Exclusive - Mortgage Market Forecast - 2007
Darren Meade
January 26, 2007
It's that time of year again...and once again, I'm ready to lay out my thoughts and forecast for the year ahead. So crystal ball, ouija 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 all.
THE BIG PICTURE
So I'll start out by looking at the US ecomomy atlarge. 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 over-heated economy is something you often hear the Fed wants, but rarely can achieve...yet so far, the cooling has indeed been graduall and orderly. I 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 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 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 charges 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 to far with hikes - and that's easy to do because it takes six tonine 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 a 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 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 the expecting adjustments during the year. And with $1.5 Trillon dollars of mortgage loans set to adjust during 2007, to significantly higher interest rates, many borrwers may face difficulty and migh be embarrassed that they didn't know what they were getting into...and perhaps your finances don't look as put together as a result of unexpected mortgage payments or Home Equity Lines of Credit (HELOC) which damaged your credit score.
STOCKS and OIL - THEY ROCKED and ROILED
In my 2006 forecast, I thought stocks would be a bright spot...and that's exactly how things turned out, with healthy gains in all the major averages. I cited how earnings were very healthy, and how that trend should continue. We see more of the same for 2007, and although stocks may comeshort 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 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, and oil pipeline disruption in Alaska sent prices at the pump screaming up above $3 per gallon. Some felt the need for a cash out refinance, just to fill up the tank! And not coincidentally, mortgage rates spiked to their highest levels ofthe 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 hoovering 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 housingmarket 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 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 area 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 alonelook around and think a fewminutes, before having to write up an offer that was ay 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 perhaps the most interest - no pun intended - where do I 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 aveerage between 6.25% and 6.625%...which is exactly howthe year played out. For 2007, I 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%
MORTGAGES PLANS FOR 2007
When Chairman Bernanke says there is a desperate "need for greater financial literacy" among consumers and home buyers, this should tell that's it's time to get serious about a Mortgage Plan. Please check back as we continue to provide free weekly upates on the market and provide guidance to home sellers, buyer and refinancers.
THE BIG PICTURE
So I'll start out by looking at the US ecomomy atlarge. 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 over-heated economy is something you often hear the Fed wants, but rarely can achieve...yet so far, the cooling has indeed been graduall and orderly. I 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 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 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 charges 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 to far with hikes - and that's easy to do because it takes six tonine 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 a 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 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 the expecting adjustments during the year. And with $1.5 Trillon dollars of mortgage loans set to adjust during 2007, to significantly higher interest rates, many borrwers may face difficulty and migh be embarrassed that they didn't know what they were getting into...and perhaps your finances don't look as put together as a result of unexpected mortgage payments or Home Equity Lines of Credit (HELOC) which damaged your credit score.
STOCKS and OIL - THEY ROCKED and ROILED
In my 2006 forecast, I thought stocks would be a bright spot...and that's exactly how things turned out, with healthy gains in all the major averages. I cited how earnings were very healthy, and how that trend should continue. We see more of the same for 2007, and although stocks may comeshort 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 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, and oil pipeline disruption in Alaska sent prices at the pump screaming up above $3 per gallon. Some felt the need for a cash out refinance, just to fill up the tank! And not coincidentally, mortgage rates spiked to their highest levels ofthe 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 hoovering 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 housingmarket 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 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 area 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 alonelook around and think a fewminutes, before having to write up an offer that was ay 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 perhaps the most interest - no pun intended - where do I 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 aveerage between 6.25% and 6.625%...which is exactly howthe year played out. For 2007, I 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%
MORTGAGES PLANS FOR 2007
When Chairman Bernanke says there is a desperate "need for greater financial literacy" among consumers and home buyers, this should tell that's it's time to get serious about a Mortgage Plan. Please check back as we continue to provide free weekly upates on the market and provide guidance to home sellers, buyer and refinancers.
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