Archive for February, 2008

And isn’t it ironic… don’t you think?

February 21, 2008

In the words of a great theologian of our time, Alanis Morissette, said:

And isn’t it ironic… don’t you think
It’s like rain on your wedding day
It’s a free ride when you’ve already paid
It’s the good advice that you just didn’t take
Who would’ve thought… it figures

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I have been posting for weeks now about inflation figures eventually increasing and causing problems for bond prices – and eventually mortgage rates. Well, half of that prediction happened yesterday.On a day when inflation figures come in higher than expected, which is normally terrible news for bonds, the market actually picks up over 50 points on the day! The main reason for this unexpected result due to the losses bonds endured over the previous nine days of trading. Bonds prices fell almost 300 points — an average of over 30 points every day — for the previous 9 days of trading – making a rebound eminent. During this time, we have seen mortgage rates increase on average of 0.500% across the board on conforming mortgages. 
The biggest surprise was the year-over-year Core PCE (the figure the Fed’s watch closer than anything else to gauge the rate of inflation) is now at an eyebrow raising 2.5%, significantly higher than the Fed’s 2% upside tolerance level. So, why do the Fed’s target 2% (or less) for the year-over-year Core CPI? For an example, let’s look at the cost of a new Toyota Corolla today to see how a slight increase in inflation can make a significant difference.

In 2008, you can get a new Corolla for the MSRP price of $16,500. Assuming inflation rates stay at the Fed’s target of a 2% for the next 30 years, in 2038, a new Corolla will cost $29,887. If the current figure of 2.5% holds, that same Corolla would cost $34,610. Finally, what happens if inflation figures get as high as 5%+ as they were in the early 1990’s? Under that scenario, a Corolla is going to cost you a whopping $71,312 in 2038!

That is why Bernanke and the Feds are keeping a close eye on inflation. I mean, who wants to pay over $70,000 for a Corolla?!? Also, considering that most economists feel it takes up to 6 months before we see the effects of Fed rate cut, inflation figures may only get worse. Remember that 6 months ago the Feds began their initial cuts. What happens 6 months from now when the 1.25% drop in the month of January alone takes affect?

Getting back to mortgage rates, with bond prices enjoying a little bit of a rebound yesterday and today (Thursday), anyone looking to lock in a rate for a refinance or purchase should be watching the market closely. While the rebound of the market is a good thing, the current trend direction shows mortgage rates continuing to increase. The best strategy would be to cautiously wait to see how much of a rebound bonds get before locking in your rate.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

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Lurking Under the Surface

February 14, 2008

Imagine yourself on the open ocean. Feel the wind on your face, chumming away with not a care in the world. All of the sudden, out of nowhere – trouble.

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Now, if you know the movie, you are well aware that the characters accomplished their goal – they were able to lure the shark to them. And as we all know, by the end of the movie, things didn’t turn out so well for the boat and some of its crew.

That is the situation the Feds have found themselves in the last several weeks as they attempt to fight off a recession. To do this, they have continued lowering the federal funds rate, including an emergency cut of .75% a couple of weeks ago.

The cuts have helped to fend off a recession for now, but sadly, the Feds are getting what their actions asked for – increased retail spending and maybe inflation. As the federal funds rate lowers, inflation tends to increase. Mortgage bonds hate inflation and their value weakens when inflation rises. This causes mortgage rates to rise.

As I wrote in previous posts, at some point in time the federal fed rate cuts will catch up to mortgage rates, and it seems that time is now. See the bond market chart below.

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The first three weeks of January showed bond prices continuing to rise, which pushed mortgage rates down close to historical lows. Then there were two rate cuts that totaled 1.25% reduction in the Federal funds rate. Even though there has been some back-and-forth movement on a day-to-day basis, the trend shows bond prices going down, which is raising mortgage rates.

No one is blaming the Feds for their actions. They are in a tough position and doing their best to keep the economy from falling into a recession. However the negative reactions to the rate cuts, which have been swimming under the surface the entire time, have finally shown themselves and the image isn’t pretty.

With the Fed hinting at additional rate cuts, things may only get worse for bonds. If you are in the market to refinance, now is the time to take advantage of where rates are today instead of hoping things turn around in spite of the inflation news. You don’t want to be left in this boat at the end of the movie.

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Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.