- The Washington Times - Friday, January 1, 2010

Today is the first day of the last year of an interesting decade. I thought I’d use today’s column to regurgitate what the economic experts are predicting for the economy this year.

Because this is a mortgage column, let’s talk about interest rates. The Federal Reserve Board of Governors recently announced its intent to keep short-term rates low for an extended period of time. While this will keep rates down on auto loans and home equity lines of credit, it doesn’t guarantee that 30- and 15-year fixed rates will remain at their current low levels.

In fact, the Fed has been purchasing billions of dollars in mortgage-backed securities to create a demand for mortgage investments. The simple rule of supply and demand indicates that prices rise when demand is strong. The mortgage buying plan of the federal government is creating this demand and keeping mortgage prices high. Mortgage prices move inversely to the interest rates, so the higher the price of mortgage-backed securities, the lower the interest rates on mortgage loans.

The Fed announced that its spending spree will continue through the first quarter of this year. Most analysts agree that rates will stay low until the buying stops. Rates will then move higher. Other economists predict that worldwide investors will step in and continue buying long-term U.S. investments, such as home mortgages. These folks insist that rates will stay low for a longer period. They argue that while the American economy is in poor shape, economies in other nations - such as in Western Europe - are in worse shape, so foreign investment will continue in the United States.

One phrase to describe housing prices has always seemed appropriate to me: “The bigger the boom, the bigger the bust.”

American real estate experienced a pretty big boom from 1996 to 2006, and we all know about the subsequent bust. The question is whether the bust is over. I think housing prices are close to the bottom of this cycle, but I may be wrong.

I attended a holiday party recently and spoke to a friend of mine in the finance business. He thinks residential real estate prices have a lot more room to fall and that a recovery may not happen until 2011 or later.

Either way, real estate has proved to be a good investment, but only if you are able to hold it for a long period. Most folks who practiced “day trading” on real estate during the first half of this decade got burned.

What about jobs and inflation? After hitting the highest level since World War II, unemployment has dropped slightly, to about 10 percent. Employment levels won’t improve until employers need more employees, and that doesn’t happen until consumers increase spending. Inflation recently spiked up, but not to levels that appear to give the Fed a huge concern.

I think economic growth is not likely to come roaring back anytime soon. While that’s bad news in some areas, it means inflation is likely to remain subdued. This would suggest that mortgage rates might remain low, at least for a while. This will encourage folks to buy homes, helping the real estate market. It also will prolong the current refinance wave, giving procrastinators another chance at lowering their rates and saving some money.

c Henry Savage is president of PMC Mortgage in Alexandria, Va. Reach him by e-mail at henrysavage@pmcmortgage.com.

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