HSH.com releases new “Two-Month Forecast for Mortgage Rates”by Tim Manni
On a bi-monthly basis, HSH.com releases our Two-Month Forecast for Mortgage Rates. In each forecast, we review our previous prediction — evaluating the circumstances that caused rates to do what they did — and we examine current economic factors and conditions in order to forecast mortgage rates over the next nine weeks or so.
Each two-month forecast is made up of four parts: (1) the preface; (2) a recap of our previous prediction; (3) the forecast discussion; (4) and finally the forecast itself. We’ll do a short summary of each section here on the blog, but be sure to visit HSH.com to read our entire Two-Month Forecast for Mortgage Rates.
The tone of the last forecast (back in September) had a lot to do with uncertainty. Unfortunately, much of that uncertainty still persists, but the overall improvement in the economy has served to foster a more positive outlook this time around — even if that means a firming of mortgage rates:
The elections are behind us, and the tenor of economic reports has become a little warmer after a difficult mid-year period. That stumble in the recovery is fading behind us now, and there are encouraging signs that the recovery may finally become more self-sustaining before too much more time passes. The Federal Reserve has begun Quantitative Easing (QE) a program of buying up additional Treasury obligations in hopes of fostering some price inflation while pushing the economy forward at a faster pace. These goals are a little at odds with one another, since growth tends to push interest rates a little higher, and additional inflation certainly will, too.
Looking back over our last forecast, our predictions fared pretty well:
Back on September 24, we looked ahead and expected that our overall indicator for mortgage rates — HSH.com’s FRMI — would be likely to travel in a range between 4.58% and 4.92% during the nine-week forecast period. In that time, we actually got a range from 4.58% to 4.78%, and so we were pretty close. For the overall average of the 5/1 ARM, we expected a 3.56%-3.90% gap, and got a 3.51% to 3.62% range instead, a much narrower one than forecast. As far as conforming 30-year FRMs go, we called for a 4.38% bottom and a 4.70% top for the fall, and the market presented us with a 4.32% to 4.53% differential instead. Overall, we think we fared pretty well.
With the Fed embarking on program with largely-unknowable outcomes, and with an economy that has become so accustomed to minute growth, it’s hard to say at this point just how much of an influence both QE2 and a slowly-improving economy will have on mortgage rates to any great degree:
The improving signals of the economy we’ve alluded to above are subtle, but seem real. For example, over the last few weeks, the level of new unemployment claims has turned downward to the best levels of the recovery, and while still elevated, represent a positive change in what has been an intractable pattern for much of 2010. Consumer spending has firmed up somewhat, and manufacturing and production-related indicators have turned up again after a weak summer-and-early-autumn showing. Housing remains in the tank, but seems to be stabilizing after a tax-credit hangover. Auto sales have been firmer of late, notching a two-year high last month. Indicators of consumer moods have been stable to higher.
On one hand, a firmer recovery argues for firmer interest rates. On the other, have we become so accustomed to a poor economic climate that even a mid-to-upper two percent for GDP growth is “hot” enough so as to be considered worrisome, in that it might spark inflation? At present, there is so much “resource slack” — everything from production capacity to people — in the economy that we could probably grow at double that clip for a while without serious damage. The Fed is trying to err on the side of caution and trying to spark above-trend growth by keeping short-term and now longer-term interest rates low.
The next time we check in with a new two-month forecast, it will be the start of a new year with hopefully even better economic conditions to report.
Where exactly will rates move over the next two months? CLICK HERE to continue reading HSH.com’s latest Two-Month Forecast for Mortgage Rates.