubles in the world, the Fed’s first move has probably been bumped down the road a bit, with August possible but October a more likely date for the first change in “policy” in years. In this estimation, we still remain firmly in the minority, but even with inflation still at bay and plenty of labor market slack, it would be better for the Fed — and a confirming signal in the strength of the recovery — to start to adjust policy sooner than later.

However, part of the reason for holding off is that there is no easy way to discern if the ECB (and other central banks’) moves to address the euro-zone debt crisis will do the trick. While financial markets can be papered over with enough cash to calm them (at least temporarily), the social unrest related to any government austerity moves makes needed fiscal reforms by those governments a significant challenge. To the extent that the crisis persists, global investors are likely to continue to flock to investments as close to risk-free as they can find, leading them back to US Treasuries as a safe haven for their funds.

t the same time and no matter how marginal, any slowdown in trade will serve to slow the expansion both here and in other economies around the world. Domestic growth has already settled somewhat, easing from a hot 5.6% rate in the last quarter of 2009 to 3.2% in the first of 2010. The present estimated growth rate is certainly a fair pace, but insufficient to engage the millions of under- and unemployed people seeking work. If growth slips further, or fails to accelerate, the expansion will continue to be a jobless one, making it even harder to achieve full recovery here.

All this and the added political uncertainty of financial market reforms, too. On the one hand, rates should be pressured lower; on the other, lending standards seem unlikely to loosen very much, since doing so would expose a lender to both market and political risk.

Forecast

We begin this forecast period at an unexpected place: rates at the lowest levels since late 2009. This being the case, we’re hard pressed to find a reason to believe that interest rates might go significantly lower over the nine-week period just ahead. Without a new and even larger global market panic, they simply cannot — and even that happened, a fresh rush into Treasuries seems unlikely to produce any serious downdraft in fixed mortgage rates.

That being the case — starting at the bottom — we do believe that there’s only one way for rates to go over the forecast period: Up. However, the issues identified above are a considerable drag on any upward momentum, and it seems likely to us that when they do rise, they probably won’t go that far… at least during the period covered by this forecast.

At the same time, the mortgage market will continue to move slowly away from the beneficial effects of the various support programs. So far, things seem to be transitioning about as well as can be expected, but as these lingering effects begin to wane, pressures will ultimately build for rates to rise. Meanwhile, the challenges of a still-flailing housing market remain with us, with soft sales, foreclosures, loan modifications and losses all to be considered in context.

Over the next nine weeks, we think that the overall average for 30-year fixed-rate mortgages tracked by HSH’s Fixed-Rate Mortgage Indicator (FRMI) will run in a range from 5.17% to perhaps 5.5%. The 5/1 ARM is expected to find low and high borders of 4.2% and 4.5% between now and mid-July. Conforming 30-year FRMs? 4.85% to 5.35% for the period.

Summer will be nearly a month old when the next review is due. Between the pool and the beach, why not drop back in to see how we did?

Popularity: 1% [?]

Preface

We delayed this forecast for a little while beyond its original date, simply because we wanted to have a little more time to think about the shape of the coming mortgage market, especially as it pertains to the coming “spring homebuying season.”

The housing market is still seriously challenged, and the expiration of certain supports adds in a number of variables which wouldn’t normally need to be addressed in our forecast. However, these supports have become quite material to the recovery of housing and the ability of American households to re-cast their balance sheets. Their introduction produced distorting effects in the market, both beneficial and detrimental, and their disappearance will likely do the same. The question is, “To what degree?”

Nearly 16 months ago, the Federal Reserve announced a program to purchase mortgage-backed securities in the open market which had the effect of driving down interest rates to record-low levels. That program was joined by the Treasury, which also kicked in a couple of hundred billion dollars to reinforce the Fed’s work; the Fed also purchased billions in Treasuries and Fannie and Freddie-issued debt to ensure low financing costs all around.

During the last year, Congress provided up to $8,000 in tax credits for homebuyers to help spur demand. Initially limited to “first-time” purchases, the original program expired in November but was revived and expanded to include $6,500 for certain trade-up folks, too.

Recap

Our December forecast called for a working range for interest rates to wander in a range about 35 basis points (0.35%). We expected that the range for HSH.com’s Fixed-Rate Mortgage Indicator (FRMI) would trend between 5.10% and 5.45% during the period. The actual range was tighter than that, with just a quarter-percentage point difference between the high and low values. However, that range was biased to the high end of out expectations, with the FRMI running between 5.34% and 5.59%. However, for the second period in a row, our outlook for the 5/1 ARM was fairly on track. The wandering range for the product was actually just 37 basis points (0.37%), with a low value of 4.48% and a high value of 4.85%, both fairly close to the boundaries we forecast.

The high-end bias for both of these kinds of loan all happened at the beginning of the period, when a cascade of new government debt overwhelmed holiday-thinned investor demand for such product.

Forecast Discussion

Since the last forecast, several new mechanisms have been introduced which will significantly influence rates and markets in the coming weeks. Six days after the last forecast was released, a late Christmas Eve announcement came that Fannie and Freddie would essentially be allowed to incur unlimited losses and eased portfolio size restrictions for the two GSEs. The expansion of portfolio holdings and available cash resulted in a program announced in mid-February where up to $200 billion in delinquent loans will be “bought back” from investors.

The combination of these events means several things. First, although the Fed will be moving out of the MBS investment business, Fannie and Freddie can balloon their portfolios of holdings. This means the process of sponging up excess supply of MBS (by the Fed) will be replaced by a process which instead limits how quickly securities come to the market, providing a different (though effectively equivalent) sponge. As such, rather than the process of lenders originating loans, then selling them to the GSEs, which in turn sold them to the Federal Reserve (and any other takers, of course), this new arrangement means that Fannie and Freddie can accumulate loans or securities on their books without needing to dump them into the market all at once; instead, they can mete out supply to the market, providing a stabilizing effect on interest rates.

At the same time, the re-purchase of up to $200B of bad loans from investors should produce some gaping holes in investor portfolios, which will need to be refilled. “Fixed-income investors” — those who purchase bonds — may have only a few choices of where to invest funds, with MBS among them. Faced with a handful of cash, it’s reasonable to expect that at least some of the funds will buy new MBS from Fannie and Freddie. The repurchase program will spark fresh private demand for securities, which will help to offset the Fed’s influence in the market.

As a result of all of this, we think that the transition away from a Fed-dominated mortgage market will be smoother than we expected way back at the end of last year when we wrote the last forecast and put the finishing touches on our 2010 Outlook.

Keeping mortgage rates low is a key issue for the housing market. “Affordability” is the balance between a home’s price and the “carry cost” generated by price of financing. If one rises, the other necessarily declines until balance is restored. In this way if mortgage interest rates rise, home prices may need to decline in order to produce the same affordable monthly payment.

While the interest rate isn’t the only consideration when buying a home, and a minor rise in rates won’t ruin homebuying plans, it could put additional pressures on home prices at a time when they are just starting to find solid footing in many marketplaces. Of course, the other factor which spurs home price increases is rising demand, which has been tough to produce in a difficult economic climate. One bit of assistance has come with the homebuyer tax credit, which has served to produce some additional demand in the market, but created distortions in sales patterns late last year. With that program essentially coming to an end in late April (deals need to be signed by then and closed by late June). We think that there will be significant political pressure to again extend the program at least through the spring season as there is demonstrable evidence that the program is providing important support (see last October and November’s spike in sales) and the simple fact that if the program isn’t being used it costs the government nothing.

If we are correct, and the above factors come to pass, we should have a Fed-to-private-market handoff with much less disruption for interest rates, coupled with perhaps a bit of seasonally-firming demand for home sales, spurred on by incentives which will be gone at some point.

Forecast

Way back in December, we considered the entirety of 2010 as a whole, and especially the delayed end of the Fed’s MBS program. At that time, we thought planning for a half-point rise in conforming 30-year fixed rate mortgages might be a prudent stance. In light of what’s outlined above, we think that there will be less disturbance in rates than that. The shift from a guaranteed public influence in the MBS market to one more dominated by private interests will bring some uncertainty, and that uncertainty — risk — will influence interest rates to at least some degree. Even a small rise in interest rates will seriously curtail refinancing activity; this means, however, that there will be fewer loans for Fannie and Freddie to accumulate, so less supply of MBS will come into the market at a time when demand should be increasing to some degree… all of which should serve to temper any rise in interest rates. There are a lot of intersecting factors here which need to all occur simultaneously, but we think it will all work out fairly well.

If everything works as planned, we think that the next nine-week period will see HSH’s overall FRMI trend between an average rate of 5.25% to perhaps 5.60%. At the same time, the overall 5/1 ARM will likely wander from perhaps 5.25% to 5.60%. Although we don’t usually provide an outlook for conforming 30-year fixed rates by themselves, we’ll wing it a little this time, and call for a 5% to 5.40% range over the next couple of months.

Early-mid May’s the expiry for this forecast. Stop back and see us!

Popularity: 1% [?]

Preface

Mortgage rates remain quite favorable, thanks to a gently improving economy and the push-back of the end of the Fed’s mortgage-backed securities program to March. Absent that move, we’d probably be talking about very rocky market conditions right now, instead of the smooth and familiar ones which exist.

Economically, we’ve technically ended the recession, but troubled labor and housing markets remain. The administration is strongly pushing lenders to conduct more loan modifications, but there are concerns that these measures are merely pushing foreclosures, and the associated impacts on home inventories and home prices into next year, additionally challenging the market even as supports for it begin to disappear.

With improving banking dynamics, the discussion in the last forecast about how improving fundamentals means lower risks for lenders — and lower interest rates as a result — does seem to be continuing. Perhaps the best reflection of this can be seen in the rates on non-government- supported, private market 30-year fixed rate jumbo mortgages, which moved into four-year-low territory during the last forecast period. As lenders become more solvent, their ability to support the mortgage market should improve. That said, the fully-government-insured FHA program, virtually risk-free to lenders, is garnering a huge amount of market share, so it’s clear that things aren’t all that great just yet.

Recap

Our October forecast called for a wider range for rates than we actually got, and stable-to-declining rates helped foster a lot of refinancing activity. We expected that the overall 30-year fixed rate mortgage average would trend from 5.60% to as low as 5.15%, and we certainly well covered that range as rates actually held between 5.45% and 5.24% during the period. Our expectation for the overall 5/1 ARM average was right in the sweet spot as well, dead center in the middle of our expected range of 4.85% to 4.40%, and the actual range was 4.69% to 4.56% — 16 basis points from both the top and the bottom. We’ll call the last forecast a success amidst what ended up being a gentle period for rates.

Forecast Discussion

As we write this, 2010 is fast upon us. It occurs to us that 2009 was all about promoting stability for money, mortgages, and financial markets, and we expect to largely enjoy those conditions for a little while longer yet.

As we write this, 2010 is fast upon us. It occurs to us that 2009 was all about promoting stability for money, mortgages, and financial markets, and we expect to largely enjoy those conditions for a little while longer yet.

That said, we can’t help think about what lies ahead. This forecast will expire in late February, and we’ll likely be starting to feel the nervous effects of the coming expiry of the Fed’s MBS purchase program. If the economy is still moving forward at that time, renewed concerns about Fed “exit strategies” and potential inflation may again resurface, adding additional uncertainty to the period. At some point, the short-term interest rate the Fed controls will be need to be lifted, and that day is getting closer, even if it may still be months away.

Between then and now, there are some normal end-of-year and beginning-of-year “seasonal” effects in play, including slowing demand for credit and quieter market activity in general. Of late, rates have firmed a little bit as underlying interest rates have trended higher, most likely due to investors trying to lock up profits for the year, or preparing for new strategies in 2010. As the holidays fade, market activity will again quicken.

As there is already plenty on the regulatory plate, we expect no brand-new government initiatives during the period (excepting perhaps ongoing tweaks to loan modification programs), but previously-enacted reforms do begin to come into play, notably changes to the Real Estate Settlement Procedures Act (RESPA). New, more explicit documentation will be provided to borrowers when they apply, and lenders are scrambling to make sure they are in compliance with the new regulations. We may also see a more considerable battle forming as the new Consumer Finance Protection Agency (CFPA) starts to take shape.

Increasingly, we expect to see the markets act closer to whatever passes for normal these days, reacting to signs of economic health (or lack thereof) and price pressures. The watchful eye and steady hand of the Fed will still be evident, but we’re left with the sense of them quietly backing away as we progress forward, like a parent helping a child to ride a bicycle without training wheels for the very first time.

Forecast

In this environment, tethered by the Fed and government support, movement in mortgage rates should remain muted. Conforming 30-year FRMs have been hanging just over or under the 5% mark for months now, and that should largely be the case (although just over 5% seems most likely in the coming period).

From present levels, no potential borrower should expect significantly lower rates, as the economy has largely stopped worsening and there are a growing number of sporadic clues that the economy is actually improving. Even with easing risk premiums being built into rates, those falling rates and an improving economy are at odds with one another, and if you want one you’re unlikely to get the other.

We’re not prepared to call for the end of record-low mortgage rates just yet. We visited those bottoms during slow-demand or panicky periods a few times in 2009 (most recently due to a technical default of debt issued in Dubai) but absent those kind of unknowable events we will probably remain above the bottom of the bottom for rates.

This being the case, we’re pretty comfortable generally working in the ranges described for the October forecast, but, given the expected relative stability of the market will tighten them up a little bit. For the next nine-week period, we expect the overall average interest rate expressed in HSH.com’s FRMI to trend from 5.10% to perhaps 5.45%, while the overall average for 5/1 Hybrid ARMs should wander in a range of perhaps 4.40% to 4.75% between now and late February.

If you are considering refinancing or hope to buy a home in 2010, you really should be getting those transactions underway shortly.

It’ll be late Winter when this forecast expires. Will markets still be frozen, or will global financial warming be coming into play? Drop back and find out.

Popularity: 1% [?]

Preface

We admit to a bit of surprise that Conforming mortgage rates have moved to approximately the lows of Spring, and that they’ve dragged jumbo rates down to about four-year-low levels. The economy does seem to be in a firming pattern, housing markets have improved somewhat, and government support programs will all contribute to a “technical” economic recovery which appears to have gotten underway in the third quarter.

Perhaps we shouldn’t be all that surprised that rates have eased. Prior to the last Two-Month Forecast, we speculated in the August 7 HSH Market Trends that it was just possible that an improving economy would produce lower, rather than the typical higher, interest rates for at least a time. In that discussion, we noted:

Turns out that this might be exactly the case. The minutes from the Fed’s September 22-23 meeting noted that “Yields on nominal Treasury securities also decreased since the Committee met in August. A decline in implied volatility on longer-term Treasury yields suggested that some of the drop in yields was due to reduced risk premiums.” Further on, they noted that “Given the improved economic prospects, the decline in longer-term Treasury yields and the apparent marking down of the implied path for the policy interest rate were seen as somewhat puzzling” but probably due to excess bank reserves, reduced inflationary concerns and lower term [risk] premiums in a more settled economic environment.

It’s worth noting that there are limits to how much improved fundamentals can influence rates downward, especially for conforming loans. Aside from low nominal interest rates, conforming spreads against 10-year Treasuries are near recent historical norms, and jumbos, though still elevated, are approaching spread levels half of their December peaks. To the extent that “spread compression” has run its course, the less excess spread there is to absorb any increase in underlying interest rates. Improving economic fundamentals, coupled with dwindling Federal support programs for mortgages and Treasuries will serve to foster firmer interest rates at some point, perhaps sooner than later.

Recap

For our last forecast, we believed that our Fixed-Rate Mortgage Indicator ((FRMI)) — an average inclusive of conforming, jumbo and “expanded conforming” loans — would wander in a range between 5.93% and 5.5% for the period. While our choice of gap was pretty close, it occurred in a much lower interest rate range, as that benchmark rate walked between 5.73% and 5.34% over the nine-week span. The FRMI’s 5/1 Hybrid ARM counterpart downshifted even more strongly; we called for a 5.30%-5% range, but the actual was 5.04% to 4.67%. With the significant decline, there seems to be a growing viability in the use of certain ARMs by homeowners and homebuyers seeking good stability at rock-bottom rates.

Forecast Discussion

Amid an improving but uncertain economic period, forecasting is even more of a humbling art than usual. Complicating this particular period is the still-significant influence of government policies into the credit and housing markets. Precisely how will the government extricate itself from private markets, and at what speed? How wide-ranging will be the effects of expiries and discontinuations of certain supports, and what are their influences on the economy as a whole? Are the private markets ready to assume a more substantial role? How much influence does the specter of a potential cascade of new regulations and regulators to govern those markets influence the direction we move in? Frankly, there are far more questions than answers, and that doesn’t even include any about the prospects for economic recovery. Some of these questions and issues will likely become recurring themes in the next few Two-Month Forecasts, too.

Perhaps its best to start with some “known knowns.” The Federal Reserve’s $300 billion program for purchasing certain long-dated Treasury Securities comes to a close at the end of October. The loss of a significant buyer in that market — a sponge to absorb excess issuance, if you will — may have only a minor effect on rates, since there has continued to be a strong appetite by investors for 100% guaranteed obligations. Still, the loss of that buffer at times of high supply levels of debt could add some additional volatility to rates at times.

To the extent that the $8,000 tax credit has goosed home sales, we would expect a falloff in sales when it expires in November (as witness “cash-for-clunkers,” but to a much lesser extent). This matters in the regard that such slower sales would mean a falloff in the volume of mortgages issued, and in turn, somewhat lower volumes of mortgage-backed securities to be absorbed by another Fed program as well as the market at large (not that demand there is all that great at the moment).

That MBS purchase program was recently extended by the Fed, not in terms of how many securities it will buy but the length of time in which the program will operate. Originally slated to expire at year’s end, the program will now run until the end of March 2010. In our view, this is an expression by the Fed that it doesn’t believe that private markets will be ready to accommodate the $100 billion of MBS every month which the Fed has been acquiring. The slowing of the amount of MBS purchases by the Fed over the forecast period (and beyond), and the corresponding effect on mortgage rates is a key test for the markets… and a source of great uncertainty.

New financial regulatory structures are in the early stages of formation and won’t be in place during the forecast period, but it’s reasonable to expect that concerns about them will be on the rise. Uncertainty — in the form of political and regulatory risk — influences not only the price of credit but the availability of it as well. Until it becomes clearer how much more stringent the lending environment will become, lenders (and improving capital markets) will probably keep more to the sidelines than they would coming out of a more “normal” recession, tempering access to credit and potentially fostering “defensive” pricing reactions by the market. The recent changes to credit card legislation are a good place to see that happening in real time.

All the foregoing is to simply note that there are many factors which will twist and turn the market, pushing it and pulling in different directions in the weeks ahead, and not all of them are economic concerns. As far as the recovery goes, we expect that it will be a muted affair — a technical recovery — as GDP is boosted by some rebuilding of depleted inventories amid a modest recovery of final consumer demand. Jobs and income growth will lag, and that will keep forward momentum at a minimum (all while serving to help keep inflation at bay, for now).

Forecast

With rates at multi-year or near historic “all-time” lows, it’s unreasonable to expect that they have considerable space to decline, especially in the face of a modestly improving economic climate. If the near decimation of markets earlier this spring coupled with some truly bleak outlooks couldn’t push them much lower, this climate is unlikely to, either. However, improving risk fundamentals and investor appetites, muted economic growth and low prospects for inflation should serve to keep a lid on any serious increases, too. The bleakness of Spring drove rates down; the euphoria of Summer (and inflation worries) drove them back up. The Autumn seems to have a sense of reality about it, and an improving sense of optimism about tomorrow’s economic prospects.

Somewhere between those two extremes of Spring and Summer is where we’ll probably find ourselves for the remainder of the fall. That being the case, we expect the FRMI to likely wander in a range from perhaps 5.15% to perhaps 5.60% over the next nine week period. Its 5/1 sidekick may probably have some additional room to slide, so we think a range of 4.85% to 4.40% is probably in the cards.

The next forecast is due a little before Christmas. Here’s hoping that our view of the future turns out to be a “present.”

Popularity: 1% [?]

August 10, 2009

Preface

Growing optimism that an economic recovery is coming soon has served to put a floor under mortgage rates. At the moment, it would be difficult to see a return to average interest rates in the upper-4% to low-5% range unless either a new financial panic breaks out or there is a steep decline in equity values to drive them back down to those levels.

Supports put under the economy and financial markets are doing their job, but there is precious little forward momentum, “stimulus” or not. It is safe to say that things have improved from their worst levels, but whether they can continue improving (or can improve with any sort of speed) is still the big question.

As we grind toward economic flatline (0% GDP), we continue to look for signals that a self-sustaining recovery is forming. Unemployment remains very high, consumer incomes and borrowing continue to decline, and one-time or short-term boosts (increases in Social Security payments, the “Cash-for-Clunkers” program, $8,000 “first-time” homebuyer tax credits, etc) lack lasting impact and may actually damage prospects for future upswings in activity. Additionally, the “stimulus” which has yet to be spent will promote money into narrow channels of the broad economy. Measures of consumer confidence have risen off their worst levels, but remain mired in rather dark territory.

We can’t help being struck with the notion that “Just because things aren’t getting worse, it doesn’t mean they are getting better.”

Recap

For the last forecast period, we expected that HSH’s Fixed-Rate Mortgage Indicator ((FRMI)) — an average inclusive of conforming, jumbo and “expanded conforming” loans — would range from a low of 5.30% to perhaps 5.72%. We marched well above that range shortly after the forecast was released, topping out at 6.04%, only to drift back to a low of 5.66% during that time. Our expected range of movement was pretty good, but rather than moving to the lower end of the scale, we moved to the upper side instead. That was approximately the case with the FRMI’s 5/1 Hybrid companion, which we thought would cover a 5.30% to 4.85% range. As with the FRMI, we did blow past the top somewhat (5.44%) and failed to get as low as we expected (5.07%). Almost all of the flare higher was due to a much-better-than-expected May employment report, an optimism which faded in subsequent weeks.

Forecast Discussion

As mentioned above, we keep looking for clues of a building momentum –the sort which would promote what might be called a “V”-shaped recession, characterized by a sharp downturn but an equally fast rebound. At present, it doesn’t seem to us that there is any sort of ‘letter’ forming — not V, L, W or U — which describes the sort of recession/recovery we are having or are likely to have.

The economy was in a slow fading pattern prior to the breaking of financial markets last fall. We had been shedding jobs for months, a gentle bleeding which resulted in a 0.5% decline in GDP in the third quarter. High energy prices were sapping consumer spending strength, and housing was in quite a mess. Absent the collapse of capital markets, we probably would have seen a deepening recession in the fourth quarter of 2008 and the first of this one anyway, but far shallower than the -5% and -6% figures which occurred. The additional damage caused by that break continues to vex efforts to stimulate demand, with additional job losses and tighter access to credit chief among the issues.

For all of the noise being made in housing markets, with both new and existing home sales on an upward path, it’s instructive to remember that present levels of new home sales are at about 25% of their peak, while existing home sales are at perhaps 60% of their top levels. Since those were unsustainable levels, it’s a solid fact that we have a long way to go just to get back what pre-boom ‘normal’ levels were.

Building forward momentum requires more consumer spending. Trouble is, unemployment remains high and likely will for some time as we trend toward nearly double what is believed to be the naturally occurring rate of unemployment. Until employment moves measurably higher there will be little to foster a steep incline in economic growth, leaving at best a trend of gradual, moderate improvement. There’s little more the Fed can or will do to goose economic growth, and present fiscal policies being pursued by the Administration favor government borrowing and spending of funds. This makes the stimulative power of returning money on a widespread basis to consumers (taxpayers) via marginal or payroll tax cuts unlikely; moreover, even without factoring in massive new spending plans, near-term tax increases are much more likely than decreases, which will be a drag on economic growth.

We’ve also again begun to watch the price of oil, which seems to now be tracking in lockstep with the stock market. Oil prices firming from the mid-$30/bbl to about $70 hasn’t had much effect of yet, but rising gasoline and energy prices also act as a drag on economic growth, not to mention fomenting increases in the cost of just about everything should they become persistent.

We’re not trying to sound pessimistic, only realistic. With uncertain demand forming, businesses might not hire as quickly as they have in the past, and some of the jobs lost during the downturn won’t be coming back anytime soon, if ever. If we can’t additionally stimulate via monetary policy, can’t better stimulate via fiscal policy, and can’t promote widespread consumer spending via tax policy, the recession will end, but improvement will probably be a grind higher… a process, rather than an event. That being the likely case, we may wander on either side of a pretty flat economic line for some time to come yet.

Forecast

The closing of Summer and beginning of fall usually sees a change for rates, from one of a dull pattern to one with more snap to it. For the most part, that has often meant a modest overall decline in mortgage rates, as perhaps the waning optimism of Summer has become the colder reality of Autumn. Even if firmer of late, rates remain well below last year’s level at the start of this forecast period.

Economic activity should continue to nudge higher over the next nine weeks. We expect that as moderately better numbers are revealed, discussions of when the Federal Reserve will raise interest rates will begin to surface. They won’t feel compelled to do so anytime soon, probably not until very late this year or early next at the very earliest. Even when they do, short-term rates will still remain well below normal for a long while.

Mortgage rates, on the other hand, seem more likely to be driven in a “start and stop” fashion. The backing and filling of rates after the late Spring run up has left us above “credit market crisis” levels, but well below even year ago marks. As we write this, optimism has pushed mortgage rates back toward the top of recent ranges, but it’ll take a much stronger economic showing to push us higher.

For the next nine weeks, this recent start and stop pattern seems likely to leave us pretty rangebound. Our guess is that a range of perhaps 5.93% as a high to perhaps 5.5% as a low is the most likely to be seen. The 5/1 ARM should see a tighter window of perhaps 5.30% to 5% or thereabouts.

It’ll be just about Columbus Day when the next forecast and recap comes due. Drop back and we’ll see if our realism has been upended.

Popularity: 1% [?]