Presently, the best guesstimates are that we will skirt a recession absent any new or unforeseen economic shock, but a period of slower growth and perhaps rising prices does seem to be forming. As it is usually accompanied by a declining inflationary threat, waning growth generally brings lower long-term interest rates, and that is largely the case, particularly to risk-free investments such as Treasuries. Mortgages, however, are not risk free, and may not benefit as much from any declines in underlying interest rates brought on by economic disappointment.
Providing some tempering to any downdraft in rates are inflation concerns. Price pressures do seem on the increase, and it is reasonable to expect that our weak dollar at some point will serve to firm up the prices of imported goods. Should inflation does move higher, interest rates will have trouble declining, soft economic growth or not.
In this environment, both good and bad news can be found for refinancers and homebuyers. For good-quality conforming borrowers, interest rates are close to 2007 lows as we write this -- providing a real opportunity for refinancers to escape from resetting ARMs to manageable fixed rate mortgages. Jumbo borrowers, especially homebuyers, will mostly find improving conditions and access to credit. Although the price of that money remains elevated, a jumbo borrower with an adjusting ARM may be able to trade in that ARM for a fixed rate for virtually the same rate, presently in the mid-to upper six percent range.
For all other borrowers -- those with no equity, those with no ability to document their income or assets, those with high debt loads, and those who can cover little or no increase in their monthly payment from present levels, those with poor credit -- lending windows remain closed, particularly where any combination of these issues intersect.
Forecast
Downward pressure for interest rates seems to be the dominant theme for the end of the year and into the new. However, it's our guess that the downtrend will be limited due to rising concerns about inflation and a ongoing low level of investor demand for new mortgages. The Fed trimmed interest rates twice in our last forecast period to modest effect, and there are some expectations of another cut in December. As is often the case, fixed rate mortgages can rise even as the Fed is trimming short-term rates, particularly if inflation isn't subdued.
We think that the overall average for the 30-year FRM will run in a range from about 6.70% to perhaps as low as 6.35% as we finish 2007 and wander into 2008. For Hybrid 5/1 ARMs, we think that 6.40% to as low as 6.08% is a likely gap.
