Tom Rants

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Tom Rants Default Mortgage Rates fall for two weeks

Mortgage Rates fall for two weeks

Freddie Mac’s Primary Market Mortgage Survey
One Year ARM Also Falls

McLean, VA %u2013 Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey in which the 30-year fixed-rate mortgage (FRM) averaged 6.01 percent, with an average 0.6 point, for the week ending July 8, 2004, down from last week when it averaged 6.21 percent. Last year at this time, the 30-year FRM averaged 5.40 percent.

This is the second week of decline, though the previous week was a few hundredths of a percent. Leads me to a few conclusions.

First, and obvious, the Fed rate hike was anticipated and did its job of keeping inflation fears in check. The fifteen and thirty year mortgage markets are actually much more driven by the threat of inflation than by short term interest rates. Short term rates of 1 percent threaten inflation that makes long term rates rise.

Second, it looks like we’ll be seeing long term mortgage rates in a 6 to 7% range for the foreseeable future. The rates have risen about 1 percent since this time last year without the sky falling, in terms of a housing bubble. The bond and mortgage markets seem happy with slow and steady increases in short term rates and that means we should see long term rates staying pretty steady. With all the other things the economy and the housing market have going for them another 1 percent rise shouldn’t put the brakes on the housing market though price increases may slow. (Those things I mentioned that are positives for the market: record breaking economic growth, federal tax cuts soon to be joined by state tax cuts as the economy rebounds, more “secular” demand for housing with immigration and population increases, job growth picking up steam and mostly in higher paying jobs in the $16/hr. range, increased foreign trade.)

There are a few dangerous things in the housing market. First, the tremendous refinance wave that has helped a lot of families through the slow economy may come back to bite the mortgage companies that fed it as these families deal with lower than normal equity. Second, a lot of adjustable rate mortgages will be adjusting from 3 to 4% to around 7% almost doubling many house payments. That combination plus the continued push in subprime (poor credit) lending mean the current trend of 4 to 5% default rate on mortgages won’t be easing any time soon. In this area, we’ve seen 3 years of bank owned properties accounting for 7 to 10% of sales volume in number of transactions. Expect it to continue. Again, I don’t expect to see major drops in housing prices, but these should contribute to an easing of a hot market. That is a long term positive, hopefully giving some of those getting those new higher paying jobs a chance to save down payments for first homes and slowing things before a real bubble happens.

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