Preface
New mortgage rules are in place, there's a new head of the Federal Reserve, the Fed has begun a long-awaited tapering of the Quantitative Easing program, while the economy has been pretty fair, even sporting a GDP reading of more than four percent in the third quarter.
Despite expectations for continued strength and some optimism expressed by the Fed, the economy appears to have wobbled appreciably of late, not only here, but globally as well. Short-term stumble or not, the economy's recent performance does suggest that we are still in a slog of a recovery, with only modest, reliable forward progress at best.
That said, weak patches such as these can serve as a counterbalance to any interest rate increases which might accrue from the repeated trimming of the Fed's QE program. At this writing, the Fed's purchases of Treasuries and MBS have been curtailed to $65 billion from $85 billion, and further reductions are to be expected. However, these reductions might prove to be a countervailing force of their own, since to the extent that they are propping up economic growth, that growth would be diminished by their reduction. Of course, a slower economy most often brings lower interest rates, offsetting to a degree any increase the reduction in support might have caused... and around we go.
Recap
Back in December, we looked though the holiday madness and called for HSH's 30-year Fixed Rate Mortgage Indicator (FRMI) to hold a range of 4.375 percent to 4.875 percent. That turned out pretty well for us, as we received a range of 4.38 percent to 4.64 percent for the period. For the FRMI's 5/1 Hybrid companion, we foresaw bookends of 3 percent to 3.375 percent, and were presented with a 3.09 percent to 3.27 percent pair. For the conforming, 30-year FRM, we expected a 4.25 percent to 4.75 percent set of fences, and we wandered comfortably within those, hitting a low of 4.35 percent and a high of 4.63 percent during the period. Overall, we'll call it a solid success, if skewed to the low side a tad.
Forecast Discussion
We are in a period of adjustment at the moment, as we near the day when for the first time in over five years the Federal Reserve will not be looking to directly manipulate the mortgage market.
The Fed has made it clear that unless catastrophe strikes it is committed to getting out of the extraordinary support business as quickly as possible. Frankly, with the downturn in mortgage originations (and securitizations) caused by the Fed-engineered rise in mortgage rates last year, the Fed had been accumulating a larger and larger percentage share of the MBS market, a consequence of having a fixed-sized purchase program amid a market known for strong and weak cycles.
While Treasury-purchasing programs were intended to push down long-term interest rates to some degree, the MBS programs were initiated, run and enhanced to ensure that there would be sufficient demand to absorb a surge in MBS supply, ensuring that the market would remain liquid. Without these programs, there would likely have been a volume of MBS inventory which would not have found sufficient investor demand when placed for sale. High supply and low demand for bonds means yields must rise to try to attract investors; this in turn would have tended to foster an unwanted increase in mortgage rates, cooling the housing market at a time when it needed all the help it could get.
The housing market has arguably recovered to a real degree, or at the very least turned a corner and is heading in the right direction. Sales and prices are above recession bottoms, credit availability is still tight but gradually improving for at least some borrowers, Fannie and Freddie have returned to profitability and the negative equity situation is improving and will eventually disappear in most places. Interest rates certainly played a role in generating demand and firming home prices and will continue to, if perhaps not at the pace of last year.
At the moment, odds favor that there will be some pickup in economic growth as this soft patch subsides and the increase in economic strength will again serve to firm up interest rates. However, growth seems unlikely to move upward strongly, inflation remains subdued and, for the forecast period at least, the Fed will still be manipulating mortgage markets, if at a gradually lesser pace.
Forecast
At the time of the last forecast, we were nearing the top of our expected ranges and ended closer to their bottoms than not. It seems likely at the moment that the reverse will be true for the period ahead, that we'll start out closer to bottoms and finish closer to tops. For the next nine-week period we think that that HSH's Fixed-Rate Mortgage Indicator (FRMI) probably gets no lower than 4.30%, and tops out at not more than 4.80%. Given the overall 5/1 ARM's lack of movement last time, it seems likely to us that a 3% to 3.375% range is again all we'll see. For conforming, 30-year FRMs, we think that you can expect a 4.25% to 4.75% pair of fences.
A Fed meeting and another trim to QE happens in the middle of the forecast period. At the end of the nine-week period, we'll be closing in on another Fed meeting, and at that time, the QE program will be chopped fully in half with the spring housing season getting under way.
It will be nearly Easter when this forecast expires. As you enjoy warming days, greening lawns and new bonnets, why not drop back and see how well we did (or not) with this forecast?
