Mortgage rates: déjà vu all over again

Well the Federal Reserve did not increase short-term interest rates this week and there was little movement in mortgage rates, which remain under 4% for the 30 year fixed rate (FRM) and close to historic lows:

The underlying assumption behind the Fed’s forecasts and those by groups such as the Mortgage Bankers Association (MBA) is that there will, inevitably, be an increase in inflation at some point and that interest rates will start to rise as that becomes more certain.

How accurate have past forecasts been?

The answer is not very, at least for the MBA.
In November 2013 the MBA forecast Mortgage rates “to rise to 5.1% in 2014”. Actually, the FRM was 4.0% at the end of 2014.
Undaunted, in December 2014 the MBA again forecast a rise to 5.1%, this time by the end of 2015.
By June the forecast for year-end had dropped to 4.5% and by August to 4.3%. I wonder where the September forecast will come out?

More accurate has been the Federal Savings Bank which, despite its name, is a private bank. Earlier this year it forecast:
– mortgage rates will remain low in 2015, with the Federal Reserve hesitant to raise rates
– slow international growth will keep US interest rates low
– prospective homebuyers may be more confident about entering the market

Note the reference to slow international growth, one of the factors quoted by Fed Chair Janet Yellen in her remarks this week.

Comment
I continue to wonder what is going to cause a re-emergence of inflationary pressure.
The great commodity boom was driven by China’s demand and that has diminished significantly.
While voters in indebted countries may support the idea of debt forgiveness, lenders are unlikely to be so accommodating. Those countries which have taken the tough measures to fix their own problems are unlikely to be keen to let others off the hook, and that suggests a further period of slow/no growth in the heavily indebted countries.
The main goal of zero/low interest rates has been to prevent the world from falling from recession into depression. We are seeing growth starting to reappear in some parts, but many countries have failed to make – or have not been allowed to make – the structural reforms necessary to change fundamentally their prospects.
And yesterday the chief economist at the Bank of England suggested that the fallout from weakening emerging countries could reduce UK growth – and the UK has been the best performing economy in Europe – and cause the UK to consider lowering, not raising, interest rates.

The US
In a world of uncertainty, the vast economic engine that is the US continues to move forward at a steady rate. Steady, but not enough to overcome continued weakness elsewhere in the world, not enough to create enough full-time jobs to satisfy the workers who seek such jobs, and not enough to create wage demand pressure.

All the pundits may prove to be right (eventually) and inflation will reappear. I just don’t see it happening any time soon. And if I am right mortgage rates are also not going up in the near future.

If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 617.834.8205 or Andrew.Oliver@SothebysRealty.com.

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Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated

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