A pair of economists at Fannie Mae predict long term mortgage rates will not climb above six percent until the end of the year and are raising their forecast for total industry production this year.
Job market conditions have recently pushed rates to 45-year lows, leading the economists to believe refinancings will "spike up" in the near term. Thus, they have again raised their projection for this year's mortgage volume and are predicting that the Fed will not tighten monetary policy until fall.
In their economic and market update, Fannie economists David Berson and Orawin Velz said Thursday that mortgage volume will climb to $2.43 trillion -- an upgrade from the $1.91 trillion they anticipated a month earlier -- representing the third strongest year ever for mortgage originations. In January, their prediction was at $1.79 trillion.
During 2003, volume amounted to $3.7 trillion of which refinancings comprised $2.5 trillion, according to the mortgage giant.
"Long-term interest rates responded to the weaker-than-expected February employment data by dropping to the lowest levels since last July," said the economists. "Given our projection of slowly rising mortgage rates from current levels, refi activity will spike up in the second quarter (but still remain below last year's peak) before falling over the second half of the year as mortgage rates edge upward."
Treasury yields plummeted after Friday's labor report, which showed the economy generated a mere 21,000 new jobs -- when 125,000 new nonfarm payroll jobs were expected. In line with Treasuries, the 30-year fixed-rate mortgage average sunk to 5.41%, according to Freddie Mac's most recent survey.
"Moreover, we have pushed out the time at which we expect the Fed to begin tightening monetary policy," said Berson and Velz.
While the Federal Reserve Board has kept the federal funds target rate at 1% for some time now, the economists said "it would be difficult for the Fed to begin tightening monetary policy until the job market improves significantly. As a result, we don't expect the Fed to begin tightening until this fall, with the federal funds rate ending the year at 1.25 percent."
"With inflation remaining low and the Federal Reserve tightening later in the year, long-term interest rates should rise only modestly," they said -- adding that the year will end with the 10-year Treasury note yield at around 4.60% and the 30-year fixed-rate mortgage average up to about 6.10%.
The pair said it is likely for monetary policy "to tighten more quickly next year" as the output gap shrinks and the risks of inflation rise. However, they added, this could happen even sooner than they anticipate if the job market recovers at a quicker pace, which would also "boost long-term rates somewhat further."