Fannie Mae Sees Increasing Mortgage Rates Through 2011

Today Fannie Mae’s Economics and Mortgage Market Analysis Group published its May 2010 Economic Outlook, and the prognosis was mostly positive.  The report said that a strengthening labor market along with increases in consumer spending and manufacturing have set the scene for slow but steady economic improvement.  Their optimism was tempered by the uncertainty of the situation in Europe, a continued weak housing  market, and economic effects of the Gulf of Mexico oil spill.

Fannie Mae reports a steady increase in mortgage rates, and that 30-year fixed rate mortgages will hit 5.4 percent by the end of 2010 and 5.8 percent by the end of 2011. They also predict the yield on 10 year treasury notes, the basis for interest rates in the United States to increase steadily and reach 4.2 percent by the end of 2011.

The report stated: “we have revised up our projected economic growth for the rest of the year based on strong momentum coming out of the first quarter and an improving job market, but our expectations for continued softness in housing, following the expiration of home buyer tax incentives stay in place”.  Recent reports have indicated that despite low mortgage rates, mortgage purchase applications plummeted following the expiration of the tax credit on April 30th.  Consumers who signed a purchase contract prior to April 30th still have until June 30th to close on their home and qualify for the tax credit.  For this reason, home sales will likely increase in May and June.  The real test for the housing market will come in July when the effects of the tax credit have totally evaporated.

The report predicts the economy to grow at 3.6 percent through 2010, however unemployment will stay north of 9.6 percent through the end of 2010, and the jobless rate will still be as high as 8.6 percent through 2011.

Regarding the federal stimulus, the Fannie report said: “The boost to growth from inventories will continue to diminish in coming quarters and any impact of the federal fiscal stimulus will fade in the second half of 2010.  In order for the expansion to be durable, final sales must strengthen to replace waning contributions from inventories and fiscal stimulus”.

The report also warned that the European debt crisis “poses significant risk to the forecast” and that “no estimate of the magnitude of the effect [of shadow inventory on home sales and prices] is available”.  The report cautions that these situations in addition to the oil spill in the Gulf of Mexico “increase downside risks to the base forecast”.

Do you agree with Fannie’s assessment of the economy?  Let us know in the comments section below.