Market observers are no longer questioning whether the Federal Open Market Committee will raise short-term interest rates when it meets this Tuesday, but by how much. Many are predicting a 50 basis-point hike in rates, and may have already factored that into the market, economists say.
That was just one of the topics discussed by Mortgage Bankers Association chief economist Doug Duncan at the National Secondary Market Conference in San Diego, Calif. last week. He indicated that there is a "better than 50-50" chance of the Fed raising rates by 50 basis points and that the MBA has already factored it into its forecasts.
Robert Van Order, chief economist for Freddie Mac, agreed, noting that the speculation is the cause for a sharp increase in long-term mortgage rates over the past two weeks. "We've had mortgage rates go up from a little bit over 8% a few weeks ago, to about 8.5% now," he said. "What that means is that the damage has probably already been done."
Van Order added that if the Fed does what the market is expecting it to do, there will be little impact in the mortgage market. While he adds rates may go up slightly after the move, they will most likely hover in the 8.5% range. "They'll be higher than they were a few weeks ago," he said. "And that will have a little bit of an effect on the mortgage market and on the housing market, but not a huge one."
However, David Berson, chief economist at Fannie Mae, sees rates moving even higher to about 8.7%, with short-term rates moving up even more than long term. Berson even suggested the Fed will continue its tightening another 25 basis points in June, and again in August.
As for mortgage-backed securities, which have not been linked as closely to Treasurys recently, MBS and Treasurys will move in tandem with the Fed's increase.
Despite the tightening, the housing market still looks to be fairly strong throughout 2000, Van Order said.
Duncan added that, relative to the past, mortgage interest rates will still remain low, with overall volume at about $950 billion. - FM