Mortgage Market Forecast 2007 by Barry Habib

Mortgage Market Forecast 2007 by Barry Habib

It’s that time of year again…and for the fifth year running, we’re ready to lay out our thoughts and forecast for the year ahead. They say “hindsight is 20/20”, and looking back, we’re quite proud of how well our past predictions have held up, especially in terms of interest rates. So crystal ball, Ouija board, and Tarot cards aside, let’s do our best to see into the future, and how 2007 might look on some specifics that could impact us. And most importantly, let’s understand how we, our clients and our referral partners can benefit from these insights.

The big picture

So we’ll start out by looking at the US economy at large. Things began to slow down in 2006, which was not only needed after its former torrid pace, but also exactly what the Fed wanted to see happen. A “soft landing” for an overheated economy is something you often hear the Fed wants, but rarely can achieve…yet so far, the cooling has indeed been gradual and orderly. We expect more of the same in 2007 – a gradual cooling, without the economy crashing.

Job growth will likely stabilize, and unemployment rates may click just very slightly higher as the economy cools. Overall, the labor market in the US remains quite strong. And this is good news for the housing market, since healthy job markets often help housing markets remain stable. The more susceptible areas for increasing unemployment and flat or declining job growth are where manufacturing plays a key role in the local job scene, since the manufacturing sector never fully recovered as strongly as other parts of the US economy.

Former Fed Governor, Dr. Edward Gramlich: “Central Bankers are paid to worry – every silver lining has a cloud.”

After nearly nineteen years in office, 2006 also saw the baton passed from former Fed Chairman Alan “The Maestro” Greenspan to the rookie, new Fed Chair Ben Bernanke. And both deserve credit for orchestrating favorable economic conditions, while reining in inflation. And that’s what the Fed is charged with doing…controlling inflation so that the economy can sustain ongoing financial health. This sometimes means short term pain, like the seventeen Fed Funds Rate hikes that both Greenspan and Bernanke oversaw. In the past, the Fed has often gone too far with hikes – and that’s easy to do, because it takes six to nine months for the effect of a hike to filter its way through the economy. But the Fed has been commendably patient, although not unanimously so, in allowing the seventeen hikes to slowly take the steam out of an overheated economy. We know the Fed wants core inflation to ride between 1 and 2% - and they are getting closer and closer to this target.

The Fed finally did pause in June of ‘06, with a Fed Funds Rate of 5.25%. This appears to be the top of the current hiking cycle – and in last years forecast, we had expected a pause slightly sooner at 5%. So what will the Fed do in 2007? The inflation-measuring Core Personal Consumption Expenditure (PCE) will need to be at 2% or less for two or three consecutive months, before the Fed starts to talk rate cuts. Always wanting to remain ahead of the curve, and fully cognizant of the delay between Fed action and economic impact – the Fed will be worrisome that the economic decline will go too far. So we anticipate a Fed rate cut cycle to start in 2007, but not until the summer or fall.

This will be some welcome news for individuals with Home Equity Lines of Credit. And while it will eventually benefit those with ARM’s, the damage has already been done for those expecting adjustments during the year. And with $1.5 Trillion dollars of mortgage loans set to adjust during 2007, to significantly higher interest rates – we have an incredible opportunity to help our clients, gain new business, and increase our own production significantly. But don’t expect to have your phone just ringing off the hook – you’ll have to be proactive in reviewing your database, personally contacting your customers to congratulate them on the interest saved by using an ARM, and determining if a different strategy may make sense for them at this time.

Also, you’d be smart to proactively reach out to consumers in your community, via doing presentations or using the media. Why? Because unlike the typical “refinance runs” we’ve seen in the past, where consumers grab at interest rates that were lower across the board, many consumers with ARM’s are embarrassed that they didn’t know what they were getting into…and perhaps embarrassed that their finances don’t look as put together as a result of unexpectedly increased mortgage payments. They also may feel skeptical of loan officers – since someone out there sold them the product they may currently be having trouble with – and they may feel somewhat distrustful. This is a place where your role as Trusted Advisor can shine, as you inform them on market conditions by using the Daily Update, and then laying out a new mortgage strategy more fitting to the current situation. A 2/1 buydown can be a great fit for a client wishing to “step” out of an ARM they have currently into a Fixed Rate mortgage, but is not quite ready to make the full Fixed Rate payment just yet. Make sure you are familiar with this product, as it is also a great fit for new buyers.

Stocks and Oil – they Rocked and Roiled

In our 2006 forecast, we thought stocks would be a bright spot…and that’s exactly how things turned out, with healthy gains in all the major averages. We also cited how earnings were very healthy, and how that trend should continue. We see more of the same for 2007, and although stocks may come in short of their 2006 performance, they will still yield a handsome return in the 8 -11% range.

A very slippery area for 2006 was the oil markets – and how the volatile swings affected what we paid at the pump, how much we had left to spend, and inflation in general, since oil is in everything. Last summer, an oil pipeline disruption in Alaska sent prices at the pump screaming up above $3 per gallon. Some felt the need for a cash out refi, just to fill up the tank! And not coincidentally, mortgage rates spiked to their highest levels of the year – near 7% – due to the threat of increased inflation. Thankfully, prices have moderated – but the lesson is how delicate and volatile this area is, as well as how wide an impact that oil can have. That makes forecasting oil prices very challenging, but we can see oil in a $55 – $65 per barrel range, keeping prices at the pump hovering a little above $2 per gallon.

“The rumors of my death have been greatly exaggerated.”

Mark Twain might have coined the phrase when his death was reported while he was still alive and well…but it is also a rather fitting phrase for the housing market of 2006. Many so-called “experts” had forecast a housing bubble bursting, a crash, big doom and gloom to grab headlines…the reality was an orderly slowdown, along with some price softening, which we see continuing in ’07. Last year, the softest areas included condos, investment properties and vacation homes, and as mentioned earlier, areas with weaker job markets. These areas will continue to soften, but markets that are predominantly owner-occupied with solid employment have and should continue to hold up well.

Reasonably priced homes continue to sell, although time on the market is longer than experienced a few years back – and this pace will continue this year. But look at the bright side of this. Remember how buyers complained that they could barely pull into the driveway of a house, let alone look around and think a few minutes, before having to write up an offer that was way above list price? The cooling off of an overheated market allows buyers to make more reasonable decisions, without rushing into something that may not be right for them, their family…or their budget.

And to help listing agents move their inventory, offer the strategy of a seller-paid 2/1 buydown. This offers a great way for a homebuyer to step into their house payment affordably, with the security of a Fixed Rate…and costs the seller less than a typical price reduction. This won’t be a “turnaround year” for housing, but it won’t be too bad, and we’ll expect to see a modest continuation of the slowdown. The bottom has probably not been reached quite yet, but we feel that we’re most of the way there.

Drum roll please…

And of perhaps the most interest – no pun intended – where do we see mortgage interest rates in 2007? Last years forecast was incredibly accurate, which called for rates to be above 6% and below 7%, with an average between 6.25% and 6.625%...which is exactly how the year played out. For 2007, we actually see interest rates slightly lower, within a range of 5.75% and 6.75%, with a sweet spot between 6.00% and 6.375%.

Opportunities for 2007

When Chairman Bernanke says there is a desperate “need for greater financial literacy” among consumers and home buyers, this should tell you that it’s time to get serious about being a mortgage planner. ARM’s adjusting, negative savings rates, insufficient life insurance, little to no estate planning, lack of college or retirement planning…all point to enormous opportunities for those who are prepared. If you haven’t done it already, get your CMPS designation (www.CMPSinstitute.org), because it will give you the knowledge and skills you need, and qualify you to form your own “wealth creation team”. The wealth creation team is your powerful network of financial professionals, including a financial planner, estate attorney, CPA, insurance agent…all in a position to help create wealth and security for your client and protect their financial future. Your clients need it – and so do your referral partners. Think of the powerful difference you can make in their lives. Developing a wealth creation team should be among the most important action items in your business plan for the coming year.

And finally, most importantly, we want you to take care of yourself first. So many originators are striving to help their clients create wealth and financial security – but haven’t yet taken the time to help themselves or their families first. Before you ask one more client about their will, their life insurance, their estate planning, their retirement planning, their debt management, or their college funds…ask yourself first, and take the necessary steps to get your own will, your own retirement planning on track, your own life insurance in place. Ask for help if you need it – what a great way to develop a terrific lasting bond with new referral partners – your own wealth creation team – then to go through the planning process yourself. Both Sue Woodard and I will be focusing on this in a brand new series of presentations we’ll be doing throughout the country in 2007…and we hope to see you there.

Not only should you understand the concepts of wealth creation better, and be able to advise your clients more clearly and professionally…you will have done the right thing for yourself and your family first. And really, who could wish for a better start to the New Year than that?