This month, we will continue on our 2005 rate preview topic from last month. Last time, we covered broader market factors that move rates. This time, we will make some predictions of our own based on the market data available. We will begin with predictions for fixed and ARM loan rates, and then follow with rationale for each.
The 10-year Treasury, which is a key benchmark for longer-term commercial and consumer rates, implies a 30yr fixed mortgage rate increase of about .75%. At press time, a jumbo 30-yr fixed rate loan is 5.875%, which means it could hit 6.625% by year’s end. Jumbos are loan amounts from $359,650 to $650,000. The two-year Treasury and the Fed Funds Rate imply intermediate ARM loan rate increase of about 1.25%. Currently, a jumbo 5-yr ARM is 5.25%, which means it could hit 6.5%.
It’s important to note that fixed and intermediate ARMs are more tied to mortgage bond yields than Treasury yields, but Treasury predictions are much more widely available, so that’s why I’m using those. Most estimates call for a 5% rate on the 10-year Treasury for 2005, relative to a 4.25% rate right now. This is the basis for the .75% increase. But predicting ARM rates more than two months out is much harder to get right because, even if markets suggest a certain rate level, lenders will intervene and lower rates if a market rate spike slows ARM loan demand. The Fed Funds estimates for 2005 call for 3.5% versus 2.25% now. And two-year Treasuries went up about 1.4% during 2004. These spreads are where we draw our estimate from. Again, this is all just educated guessing to give you a rough feel for 2005. For those who want to know what’s going on weekly, we suggest reading MarketWeek published on Mondays, which tracks mortgage bond pricing more specifically.