NEW YORK - The persistently strong housing market will get a boost in the aftermath of Hurricanes Katrina and Rita, as displaced homeowners need replacement homes, said Freddie Mac Chief Economist Frank Nothaft at the CPR & CDR's Prepayment and Mortgage Credit Modeling & Strategy Conference' held here last week.
However, with the two hurricanes shattering business and causing oil prices to rise, Nothaft is expecting lower GDP growth, 3.5%, for the rest of the year. Although by the first half of next year, he predicts GDP growth to be at 4.1% due to the rebuilding effort expected to take place. Energy price spikes are also seen as temporary - as refineries and pipelines are quickly being brought back in line - but high oil prices are here for the next few months, Nothaft said.
Nothaft expects the Federal Open Market Committee to raise rates by quarter point intervals in November, December and January. With the higher oil prices, inflation has picked up as reflected in the overall Consumer Price Index, although core CPI should remain fairly stable over time.
Despite the rate hikes, the mortgage market will remain "busy," Nothaft added, boosted by mortgage rates remaining historically low, averaging 5.8% for the last three years. And even if they rise to the 6% level, Nothaft said that this would still be 30% below rates seen in 2000 when the economy was at its peak, and the yield curve flat. But, despite remaining robust, Nothaft expects loan originations to slow by 5% next year and again, by the same amount, in 2007 because of a drop in refinancing. Purchase money volume is expected to rise, however, and ARM originations will account for one in four loans next year, Nothaft predicts.
Other trends that Freddie Mac is mindful of include rising investor and second home share of purchase money mortgages, as high as 36% in some cities like Phoenix and Las Vegas. It is a cause for concern that the "speculative component is driving the valuation of homes" probably accounting for as much as 50% in certain parts within these areas, said Nothaft.
Improving employment in the past year has dampened mortgage delinquencies, although unemployment remains high in regions reliant on manufacturing. Nothaft added that despite strong house price growth and low interest rates boosting loss mitigation, FHA and subprime delinquency rates remain worrisome, with subprime delinquencies as much as eight to nine times higher than prime loans. He added that default rates typically peak one year after employment recovery starts.
Although Freddie Mac expects home prices to moderate in 2006, Nothaft does not project a national price decline, a conclusion supported by history. U.S. home prices have grown every year since 1950 and the last time home prices declined nationally was during the depression. Additionally, inventories of homes-for-sale are very low and income has grown with home prices. Nothaft said home price growth remains tied to local economies and, although currently accelerated home price rates may not be maintained, appreciation is still expected over the next five years. Freddie Mac expects house price appreciation to average 3.5% in the next five years, with coastal regions maintaining a decent amount of appreciation. The Pacific coastal region, for instance, is expected to have a 5.1% average appreciation rate over the next five years.
In a separate presentation, Art Frank, head of mortgage research at Nomura Securities, said that he also expects a slowdown not only in home price appreciation, but also in housing turnover - which is at the highest levels since the late 1970s. "We do not see price declines in most bubble markets in the near-term due to the strong employment outlook, rising household incomes and strong economic growth," Frank said, adding that housing turnover levels will likely stay above the 1994 to 1995 levels even with higher rates, although he expects a slowdown from the "torrid rate" seen this year. One factor that drives turnover rates, said Frank, is increased borrower mobility. "As the percentage of homeowners approaches 70% of all households, the mobility of the homeowner population has increased," Frank said. Additionally, borrowers who were comparatively less settled 10 years ago have now become homeowners.
He also noted the abundance of new affordability products that are enabling borrowers to lower monthly payments, despite increasing the reset risk. He said that offsetting these risks are tighter underwriting on these loans as well as higher FICO scores.
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