Economics 101 – Interest Rates

Now that we are hovering at the mid-year point, economists are starting to review their projections for this year. And based on the latest available national economic data, indications for the remainder of 2006 through 2007 are consistent with RealtyTrac’s May 2006 U.S. Foreclosure Market Report, which shows a 2 percent increase in foreclosure activity from the previous month. (See full report here.)

The forecasters at the A. Gary Anderson Center for Economic Research at Chapman University have a stellar track record when it comes to projecting the direction of economic activity. The results of their latest analysis, released Wednesday, indicate that a number of factors are at work supporting the notion of a continued increase in the number of properties entering the foreclosure pipeline, although not skyrocketing to levels seen back in the early 1990s.

The key factor of concern to real estate investors, first-time homebuyers and agents looking to get into the foreclosure business is interest rates. Economist James L. Doti, president of Chapman University, expects Federal Reserve Chairman Ben Bernanke to raise the Federal Funds Rate three more times – 25 basis points each time – ratcheting the short-term rate up to 5.75 percent by year’s end before taking a wait-and-see attitude towards future adjustments.

These latest adjustments follow closely on the heels of 16 similar adjustments the Fed has made since June 2004. With these latest adjustments, the Chapman forecast calls for 30-year fixed-rate mortgages to peak out at 7.1 percent before dropping back slightly in 2007.

According to Dr. Esmael Adibi, executive director of the Anderson Center, the people who are going to be hurt the most by these adjustments, and those taking the greatest risk of going into foreclosure, are homeowners who purchased within the past couple of years, have insufficient equity built up, and financed their purchase with either a adjustable-rate or negatively amortizing mortgage, or some other form of creative financing.

Let us know if you think this report is on target. More to come on the Chapman report.