Our Two-Month Forecast for Mortgage Rates Is All New

Where will mortgage rates be come January, February of next year? Since we got out of the fortune-telling business long ago, we can only rely on our 30 years of experience to make such an educated guess.

Every two months, HSH.com publishes their “Two Month Forecast for Mortgage Rates.” We start by examining specific market conditions that led rates to go either up or down over the last few months, then we examine which conditions that we think will influence rates over the next few months. From there we make our predictions. Here’s just a sample from each section:

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.

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.

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.

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.

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.

Click here to continue reading HSH.com’s “Two-Month Forecast for Mortgage Rates.”