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Stock market swing unlikely to affect mortgage outlook

The stock market’s roller-coaster ride this week has been blamed partially on investor fears that interest rates are poised to rise. Housing economists, however, generally haven’t budged off their forecast that the 30-year fixed rate will end the year at under 5 percent — still low by historic standards. 

The Dow Jones Industrial Average tumbled by 666 points this past Friday, Feb. 2, and then posted a record 1,175 point drop on Monday, Feb. 5, followed by huge swings on Tuesday. It ended the day Tuesday, Feb. 6, up over 550 points. The stock market’s volatility comes after mostly good news about the economy. The robust economy, however, also is fueling inflation fears and expectations of higher rates.

stockmarket“That (the stock market drop) is just the nature of financial markets,” said Mike Fratantoni, chief economist for the Mortgage Bankers Association. “I don’t read that much into it because the underlying economic fundamentals really haven’t changed from last Thursday to today.

“The job market is still incredibly strong,” Fratantoni said during an interview on Tuesday. “Inflation is picking up a little bit, but it is still very low. We really haven’t changed our outlook for the economy at all as a result of this.”

MBA analysts have been predicting a sharper rise in interest rates than many other experts, believing that the Fed will raise rates four times this year and forecasting that the 30-year fixed rate will climb to nearly 5 percent to end the year.

Most analysts have predicted three Fed rate hikes this year, with the first coming in March. Freddie Mac and the National Association of Realtors believe the 30-year fixed rate will rise only a half a percentage point this year, to 4.5 percent.

Fannie Mae, however, has forecast that the Fed will raise short-term rate just two times, and predicts that long-term rates will barely move over the next two years.

Fannie’s Chief Economist, Doug Duncan, said new Fed Chairman Jerome Powell likely won’t diverge much initially from the policy of former Fed Chair Janet Yellen, but eventually will become a different sort of leader at the Fed.

“Governor Powell is not a classically trained Keynesian, orthodox macro-economic theorist,” Duncan said during a Jan. 29 interview.  “He is more like a businessman with experience in corporate, capital markets and some industrial-sector investing. He is an attorney. So, he comes at it from a different perspective,” Duncan said.

“We think there is the potential that he may be more patient than Chair Yellen would have been, to allow the tax cut to take root and see what its implications are for growth versus inflation before changing the path for monetary policy,” Duncan said.   

Duncan also said that the moves of key foreign central banks are important. He said European Central Bank has hinted that it could tighten its policy, a move that could also push up U.S. long-term rates.

“Rates are not just determined by U.S. central bank policy, but by combined global central bank policies,” Duncan said.

Fratantoni said MBA has identified “a financial market disruption,” such as a stock market correction, as a general risk to the economy.

“We just experienced that, and we will have to see the next couple of weeks whether that really impacts investor psychology and gets markets headed in a different direction,” Fratantoni said. “If this is just a short-lived stock market correction, I don’t see that impacting consumer psychology for the course of 2018 — even though it is certainly unsettling over these last couple of days.” 


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