Freddie Mac has released its U.S. Economic and Housing Market Outlook for November showing that, despite positive economic signs, consumers remain worried about their financial well being—a major reason why home sales remain relatively lackluster, despite the most affordable home-buyer market in decades. Regardless, originations are projected to see a boost from the extension and enhancement of the Home Affordable Refinance Program (HARP) and the extremely low fixed-rate mortgage rates that currently prevail in the market.
Domestic aggregate demand (consumers and businesses), rose 3.6 percent annualized during the third quarter, the second biggest quarterly gain in five years. The report also found that non-residential fixed investment (buildings, equipment and software) expanded at a pace of 14 percent during the third quarter; residential investment also rose a little bit for the second straight quarter.
The Freddie Mac House Price Index for the U.S. has recorded a 25 percent cumulative decline since the peak in mid-2006 through September 2011.
"Allowing eligible borrowers to refinance (who otherwise may face a limited opportunity to refinance without paying down a significant chunk of their loan principal) and obtain substantially lower interest rates and monthly payments, will likely reduce defaults, ease distressed sales in markets, and provide needed cash flow to borrowers," said Frank Nothaft, Freddie Mac, vice president and chief economist. "This latter effect can, in turn, support additional consumption spending and be beneficial for economic growth in the long run. As an example of the potential amount of payment reduction, borrowers who refinanced during the third quarter (both HARP and outside of HARP) and were funded by Freddie Mac will save about $2,500 in interest payments in the first 12 months after their refinance."
Ten-year Treasury yields continue to hover in a narrow band around the percent mark, while 30-year conforming fixed-rate mortgages have averaged in the four percent range in recent weeks. The effect of the extended and enhanced HARP on single-family originations, assuming about $200,000 loan amount on average, is likely to be around $200 billion to $300 billion over 2012 and 2013, with most of the additional volume falling in the first year.
