Don't expect further cuts in the
interest rate to mean mortgage rates are going further down, too.
Recent Daily Interviews
Deloitte & Touche
B.J. Greenwald & Associates'
Lawrence Yun, forecast economist at the
National Association of Realtors
, says one-year adjustable rate mortgages might continue to fall slightly below 6%. But at 7%, the 30-year fixed-income mortgage rate is about as low as it's going to go.
While it might seem unfair that banks are unwilling to pass a full 200 basis-point rate cut or any additional cuts onto homeowners, Yun says that banks already lowered 30-year rates from 8.5% to 7% last fall and are reluctant to lower them any further because of inflationary fears.
But the good news, Yun says, is that the Fed's rate cuts should keep 30-year mortgages steady in the 7% range for many more months to come. And they should continue to boost the housing market to new records in 2001, which, Yun says, is good for the overall economy.
TSC: How welcome was Wednesday's rate cut and how great of an effect will it have on the housing market?
It was very welcome. But our housing outlook really does not change so much because the Fed influences the short-term rates, but not necessarily the long-term rates, which are based more upon inflationary expectations. The 30-year mortgage rate won't necessarily go down along with the cut by the Fed. The one-year adjustable rate will move down partially, which will have more of an effect on first-time homebuyers, who usually favor such a rate.
Concerning the economy as a whole, the economy over the last three months has been pretty much in a no-growth zone. The manufacturing sector was definitely in negative territory. But yesterday's number on industrial production, coming in at 0.4% for March as opposed to the negative 0.1% that was anticipated, indicates that the manufacturing sector has turned a corner. We read into this that the possibility of recession is pretty much nil and we anticipate the economy to be back on track pretty solidly by the second half of the year.
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The rate cut was also definitely good news to the corporate sector, because now it makes capital borrowing costs much more attractive.
The high spot of the economy during this time has continued to be the housing sector, which has moved up strongly since the fall. This has been in anticipation of the lower rates that we are seeing now. There won't be any major move in the housing industry. The housing industry already made a big move and has kept the economy from sinking into a recession.
TSC: There has been a lot of talk about mortgage refinancing. Will the rate cuts affect that market?
A lot of the mortgage refinancing activity has already occurred. Thirty-year mortgage rates went from 8.5% to 7% currently, so the refinancing activity has already occurred. When the Fed cuts rates, people typically refinance immediately as they realize it will put additional spending dollars in their pockets.
TSC: Could 30-year mortgage rates fall below 7%?
The 30-year rate, which is the most common mortgage rate, is tied more to inflationary expectations. It had been very high at 8.5%, and it has now come down 150 basis points to 7%. Since January, the Fed has cut its rate by 2%, which is pretty much what we would anticipate.
This mortgage rate, just above historical lows, is extremely attractive. It is rare for it to fall below 6.5%. So the housing market should remain fairly strong for the rest of the year. With today's cut, we anticipate the 30-year rate to remain steady at 7% for the rest of the year, but not to fall much below that because going forward. There is more concern with the potential for inflation a year from now.
TSC: So you think the Fed's timing has been good, that the cuts that took place in January have already had sufficient impact on 30-year mortgage rates?
Yes, their timing overall has been good. Had the Fed not gone ahead and cut these rates, we would have gone into a recession. Had that happened, the effects of a low mortgage rate would be negated by the effects of people losing jobs
But actually, it wasn't the cuts that took place in January that improved the housing market, but the anticipation of these cuts back in November. People saw back then that the economy was heading for a slowdown, they anticipated rate cuts and the housing market fared well in anticipation of the move.
TSC: Do you track at all what kind of an effect first-time mortgages and mortgage refinancing will have on the economy as a whole?
I don't have numbers on the level of magnitude. But the surprising strength of consumer spending even with the extreme slowdown in the economy has to be substantially affected by many people refinancing their mortgages and immediately putting more spending dollars in their pockets.
TSC: Do you expect the Fed to make any further cuts in May?
There could be an additional 25 basis-point cut. But after May, we don't anticipate any further cuts, the reason being that the economy should, by that time, be back on the right track. Also, if the Fed were to make further cuts, then they might have to reverse some of those cuts later in the year, and that could do potential harm.
TSC: Your organization tracks 22 housing indicators. What are some of the top-line indicators telling you about the housing industry and the economy?
Existing and new housing sales are at historically high levels. Housing starts for the first quarter of this year have been extremely strong, and even the new home sales briefly touched a record in January. These translate directly into GDP growth with a little lag time of three to six months, and should begin affecting GDP either in the second or third quarter.
We don't break out figures separately by quarter, but project them at annualized rates to correct for seasonal factors. The most recent reading of housing starts in March indicates a total of 1.613 million housing starts for 2001. And existing home sales look like they are going to top 5 million this year. Last year, there were 5.1 million existing homes sold and 903,000 new homes. We think 2001 figures are going to beat 2000.
TSC: Why have people continued to buy and build homes in light of the massive layoffs and bear market?
This has been a bit of a puzzle. According to some indicators, consumer confidence has been tanking. But this isn't being borne out in consumer behavior. A home is probably the biggest-ticket item they could purchase, and even auto sales, the second-largest item, rebounded last month.
Even with all of the layoffs, the unemployment rate is currently very low at 4.3%. We expect the unemployment rate to slowly climb to 4.5% by the end of the year, but even at this level, you are looking at a strong and healthy labor market. And anything below that puts inflationary pressures on wages.