Thursday, December 31, 2009
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Sent: Thursday, December 31, 2009 12:53 PM
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MMG Special Report: Barry’s Detailed Forecast for 2010
by Barry Habib
The past couple of years have been challenging for the mortgage and housing industries, as well as the global economy as a whole. So what does the future have in store? Let’s first look back to see how we did on our forecast for 2009.
Scorecard for 2009 Forecast:
After a couple of rough years, the big question again this year is the global economy. In 2009, Stocks helped put us on the path of recovery with an amazing run after Congress addressed the mark-to-market accounting rules. For example, Stocks have soared since hitting lows in March of 2009. In fact, between March and December, the Dow was up close to 60%, and the NASDAQ climbed over 70%. Unfortunately, the market is still fragile, which means any negative surprises will take the wind out of the sails quickly and make it tough for Stocks to eke out significant gains this year.
The sector I like best for growth this year is healthcare, since it hasn’t rebounded as much as other sectors and is due for a bump. American demographics show that the country is aging, which means more medical attention will be needed. Additionally, any Healthcare Bill that insures more people should translate into more volume for healthcare providers.
Having almost doubled during 2009, oil prices are still half of what they were in July of 2008. This wild range for oil makes it hard to forecast. There is plenty of supply, which will weigh on prices. But the US Dollar may continue to struggle, which will help buoy the price of oil. Overall – we see oil making its way higher by the summer.
Gold has had a huge run higher – and although prices declined at the end of the year, we see Gold resuming its uptrend. A lack of confidence in sovereign debt, a struggling Dollar, and the overhang of inflation in the future should help Gold make new highs and push toward $1400/ounce.
As far as the Dollar goes, it had declined significantly during 2009, and will likely decline a bit more in 2010. The endless supply of debt from government programs and low interest rates will weigh on the Dollar.
In the job market, we’re not nearly out of the woods yet. Even in the waning months of 2009, we still saw unemployment rates at 10% and nearly 500,000 new jobless claims coming in each week. The fact is…we need to see Initial Claims drop beneath 400,000 before we see stabilization in the labor market and unemployment rate.
There are about 154M people in the
And consider the almost 800,000 workers who are not even categorized as unemployed, but simply as “discouraged”, as they have not actively searched for a job in the past four weeks. There’s a lot that can be assumed here, but it’s hard to imagine that these people would not reenter the ranks of those seeking employment if conditions improved a bit. That means that these people would need to be absorbed into the system before the actual unemployment rate could decline.
Additionally – perhaps the largest category that could skew the numbers are those individuals who are accepting part-time work but would prefer full-time employment. A whopping 10 Million people are in this category. You have to think that many employers would take these current part timers and give them full-time work, before hiring someone new. Again, this will make it very hard to see the rate of unemployment make any meaningful decline this year.
Home prices began to stabilize during 2009, and homes sales showed some signs of encouragement. We expect more of the same in 2010, although there will be some additional headwinds: higher rates and expiring tax incentives will likely create a lull during the summer months. After a modestly good start to the year, home prices could actually decline in some areas by 5% to 7% once the temporary stimulus expires. In the end, however, home prices should eventually and slowly begin to firm up toward the end of the year.
The Fed will have their hands full during 2010, and a big question will be whether the Fed can retain their independence in the face of political pressure. Remember, the long-term best interests of the country often conflict with the short-term reelection interests of politicians.
It’s highly likely that the Fed will be “on hold” for rate changes during most of 2010. The Fed will have to try and play Goldilocks…and get it “just right” for the amount of time they leave interest rates at these historically low levels. Hike rates too soon, and it could derail an already fragile
While inflation doesn’t appear to be a present concern, it can be very difficult to control once it takes hold. And its effects can be very damaging. Inflation is the enemy of all Bonds – and if it does take center stage, the Fed will have to hike rates very aggressively to attempt to keep it at bay.
This low interest rate environment in the
Let’s take an example: An investor wishes to purchase $1M in Bonds yielding 4.5%. This would provide $45,000 as an annual return. In order to make the purchase, the investor puts up only 10% of $1M, or $100,000 in cash – and borrows the other $900,000 at current low rates offered to large investors, such as the 3 month LIBOR currently at 0.25% plus .75%, bringing them to a total borrowing cost of 1%. This investor borrowed $900,000 at 1%, which means their interest costs are only $9000. When the $9000 is subtracted from the $45,000 investment return, this leaves them with a $36,000 return on their $100,000 investment – or a whopping 36% “carry trade” return – on a very stable Bond investment vehicle.
At some point in the future, this carry trade will be unwound as short-term rates begin to move higher. The results will not be pretty – and many will get caught in the buzz saw. This also means that Bond prices will come under pressure as the investments are sold.
2010 is a big election year, and politicians will be doing their best to influence the Fed to keep rates low. With 36 of 100 Senate seats being contested and all members of the House facing re-election, there could be some interesting changes ahead. Currently, the Senate is made up of 58 Democrats, 40 Republicans, and 2 Independents. But, as mentioned above, 36 of those positions are up for re-election. In the House, there are 256 Democrats, 178 Republicans, and 1 vacancy…and they all face re-election. When the votes are counted, I see Democrats losing a number of seats…but probably not enough for Republicans to regain control.
Now for the big question… where will home loan rates go during 2010 and why? We’ve been forecasting rates for a long time, and this is by far the easiest call we have ever had. Rates are going higher in 2010. We do not think that the low rates seen during 2009 will be seen again. There will be more supply coming to the market in the first quarter, while the Fed’s purchases will be winding down. The overall trend for rates during this period will be higher, but as usual, this will never happen in a straight line. There will be waves and cycles moving up and down – but the trend is clearly up for rates.
Once the Fed’s Mortgage Backed Security buying program has expired at the end of March, it is likely that rates will edge higher still towards the summer. Eventually, supply will decline as origination volume slows – and mortgage rates should stabilize. But if there are hints that the Fed will be looking to hike rates, thus signaling the end of the carry trade, mortgage pricing will significantly worsen. The range for rates during 2010 is wide, with the lower end just above 5% toward the very beginning of the year. The upper end of the range could be as high as 6.5%, with rates being very volatile throughout. It is typical to see prices worsen more rapidly than they improve…but 2010 will exaggerate that characteristic, with pricing losses coming far more quickly and sharply than pricing improvements.
Final Words of Wisdom
Overall, 2010 will look better than 2009. But, good economic news is a double-edged sword, as it increases the risk of rising taxes and rates. Many people won’t understand the relationship between rates and the economy – so make sure you use the changing economic climate – and your understanding of it – as a way to establish your expertise with clients and referral partners.
You’ll also want to continue to educate your database about the Homebuyer Tax Credit and low rates in the early months of 2010. Use the impending tax credit deadline to move them off the fence before they miss this opportunity. Remember, rates are about 1% lower than they would be if Fed weren't buying all those Mortgage Backed Securities. On a 200K mortgage, that would mean about $8,000 would be needed to buy your rate down that 1%. Of course, you also have to factor in the Homebuyer Tax Credit – which is $8,000 for new homebuyers or $6,500 for current homeowners who are moving up. When you combine the 1% lower rate with the tax credit, you see that homebuyers stand to gain between $13,500 and $16,000 on a home in the mid-200K’s. That’s a big incentive for homebuyers to act now, while both incentives still exist.
Finally, in today’s wired world of Internet news and social networking sites…don’t confuse data with insight. Remember data is everywhere – anyone can regurgitate economic report numbers. But trusted insight and advice is a valued commodity.
The forecast for 2010 is challenging and realistic. But through it all – there is reason to be optimistic. Each economic condition described above offers an opportunity for us to capitalize on, whether it be by trading the markets or educating our customers, there are ways to come out ahead and differentiate ourselves from our competitors. Additionally – the mortgage herd will continue to thin. Those currently in the business are survivors, and stand a good chance of gaining further market share in the year ahead.
While we often wish for conditions to be better – we should be mindful that conditions could always be worse. Make the most of the current market conditions you are in – and have a great year ahead.
All the best to you from myself, and the rest of the team at Mortgage Market Guide!
Mortgage Loan Officer
Bank of America Home Loans
Mt. Pleasant, SC `29464
Andy Schwartz (assistant to Bobby Green)
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