Freddie Mac Economic Outlook Portends Reduced Mortgage Rates, Increased Refinancings

Probably the big news in the December 2006 Economic Outlook published by Freddie Mac’s Office of the Chief Economist last Friday was that the office has finally changed its interest rate projection for the year.

The monthly forecast since late last year has clung to a projection that the 30-year mortgage rate would average 6.5 percent for the year. This number went up to 6.6 for a few months in late summer - but the average rate for 2007 is now projected at 6.3 percent, a substantial improvement over the 6.7 average forecast earlier in the year.

Other projections in the report include:

• Home price appreciation will slow further in the fourth quarter to 2 percent from 5.2 percent in the second quarter and 4 percent in the third. Prices should “trough” in the fourth quarter and appreciate 3.4 percent in the first half of next year.

• Mortgage refinancing will see the highest market share of the year in the current quarter, reaching 48 percent of all mortgage applications. This is forecast to continue through the first quarter of 2007 and then to moderate to 36 percent by the middle of the year.

At the same time, delinquency rates recently increased to 1.7 percent, the highest level since 2003 but only marginally higher than in 2004 and 2005. The number is still well below the delinquency rates in the early 1990s.

• Adjustable rate mortgages will have a slightly higher share of the market than was thought a few months ago - 16 percent vs. 14 percent - still, the inverted yield curve (where short term rates tend to be only slight lower or even the same as long term) will make ARMs unattractive to borrowers who can afford to make the choice.