Mortgage Rate Increases Likely to Be Modest: Fannie Mae

By:
Kara Johnson | May 17, 2010
Fixed rate mortgages will rise this year, but not enough to choke off home buying activity by consumers, according to a new forecast out today by Fannie Mae.
 
The average rate on 30-year fixed rate mortgages should rise by about half a percent, the lender predicts, to around 5.5 percent, by year’s end.  While the boost is expected to sharply curtail mortgage refinancing, it should be low enough to sustain interest by home buyers.
 
Meanwhile, inflationary pressures are expected to remain subdued, and the lender does not expect the Federal Reserve will raise the benchmark federal funds rate above the current range of 0 – 0.25 percent before year’s end, thereby continuing a policy of monetary easing.
 
Issuing its monthly Economics and Mortgage Market Analysis, Fannie Mae boosted its prediction for moderate economic growth through the year, but noted that the Greek economic crisis is a major question mark that could deal a major setback to the global economy.
 
A respectable 3.2 percent annual rate of economic growth in the first quarter of the year slightly exceeded expectations, with better-than-expected improvements in employment and stronger consumer spending. The rising employment figures and other signs of economic momentum lead the lender to predict the recovery will be sustain, with a 3.5 percent growth rate for all of 2005, up from previous projections of 3.0-3.2 percent in recent months.
 
The report notes that the Conference Board Index of Leading Economic Indicators, which has a good track record of forecasting trends, has risen for 12 consecutive months as of March. That leads Fannie Mae forecasters to expect the economic recovery to be sustainable through the rest of the year, although not at a pace similar to the recovery of the early 1980s.
 
Several encouraging economic trends gave rise to optimism in the Fannie Mae forecast, including employment, consumer spending and manufacturing. The study notes that April payroll data showed an increase of 290,000 nonfarm jobs, even as the official unemployment rate rose from 9.7 to 9.9 percent, as formerly discouraged workers resumed seeking employment.
 
Consumer spending increased at an annual rate of 3.6 percent in the first quarter of the year, the fastest rate of increase in three years., while manufacturing production rose for the third consecutive quarter following six quarters of decline.
 
Meanwhile, inflation remained subdued, with personal consumption expenditures excluding food and energy, a benchmark figure, rising at an annual rate of only 0.6 percent, the smallest since 1959 and well below the Fed’s target rate of 2.0 percent.
 
The biggest economic uncertainty remains the effect of the Greek debt crisis. Although an injection of $1 trillion in funds by the European Union has stabilized the situation for now, it is unclear how the situation will continue to unfold and another freeze in global credit, much like the one that attended the collapse of the subprime mortgage market in late 2008, remains a possibility.

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