Forecasting What May Be Ahead for Home Loan Rates
2012 Is Here
Forecasting What May Be Ahead for Home Loan Rates
By Gary Umholtz, Branch Manager, RPM Mortgage
The good news–despite what the Mayan calendar may say–is that the world probably won't be coming to an end in 2012. But like 2011, this coming year may bring some significant challenges here in the US and around the world. Read on to learn more about what could be ahead for home loan rates. First, let's take a minute to recap 2011. While home loan rates finished the year at historically low levels, the housing market did not see a major improvement in the second half of the year as some experts expected. The labor market did make some modest improvements, but it is still persistently weak and this is one area of the economy in particular that we need to see consistent improvement in to help our long-term economic outlook.
Also weighing on consumer confidence and thus the economy in 2011 was the first downgrade of US Debt in history, thanks in part to our very divisive government body. Finally, the worsening and spreading debt crisis in Europe capped a year filled with financial and political uncertainty. The situation in Europe is the perfect place to begin a 2012 outlook.
Eurozone Debt Crisis
What may happen with the US economy and home loan rates in 2012–not to mention with inflation, the housing market, the job market, and even the Presidential election–may be dramatically influenced by how the Eurozone handles their debt crisis. In the simplest of terms, the issue is that like much of the developed economies around the world, Europe has way too much debt. And a lot of this debt sits on the books of the banking sector throughout the Eurozone.
In good economic times, banks could potentially "grow" their way out of their recapitalization problem by doing a lot of business and writing a bunch of loans. But that is not likely to happen with the Eurozone slipping into a recession in the first half of 2012.
Ultimately, Europe needs to provide a large financial backstop for their banks and sovereign debt in order to fix their problems longer-term. And this is something that Germany, who holds the cards in this negotiation, strongly opposes.Germany prefers to have each country shore up their own individual finances, act responsibly, and pay down their debt. Yet, Greece, Italy and other highly indebted countries have struggled to invoke tough austerity measures that would help them do so.
The situation in Europe is definitely a wild card headed into 2012. The bottom line is that as long as the uncertainty continues, the US Dollar and US Bonds should benefit, as investors will see our Bonds (including Mortgage Bonds, upon which home loan rates are based) as a safe haven for their money. This could help keep our home loan rates relatively low in 2012.
One factor that we can't ignore when it comes to home loan rates is inflation. Why? Inflation is the arch enemy of Bonds and home loan rates, because if inflation rises, investors in Bonds demand a higher yield to offset the lost buying power inflation imposes on a fixed payment. And as home loan rates are tied to Mortgage Bonds, this would mean home loan rates move higher. That's why sometimes even hints or whispers that inflation is on the rise causes Bonds and home loan rates to worsen.
So what's ahead for inflation in 2012? In the Fed's Policy Statement from the December 13, 2011 meeting of the Federal Open Market Committee (FOMC), the Fed stated that inflation is moderating...which would be good news for home loan rates. However, it's important to note that core consumer level inflation actually inched higher in 2011.
Last year, consumer inflation and the expectation of inflation rose as the Fed embarked on a second round of Quantitative Easing (QE2) in the fall of 2010, whereby they bought Mortgage Bonds to help boost the economy and the housing market. If inflation remains at current levels or pulls back a little, the Fed may just do another round of QE3 in the spring. Also paving the way for another round of QE is the change of guard at the Fed. Several hawkish (i.e., tough on inflation) voting members are being replaced by more dovish (i.e., softer on inflation) voting members in 2012.
The bottom line is that if the Fed does another round of QE, this could cause inflation to rise. And if inflation does rise in 2012, it could have a negative impact on home loan rates. However, if the uncertainty out of Europe continues to lead to a safe haven trade in our Bond markets–and remember, this helps Mortgage Bonds and therefore home loan rates–this could essentially balance out the negative impact inflation usually has on Bonds and home loan rates. Only time will tell whether inflation or the events in Europe have a bigger impact on the markets and home loan rates.
The Big Picture
In many ways, 2012 may feel a lot like 2011. Inflation and events in Europe will continue to play a big part in the direction home loan rates move in 2012. What's more, history has shown that Bonds move higher (which means home loan rates move lower) in anticipation of QE, but then selloff once the official announcement is made…think "buy on the rumor and sell on the news."
If that does happen, the first half of 2012 could be an especially great time to purchase or refinance a home. But even if the Fed does not move forward with QE3, we begin 2012 with home loan rates near historic lows, which already makes this year a great time to purchase or refinance a home.
If you have any questions about how you can benefit from this situation, contact Gary Umholtz at RPM Mortgage Sonoma (707) 343-9510.
Wishing you a wonderful and successful 2012!