Jonathan Burdick

Senior Loan Consultant, NMLS #1045837 – Fairway Independent Mortgage Corp.

Jonathan Burdick

Freddie’s Economic Revisions Optimistic for Housing

Freddie’s Economic Revisions Optimistic for Housing

Freddie Mac’s economists have revised many of their earlier estimates for the 2015 U.S. economy.  In terms of overall economic growth the revisions are not positive as they see a slowing of “the torrid pace in the third quarter of 2014,” but their new projections are good news for housing, with lower rates and a higher level of mortgage originations.

Leonard Kiefer, Freddie Mac’s Deputy Chief Economist, said in February’s edition of the U.S. Economic & Housing Outlook, that there is considerable tension in interest rates.  While it is expected that the Federal Reserve will begin raising short-term rates this year, the prevailing theory is between mid-year and the third quarter, long term rates have fallen from their peaks in 2014.  Ten-year Treasuries have declined by about ½ percentage point since October, twice reaching as low as 1.68 percent, the lowest rate since 2012.

Since the most recent low on February 2 strong employment figures have caused rates to bounce back but they remain below levels at the beginning of the year,  Even if the Fed raises short-term rates sooner than anticipated, it is unlikely, Kiefer says, to lead to a dramatic rise in their long-term counterparts.

Even as there has been a recent increase in short-term rates in anticipation of Fed action, long term rates continue to decline, resulting in a flattening of the yield curve.  Analysts often interpret this phenomenon asindicative of a weakening economy and a possible warning of an approaching recession.

Kiefer said there are two theories for the recent lowering of long-term rates.  One is that these rates are based upon expectations for short-term rates and factors in a term premium to compensate for risk.  Under this theory the recent decline is the result of lowered expectations for short term rates and, if investors accept that the economy is weakening they will accept lower premiums to compensate for risk.

The competing theory is that short-term and long-term securities are not close substitutes and thus movements in the former have limited effects on the path of the latter which are instead driven primarily by supply and demand dynamics within the securities markets.  “Thus it is supply (issuance of debt less retired securities and central bank purchases) and demand (domestic saving and foreign capital flows) for long-term bonds that drive long-term interest rate movements. The sharp decline in the budget deficit since 2009 has reduced net Treasury issuance, despite a systematic effort by Treasury to extend the average weighted maturity of its debt portfolio. The result is a reduced incremental supply of long-dated securities.”

At the same time, events in the global arena such as reduced interest rates in Europe and Japan and growing concerns over global growth have driven a flight to safety and into purchases of long-term U.S. securities.  The latest data from November, portrayed in the chart below, shows the recent surge in net foreign buying of these securities, especially Treasury bonds and notes.  Recent trends support earlier research showing that net foreign purchases of long-term securities have a large impact on long-term rates.

Reference Mortgage News Daily

1 thought on “Freddie’s Economic Revisions Optimistic for Housing

  1. Pingback: Freddie’s Economic Revisions Optimistic for Housing | Jonathan Burdick

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