Happy New Year and Rates

The question everyday in my world is, “What are interest rates going to do?’ Well I could get out my crystal ball or do what we have done for years to better benefit our clients. In all situations you should consult an expert, and in this case the expert is Barry Habib.

We subscribe to Barry’s Mortgage Market Guide so we can deliver the best advice to you on when you should lock your loan. Because they follow the Mortgage-Backed Securities market minute by minute we always know in advance if the market is worsening or improving. This knowledge allows us to deliver you the best rate possible.

Barry has an uncanny ability to understand technical analysis of bonds and is regularly featured on CNBC, CNN, and other financial sources. His yearly predictions for the last several years have been spot-on.

So with a special thanks to Flagstone’s rate advisor Barry Habib here is the –

Mortgage Market Forecast 2007
By Barry Habib

It’s that time of year again…and for the fifth year running, we’re ready to lay out our thoughts and forecast for the year ahead. They say “hindsight is 20/20”, and looking back, we’re quite proud of how well our past predictions have held up, especially in terms of interest rates. So crystal ball, Ouija board, and Tarot Cards aside, let’s do our best to see into the future, and how 2007 might look on some specifics that could impact us. And most importantly, let’s understand how we, our clients and our referral partners can benefit from these insights.

The big picture

So we’ll start out by looking at the US economy at large. Things began to slow down in 2006, which was not only needed after its former torrid pace, but also exactly what the Fed wanted to see happen. A “soft landing” for an overheated economy is something you often hear the Fed wants, but rarely can achieve…yet so far, the cooling has indeed been gradual and orderly. We expect more of the same in 2007 – a gradual cooling, without the economy crashing.

Job growth will likely stabilize, and unemployment rates may click just very slightly higher as the economy cools. Overall, the labor market in the US remains quite strong. And this is good news for the housing market, since healthy job markets often help housing markets remain stable. The more susceptible areas for increasing unemployment and flat or declining job growth are where manufacturing plays a key role in the local job scene, since the manufacturing sector never fully recovered as strongly as other parts of the US economy.

Former Fed Governor, Dr. Edward Gramlich: “Central Bankers are paid to worry – every silver lining has a cloud.”

After nearly nineteen years in office, 2006 also saw the baton passed from former Fed Chairman Alan “The Maestro” Greenspan to the rookie, new Fed Chair Ben Bernanke. And both deserve credit for orchestrating favorable economic conditions, while reining in inflation. And that’s what the Fed is charged with doing…controlling inflation so that the economy can sustain ongoing financial health. This sometimes means short term pain, like the seventeen Fed Funds Rate hikes that both Greenspan and Bernanke oversaw. In the past, the Fed has often gone too far with hikes – and that’s easy to do, because it takes six to nine months for the effect of a hike to filter its way through the economy. But the Fed has been commendably patient, although not unanimously so, in allowing the seventeen hikes to slowly take the steam out of an overheated economy. We know the Fed wants core inflation to ride between 1 and 2% - and they are getting closer and closer to this target.

The Fed finally did pause in June of ‘06, with a Fed Funds Rate of 5.25%. This appears to be the top of the current hiking cycle – and in last years forecast, we had expected a pause slightly sooner at 5%. So what will the Fed do in 2007? The inflation-measuring Core Personal Consumption Expenditure (PCE) will need to be at 2% or less for two or three consecutive months, before the Fed starts to talk rate cuts. Always wanting to remain ahead of the curve, and fully cognizant of the delay between Fed action and economic impact – the Fed will be worrisome that the economic decline will go too far. So we anticipate a Fed rate cut cycle to start in 2007, but not until the summer or fall.

This will be some welcome news for individuals with Home Equity Lines of Credit. And while it will eventually benefit those with ARM’s, the damage has already been done for those expecting adjustments during the year. And with $1.5 Trillion dollars of mortgage loans set to adjust during 2007, to significantly higher interest rates – we have an incredible opportunity to help our clients, gain new business, and increase our own production significantly. But don’t expect to have your phone just ringing off the hook – you’ll have to be proactive in reviewing your database, personally contacting your customers to congratulate them on the interest saved by using an ARM, and determining if a different strategy may make sense for them at this time.

Stocks and Oil – they Rocked and Roiled

In our 2006 forecast, we thought stocks would be a bright spot…and that’s exactly how things turned out, with healthy gains in all the major averages. We also cited how earnings were very healthy, and how that trend should continue. We see more of the same for 2007, and although stocks may come in short of their 2006 performance, they will still yield a handsome return in the 8 -11% range.

A very slippery area for 2006 was the oil markets – and how the volatile swings affected what we paid at the pump, how much we had left to spend, and inflation in general, since oil is in everything. Last summer, an oil pipeline disruption in Alaska sent prices at the pump screaming up above $3 per gallon. Some felt the need for a cash out refi, just to fill up the tank! And not coincidentally, mortgage rates spiked to their highest levels of the year – near 7% – due to the threat of increased inflation. Thankfully, prices have moderated – but the lesson is how delicate and volatile this area is, as well as how wide an impact that oil can have. That makes forecasting oil prices very challenging, but we can see oil in a $55 – $65 per barrel range, keeping prices at the pump hovering a little above $2 per gallon.

“The rumors of my death have been greatly exaggerated.”

Mark Twain might have coined the phrase when his death was reported while he was still alive and well…but it is also a rather fitting phrase for the housing market of 2006. Many so-called “experts” had forecast a housing bubble bursting, a crash, big doom and gloom to grab headlines…the reality was an orderly slowdown, along with some price softening, which we see continuing in ’07. Last year, the softest areas included condos, investment properties and vacation homes, and as mentioned earlier, areas with weaker job markets. These areas will continue to soften, but markets that are predominantly owner-occupied with solid employment have and should continue to hold up well.

Reasonably priced homes continue to sell, although time on the market is longer than experienced a few years back – and this pace will continue this year. But look at the bright side of this. Remember how buyers complained that they could barely pull into the driveway of a house, let alone look around and think a few minutes, before having to write up an offer that was way above list price? The cooling off of an overheated market allows buyers to make more reasonable decisions, without rushing into something that may not be right for them, their family…or their budget.

Drum roll please…

And of perhaps the most interest – no pun intended – where do we see mortgage interest rates in 2007? Last years forecast was incredibly accurate, which called for rates to be above 6% and below 7%, with an average between 6.25% and 6.625%...which is exactly how the year played out. For 2007, we actually see interest rates slightly lower, within a range of 5.75% and 6.75%, with a sweet spot between 6.00% and 6.375%.

What’s your take on interest-rates? I’d love to hear e-mail me at cary@flagstonemortgage.com

Cary