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Feb. 3--Mortgage rates won't start galloping upward. And home prices won't start retreating downward, even with the Federal Reserve threatening more interest rate hikes after making their sixth one of eight months on Wednesday That's the word from Scott Simon, head of the mortgage team at Pimco, the Newport Beach bond traders managing $445 billion in assets.
Simon noted that almost every word of the Federal Reserve's statement that accompanied their rate hike on Wednesday was the same as in their last two statements.
The hike also was identical to five previous increases.
"So (Wednesday's) announcement didn't really change much," he said.
Simon believes that mortgage rates -- currently averaging at 5.2 percent for a 30-year fixed loan -- will remain low, rising no more than 1 percentage point in the next year.
Pimco officials predicted in December that the Fed would rest after Wednesday's increase in its influential Fed funds rate to 2.5 percent.
But Pimco now believes the Fed may go as high as 3.5 percent.
"They've pretty much signaled that they'll keep going," Simon said.
Mortgage buyers carefully eye the housing market because they want to make sure the collateral underlying the loans they own is intact.
Home prices nationwide will continue rising in 2005, Simon said.
Appreciation will slow to zero by 2006, but Simon warns that prices may fall for overpriced top-end homes.
Simon worries that many people buying homes at today's record prices may be borrowing beyond their means.
Simon explained that when mortgage rates first dropped a few years ago, buyers could buy bigger houses for the same monthly payment.
"It's not surprising that (house) prices went up so much," he said.
But the buying frenzy didn't stop when the monthly house payments rose beyond the average buyer's means, he said.
Instead, many buyers with marginal credit histories are lowering their monthly payments by postponing paying down the loan balance. These loans also offer discounted starting or "teaser" mortgage rates that go up after two or three years.
Simon figures these borrowers face payments soaring as much as 40 percent after two years at a time when borrowers are "maxed out." Such risky borrowing poses the biggest risk to mortgage buyers like Pimco, who lose money if homeowners default on their loans. So Pimco is being very cautious about the mortgages they are acquiring.
"Our concern is when people use (these risky loans) when they can't qualify any other way," he said.
"They're over-extending credit to people who have the least means to afford it."
Simon noted that almost every word of the Federal Reserve's statement that accompanied their rate hike on Wednesday was the same as in their last two statements.
The hike also was identical to five previous increases.
"So (Wednesday's) announcement didn't really change much," he said.
Simon believes that mortgage rates -- currently averaging at 5.2 percent for a 30-year fixed loan -- will remain low, rising no more than 1 percentage point in the next year.
Pimco officials predicted in December that the Fed would rest after Wednesday's increase in its influential Fed funds rate to 2.5 percent.
But Pimco now believes the Fed may go as high as 3.5 percent.
"They've pretty much signaled that they'll keep going," Simon said.
Mortgage buyers carefully eye the housing market because they want to make sure the collateral underlying the loans they own is intact.
Home prices nationwide will continue rising in 2005, Simon said.
Appreciation will slow to zero by 2006, but Simon warns that prices may fall for overpriced top-end homes.
Simon worries that many people buying homes at today's record prices may be borrowing beyond their means.
Simon explained that when mortgage rates first dropped a few years ago, buyers could buy bigger houses for the same monthly payment.
"It's not surprising that (house) prices went up so much," he said.
But the buying frenzy didn't stop when the monthly house payments rose beyond the average buyer's means, he said.
Instead, many buyers with marginal credit histories are lowering their monthly payments by postponing paying down the loan balance. These loans also offer discounted starting or "teaser" mortgage rates that go up after two or three years.
Simon figures these borrowers face payments soaring as much as 40 percent after two years at a time when borrowers are "maxed out." Such risky borrowing poses the biggest risk to mortgage buyers like Pimco, who lose money if homeowners default on their loans. So Pimco is being very cautious about the mortgages they are acquiring.
"Our concern is when people use (these risky loans) when they can't qualify any other way," he said.
"They're over-extending credit to people who have the least means to afford it."
posted by Kirby P at 3:16 PM
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