Interest and Amortization

Freddie Mac's Nothaft Predicts Mortgage Rates to Remain Below 5%

Posted on Wednesday, January 5, 2011

Frank Nothaft, chief economist for Freddie Mac, says he expects long-term mortgage interest rates to hold below the 5 percent threshold throughout 2011, as key macroeconomic drivers provide a backdrop that supports a continued, albeit gradual, recovery in the housing and mortgage markets.
In November, fixed mortgage rates dropped to their lowest level since the early 1950s. According to Freddie Mac’s weekly survey, the 30-year fixed mortgage rate bottomed out at 4.17 percent for the week ending November 11. They’ve since begun to rise, quite significantly in fact, but for the week ending December 23, rates began to retreat again.
Still, Nothaft says with the Federal Reserve expected to keep the benchmark federal funds rate between 0.0 percent and 0.25 percent, relatively low mortgage rates will be a feature of the 2011 mortgage market.
“While some rise in fixed-rates is expected, 30-year fixed-rate loans are likely to remain below 5 percent throughout the year, and initial rates on 5/1 hybrid ARMs [adjustable-rate mortgages] will likely remain below 4 percent in 2011,” Nothaft said.
Turning to home prices, Freddie’s chief economist says markets that have relatively large inventories of for-sale homes and REO properties will continue to see home-value weakness in 2011.
“However, price indexes for the U.S. as a whole are likely close to bottoming out,” Nothaft said. “Most experts look for single-family U.S. indexes to bottom out in the first half of 2011, with a gradual, but sustained, recovery after that.”
With both home prices and mortgage rates near cyclic lows, buyer affordability is at the highest level in decades, and Nothaft says he expects this will lure many first-time homebuyers into the market in the new year, likely translating into more home sales in 2011 than in 2010.
While more home-purchase originations will likely be a prominent feature of next year’s market, refinance activity is forecast to dwindle – in fact, the falloff has already begun. The federal government’s Home Affordable Refinance Program (HARP) is scheduled to expire on June 30, further dampening second-half refinance volume.
Nothaft says the expected decline in refinance originations more than offsets the potential pickup in purchase originations, which will lead to lower total lending in 2011.
He describes the current level of single-family mortgage delinquencies as “extraordinarily high,” but he expects those numbers to begin improving in the new year.
“Look for the seriously delinquent rate in the overall market to gradually decline further during 2011, reflecting employment gains and family income growth, additional loan modifications and other foreclosure alternatives, and the transition of foreclosed homes to REO,” Nothaft said.
He notes that macroeconomic factors – such as income growth, unemployment, and inflation – will have a significant impact on the performance of the housing and mortgage markets throughout next year.
“With fiscal policy supporting aggregate demand for goods and services and an accommodative monetary policy providing low interest rates and ample liquidity to capital markets,” Nothaft said, “the economic recovery should accelerate gradually over the year, with the second half of 2011 exhibiting more growth and job creation than the early part of the year.”
By: Carrie Bay

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