Mortgages headed to 5% in 2003, advisory firm says
Research firm sees rates dropping further in coming year
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Last Update: 12:12 AM ET Oct 17, 2002
NEW YORK (CBS.MW) -- How would a 5-percent mortgage sound? Homeowners may still get their crack at it next year despite the sharp rise in rates this week, if one analysis proves correct.
StartBank, an investment-advisory firm specializing in mortgage-company mergers and acquisitions, examined the relationship between mortgage rates and Federal Reserve rate cuts and concluded that 30-year fixed rates, which reached an average 6.17 percent this week, could still fall back into the 5 percent range in 2003.
"As mortgage rates continue to trend downward, many investors are focusing -- not upon how low mortgage rates will ultimately go -- but rather, upon when the trend will reverse itself," StartBank Chief Executive Richard Easton said.
"This pessimistic thinking is unwise," he said. "Mortgage rates actually have further room to fall, and are likely to fall throughout 2003."
The StartBank forecast is at odds with most housing-industry projections, which see 30-year fixed rates rising slightly next year from their 6-percent level today.
StartBank bases its prediction on declines in the Federal Funds target rate, which has fallen 449 basis points in the last three years. During that same time, mortgage rates have dropped only 195 basis points, to 6.26 percent from 8.21 percent.
By contrast, during the 1990s, the Fed Funds rate fell 313 basis points, with mortgages dropping 256 basis points. That makes the spread today 42 percent higher than it was during the 1990s, and 85 percent higher than it was from 1995 through 1999.
"As compared to the broader credit markets, today's residential mortgage rates are extremely high," Easton said. "Given the historical relationship of mortgage rates to the Fed funds rate, a 30-year mortgage rate near 5 percent is likely to occur in 2003."
But not everyone agrees with that forecast. Freddie Mac, for example, is expecting the 30-year mortgage rate to stay around 6 percent in the near term and average 6.1 percent in 2003, said Amy Crews Cutts, its principal economist.
A drop to 5 percent is highly unlikely, she said, because the StartBank analysis fails to account for market volatility and uncertainty, especially the effects of a war with Iraq on the economy and energy prices.
"They're basically assuming that the Federal funds rate is not going to change but that 30-year mortgage rates will come down because the spread is artificially high," Cutts said.
Despite this week's large jump, Freddie Mac isn't expecting big moves in either direction, she said. |
