When I interviewed Lawrence Yun for a previous issue of National Mortgage Professional Magazine, he estimated that we are going to see a plateau in terms of unit sales, with an increase in price hovering around six percent. This isn’t a necessarily bad thing, considering the economy is recovering at a relatively steady rate, quantitative easing (QE) is estimated to be scaled back $10 billion at a time, something that sent a minor shockwave through Wall Street, stimulating growth and slight recovery, attributed to confidence in economic recovery. All in all, 2013 can be looked at as a solid year of economic stimulation, a “righting” of the ship in terms of getting America’s economy going again.
Even though this is a far more dramatic instance, the 1930s saw a Depression-era mortgage crisis that resulted in high default rates and increasing loan to value ratios. While facts and figures from 80-plus years ago might not directly correlate to the current economic climate, it’s important to remember historical situations. In Kenneth Snowden’s 2010 paper, “The Anatomy of a Residential Mortgage Crisis: A Look Back to the 1930s," the author draws upon similarities of the then-current economic situation and the post-Depression era quite succinctly.
Snowden’s paper discusses the Home Owners’ Loan Act of June 1933, which isn’t dissimilar to President Obama’s Home Affordable Refinance Program (HARP), in that it provided then-delinquent borrowers with better rates. Everything that’s old is new again, in the case of the mortgage crisis and economic downturn. A recent Wall Street Journal feature highlighted HARP’s success in 2013, amid troubling Obama legislation.
But what does this mean specifically for interest rates? I was curious to hear from those in the industry regarding their estimates for 2014.
“I don’t think we’ll see 30-year term mortgages in the threes anymore, we’re trending higher, but I think the Fed should let the economy recover (lower unemployment, etc.) before raising interest rates—let’s give people a chance to secure financing comfortably, especially with a new regulatory environment and controls imposed upon us,” said Mary McPhail, marketing manager with Vanguard Funding. “It seems that the ‘new’ regulatory approach to financing is more reactive than responsive. We need an organic lift to the American lifestyle again and people will buy homes, even homes that need rehab, but at least we will stimulate the economy in its rightful order.”
“Where rates ultimately end up at the end of 2014 is really going to depend on the Federal Reserve and how the economy performs throughout the year. Assuming the economy continues to get better and the Feds dwindle off from its bond purchasing program, we’ll see rates move past five percent by the end of 2014, with additional increases into 2015,” said Rob Pommier, senior vice president of strategic alliances for OpenClose. “One thing is for sure, rising interest rates are going to slow housing demand in 2014 and many first time homebuyers that were anticipating buying a house with a very low rate are going to have a tougher time getting into homes.”
“I think everyone agrees that interest rates will rise and refis will fall—the question is by how much. We expect interest rates to hit close to 5.4 percent for a 30-year fixed by the end of 2014, resulting in more than a 25 percent drop in refis,” said Vladimir Bien-Aime, president and chief executive officer of Global DMS.
A recent Ken Harney article highlighted increasing mortgage rates while also putting an emphasis on the potential rise in the relatively unpopular hybrid mortgage. Harney also estimates that rates could reach as high as 5.5 percent for the year. By exploring other options, such as a hybrid mortgage, an individual could find themselves in better shape than with the current slate of mortgage offerings, especially if rates climb as high as Harney predicts.
Perhaps the rising rates will, in fact, create a new breed of renter, or perhaps, force individuals into making hasty purchasing decisions in order to potentially lock in their rate. Many estimate that, should the Fed hit their mark in tapering QE and the economy continue its upward recovery, mortgage rates could potentially remain below five percent, however; the probability of the Fed hitting both of their goals is low, so, rates will continue to spike.
For now, unemployment rates are down to near seven percent. Interest rates aren’t horrific. Tapering has begun and as of now, things don’t look so bad … right?
Robert Ottone is execuive editor with National Mortgage Professional Magazine. He may be reached by phone at (516) 409-5555, ext. 314 or by e-mail at [email protected]