Mortgage Market Outlook

Jobs and Home Prices

Let’s take a look at a few key aspects of the economy. Job growth is expected to remain strong in 2006 with an estimated two million new jobs. The unemployment rate will remain close to the 2005 level, and the economy is showing signs of steady job growth in service, high tech, and communications.

Positive job growth equates to a strong housing market. When job growth is strong in any given area, home prices rise. However, home prices will not rise at the levels seen in the past. Double digit gains are no longer going to be the case in 2006. The average U.S. home will appreciate at a modest level of 5% - 6%. This is still an excellent return on investment. For example, if you purchase a $500K home and put 10% down or $50,000, with a 5% appreciation level, your property value will increase by $25K which is a 50% return on your investment (10% down - $50K).

No Housing Bubble

The overall housing forecast has a very positive outlook. There is no bubble trouble like the media continually communicates. As long as there is a strong job market in a local area, the housing market will grow. Appreciation levels will continue at a more modest pace. Contrary to the bubble hype, values are not declining, appreciation levels are declining. If you are thinking about selling, be realistic about the price. Price to sell at the current market level, not at a level that will create a situation in which you are forced to reduce the asking price. Some areas will stagnate and therefore one should exercise caution in a market that shows signs of weak employment or a high investor concentration.

Weak employment in any area can cause prices to become stagnant or even decline. A good example of this is Michigan. Many jobs in Michigan are tied to the manufacturing industry. With many automakers laying off employees and the overall job market forecast being weak, the housing market has become, and will remain, stagnant. Additionally, areas surrounding Michigan have been affected by the weak labor market. The rate of unemployment is always a moving target, be sure to monitor the local market. For up to date information, visit http://www.bls.gov/.

Exercise caution if a market is saturated with large investor activity. Las Vegas is a great example. Many investors have purchased homes in Las Vegas. Being that the unemployment rate is extremely low, the market continues to perform very well. However, if the employment market shifts and unemployment rises in Las Vegas, many investors may decide to pull out of the market and that would cause home prices to decline. There’s no reason to panic; just use caution and monitor markets.

Adjustable Rate Mortgages and Rising Rates

The vast majority of loans funded in the last few years have been adjustable rate mortgages. Given the rise in interest rates, concern is being expressed about these products going forward. Even if interest rates go up, many consumers will refinance prior to the expiration date or the payment increase. However, even if a consumer did not refinance and had to face a substantial jump in payment, most consumers would weather the storm and adjust their finances to deal with the payment shock. Here is why. The national average debt to income ratio is 21%, if a payment increases 50% (which is a stretch), it would result in a 10% debt to income ratio increase, resulting in an average debt ratio of 31%. Additionally, adjustable rate mortgages are a good product for the right consumer. Rising interest rates will cause lenders to tighten underwriting guidelines to assure that homeowners will be able to meet payments should payments increase. If you are considering an adjustable rate mortgage, meet with a knowledgeable mortgage professional who will explain the product and the indices.

Inflation?

The big buzz word in 2005 was inflation. Not only did inflation rear its ugly head in 2005, concerns are still buzzing around the markets in 2006. Rising energy costs, a large jump in oil prices, the war in Iraq and record corporate profits all caused inflation to tick up in 2005.

Will this continue in 2006? Maybe, maybe not. Energy costs will be the biggest wild card of all. If energy prices drop, inflation will drop; if energy prices continue to rise, inflation will continue to rise. Oil prices, on the other hand, may actually decline in the future. With increased demand for new oil production, the price per barrel could drive oil prices lower and will in turn result in lower inflation. The core rate of inflation which is measured by the Consumer Price Index (CPI) will remain low at 2% (core CPI excludes food and energy costs). The overall outlook is that inflation will tick up slightly in 2006.

Greenspan vs. Bernanke and Rates

Federal Reserve Chairman Alan Greenspan had one goal in mind, and it was clearly to contain inflation. Mr. Greenspan was very vigilant about the concerns of inflationary pressure, which was demonstrated by interest rate hikes. The last 13 Federal Open Market Committee meetings have amounted to thirteen .25% hikes or 325 basis points.

Let’s take a look at the difference between Alan Greenspan and Ben Bernanke. Alan Greenspan was extremely vigilant about inflationary concern. Prior to Ben Bernanke being nominated, there were concerns expressed that he may not be as vigilant. However, being the astute scholar that he is, that outlook has changed, and Bernanke has certainly communicated that he, too, will be vigilant about inflation. With the economy currently showing signs that inflation is under control, the Federal Reserve will most likely pause with interest rate hikes after the March 28^th meeting.

Interest Rates

Speaking of the hike in interest rates coming to a halt, let’s look at where home loan rates will land in 2006. Fixed rates will increase modestly and will hover around 6.25% - 6.625%. Adjustable rate loans will continue to rise. If a consumer is considering a refinance, it may be a better choice to consider a fixed rate mortgage over an adjustable rate mortgage. Due to the inverted yield curve, the spread between a fixed and an adjustable rate will narrow, causing fixed rates to be more attractive. Individuals with Home Equity Lines of Credit should consider refinancing. Basically, HELOCs are tied to prime which will level off around 7.75%, add the average margin at 1.5%, and the interest rate will average 9.25% nationwide. The Federal Reserve will pause with rate hikes when the Fed Funds rate hits 4.75% (expected at the March 28^th meeting).

The Stock Market

The stock market is expected to perform well and provide positive returns in 2006. The U.S. remains one of the most vibrant economies in the world. The U.S. has had record corporate earnings the past three years. The Dow is continuing to trade higher and with the end of rate hikes in sight, stocks will continue to move higher.

Overall Economic Outlook

The overall economic outlook is a very positive one. With job growth expected to increase in telecommunications, high tech, and service industries, a strong housing market, and interest rates leveling off between 6.25% - 6.625%, 2006 will bring positive economic growth to the United States.

.