Frank Nothaft, Chief Economist for Freddie Mac, spoke last week on several topics of great concern to those involved in business and housing. Mr. Nothaft weighed in on these subjects earlier in the year and his expectations were not only insightful, but also incredibly accurate.

Areas noted and addressed in this interview were housing, employment, interest rates, and the financial markets. Overall, Mr. Nothaft is quite optimistic.

Housing – Look for appreciation levels to decelerate but not decline. There is no bubble in sight. Expect property values to slide into a range of a little below to a little above 5%. While some areas of the country may actually see a decline in values, look for these to be limited to areas where manufacturing employment has been hit hardest.

Home sales have been incredibly strong, remaining at levels that will be unsustainable. However, look for sales rates to moderate to the levels seen in 2002 and 2003, both very strong years.

Interest Rates – Interest rates have had an incredible run. Alan Greenspan and the Federal Reserve will consider increasing the Fed Funds Rate again in September. Look for the answer of “will they or won’t they” on September 3rd with the release of the employment figures for August. If there was significant hiring and unemployment falls, look for an increase. If the “soft patch” continues, overnight rates and the Prime Lending Rate may stand until after the election.

Long-term interest rates, those most affecting rates on home loans, will gradually rise through the end of 2004 and 2005.

Economy – New job growth has faltered in the past quarter. Primary reasons are the rapid increase in oil prices and increasing levels of worker productivity, currently over 5%. With consumers having less money to spend and workers continuing to get more done on the job, companies haven’t had to hire. Annualized growth of 4% will bring lots of jobs and unemployment will fall to 5.4% going forward.

Much has been said of jobs leaving the U.S. for other countries. However, little has been said of foreign companies boosting jobs here. Toyota, BMW, Honda and Mercedes all have US plants as do other foreign concerns. The “net” difference in jobs going overseas and relocating here is nominal.

Inflation has been tame and should remain so. Even with rising energy and raw materials costs, companies have been able to maintain pricing simply through increased productivity.

Watch oil prices. If oil continues its march higher it could throw markets and consumers off track. Also keep in mind that while oil is at a historic high, in real inflation adjusted dollars, it is still well below the levels of the 1970’s.

Investments – Housing still looks like a home run. With appreciation levels of 5%, the beauty of leverage means that a home appreciating at 5% equals a 25% rate of return on a down payment of 20%. The stock markets will continue to see improvement through 2005.

November Elections – Regardless of who wins, Bush or Kerry, the next two years should be the same economically with Greenspan in office. Mortgage and housing markets will be basically unaffected. What will be impacted by the election will be who holds the chair Greenspan sits in today when his term ends in 2006.

Mortgage Markets – Home loan rates will definitely trend higher. Opportunities will exist to see short drops, based on limited factors like terrorism. 2005 will be a good year for mortgage volume, but not great. As compared to 2004, volume should fall 40-50%. With this drop in volume, the mortgage industry will lose jobs as companies won’t be able to justify the carrying costs of additional staff. The drop in volume will be attributed to loss of refinance applications.

Mortgages with adjustable rates will continue to see a larger share of overall mortgage volume. Falling to 10% during the boom of mortgage activity last summer, ARM’s will increase to stabilize at 30% of the overall market.

Concern may be warranted about the increase of “interest only” products available, where a consumer is required to pay only the interest on their mortgage balance. Historically, these loans bring higher delinquency and default rates. In the event of a decline in property value, a significant payment change, due to rising interest rates or a combination of the two, trouble could be brewing.

In Summary: Mr. Nothaft predicts that housing will remain strong, interest rates will drift higher but not significantly, the economy will grow at roughly 4%. Goldilocks would be pleased here…not too hot, not too cold, just about right.

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.