Two-Month Forecast: 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!
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