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Top Seven Reasons for Lower Mortgage Rates

Posted By Barry Ritholtz On July 6, 2005 @ 10:32 am In Fixed Income/Interest Rates,Real Estate | Comments Disabled

John Herrmann is the Economist for Cantor Fitzgerald (and a nice guy to boot).

Despite his congenitally bullish outlook, I find many of his pieces to be thoughtful and thought provoking.  Here are his

reasons for significantly lower future mortgage rates:

We continue to expect that mortgage rates are headed towards 4.0% over the next three and a half years, and not towards 7.0% over the next three and a half years – the current rate for 30-Year fixed conventional mortgage rate is 5.47%.

Top seven reasons for lower mortgage rates

Increased competitive pressures amongst the nation’s lenders;

Surplus capacity in mortgage lending services sector;

Financial innovation in the form of new mortgage products;

Improved pricing efficiencies in pricing these new, and existing, mortgage contracts;

Improved marking-to-market pricing of duration risk of mortgage contracts, towards the 5-year sector of the Treasury Note/Swaps curve, and away from the 10-Year sector of those curves;

Moderating core consumer inflation pressures in 2006 and beyond;

The back-up in the 10-year Treasury Note yield is likely capped below 4.5% over the next three years, and that yield could fall to as low as 3.0% during the next recession (in 4.0 years).

Thus, with this "constructive" outlook for mortgage rates going forward, and given our forecast for an additional 4.25 million net new jobs to be created over the next 3.5-years, we continue to expect that home sales will remain very resilient going forward, with a new record set in 2005 for total home sales (for the seventh consecutive year), and with a possible new record set in 2006 (for what could be the eighth consecutive year).

Again, when we strip out the growth in the US housing market, we estimate that real GDP is only growing at a 3.0% rate, and that non-farm payroll jobs growth is only +127.0K per month. 

So, lower mortgage rates is one way that the US economy grows closer to its potential real GDP growth rate of +3.5%.


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