I went to the top for this guest post and asked the co-owner of Greenpark Mortgage for his thoughts on where rates may be headed and why for 2012. Below are his thoughts:
Given the drop in mortgage rates to historic lows over the past several months, consumers are wondering if now is the time to refinance or perhaps purchase a new home. Additionally, they are concerned about the lending process and credit guidelines.
Below are my thoughts on where rates may be heading and what to expect when applying for a loan.
We are in uncharted territory with mortgage interest rates. There is a likelihood rates might drop lower in the near-term as the Federal Government continues to buy mortgage backed securities, but buyers shouldn’t count on that and would be smart to refinance or buy now.
I believe there are three keys to the direction of the economy, real estate, and by extension, rates:
- Employment: If we see two consecutive months of non-farm payroll growth of more than 300,000 then rates will go up. The January report for growth of non- farm payroll was a positive 240,000. The February number will be released March 9th, 2012. This non-farm number is usually released on the first Friday of each calendar month, but some months there is not enough time to calculate accurate data and the report is pushed back. It reports on the previous month’s figures and there are revisions to prior months.
- Easy Money: In my opinion, the Fed’s actions have created a lot of pent up inflation pressure, and like a spring being wound, this pressure will be released quickly once the employment picture improves. Sovereign governments have also released trillions of dollars into the monetary systems worldwide and all of this money is sloshing around, waiting for a spark.
- Housing: There is currently a glut of housing. The glut is actually worse than the numbers might show because of shadow inventory. Banks have millions of properties they should have foreclosed on but haven’t because they don’t want to pay to manage and upkeep the properties. The way that banks deal with this “Shadow Inventory” could have a negative effect on home prices. If too much of this inventory is released too quickly, then there will be an oversupply of housing inventory. Over the last year, the marketing time to list, market and sell a home has improved. This is positive for housing.
Bottom line: I believe that in the near term rates will remain low or even drop a bit but longer-term, as the economy continues to improve, rates will go up, potentially dramatically.
Getting a Loan
I look at the mortgage qualification environment like a pendulum that swings from too lenient to too conservative based on recent trends regarding the delinquency of mortgage payments. This pendulum will swing from +10 to -10 where +10 signifies easy money and -10 signifies tight lending conditions. Seven years ago the pendulum was pointing towards +15. The pendulum had gone off the charts!! Banks were handing out money. Today, the number is at -4. I think the conditions are a bit too tight, but not far off from where they should be. Unlike the boom days, lenders are now carefully examining employment history, income, credit scores, past mortgage payments, and savings. They are also relying on credible appraisals to determine values.
To get a loan today, you have to show banks you can afford to pay the monthly payments. Be prepared to have the proper documentation.
MBS Market Improving
Getting more technical, all of this means the Mortgage Backed Securities market is improving, and that may be the hidden story of 2012. The industry must create quality loans and securities that will bring investors and sovereign governments back to invest in mortgage backed securities. Tighter control on underwriting means better mortgages with more predictable and lower rates of delinquencies and defaults. This is backed up by statistics, which show that the vintage of 2008 – 2012 loans have the highest quality seen in years. That means investors will eventually come in as buyers, replacing the US government and allowing for more growth in the secondary market. Will the pendulum ever get back to a 15 level where credit is too easy and abundant? We hope Never Again, because all that did was to create a huge bubble in real estate that nearly brought the world to its knees. It’s possible that underwriting might loosen a bit more as this process accelerates and the government exits the market.
Overall, I am cautiously optimistic about real estate as an asset class. I believe that an improving economy led by lower unemployment, low to moderately increasing mortgage rates, and the work-down of the real estate inventory glut will largely cancel each others’ effects, resulting in stable, if not slightly increasing real estate values.
I would like to thank Paul for offering his insights on the current rate market and where they may be headed. Now you can see why I work at Greenpark Mortgage. In addtion to world class local processing and underwriting, management and ownership have their pulse on the market and have been able to proactively adjust to the many changes that have been occuring in the industry for the past half-decade.
I would add that until Europe get it’s house in order, there will be rate repression as the flight to safety of US Treasuries and the MBS market will continue. If by some miracle, the European Central Bank and the 17 nation European Union can save Greece, Portugal, Italy, Spain and others, and the US economy continues to improve, we will see rates rise even more dramatically than Paul proposes.
Should you have any questions regarding the vast array of products that we offer, please contact me at dgaffin@greenparkmortgage.com, or call me on my office or mobile at 781-726-6095 x157 or 508-254-2645 respectively.
As always, thank you for reading and I would welcome your thoughts and comments.
