Archive for January, 2009

Headed in the wrong direction

January 30, 2009

Interest rates took a surprising turn this week – for the worse!  After setting record lows for fixed rates, the market has slowly but surely eroded and suffered brutal days this past Wednesday and Thursday.  What caused this trend?  Let’s take a look at some of the indicators.

Economic News:  Remember that bad news for the economy is good news for interest rates.  Needless to say, I’m sure we all know the news has been bad for the economy.  Rising unemployment, sharpest GDP drop in 20+ years, continued decline in new home purchases, heck, even liquor sales aren’t recession proof.  In the face of all of this news, rates still dropped.

Stock Market:  When stocks struggle, bonds typically thrive.  Stocks have struggled mightily over the past three weeks, yet bonds have been unable to improve or even hold their ground.

The Federal Reserve:  When mortgage backed security (mbs) bond prices improve, interest rates go down – they share an inverse relationship.  Knowing that, one would think that mbs bond values would only increase with the Fed’s continuing to buy them.  With none of the other typical predictors holding, it was no surprise that this didn’t prevent bond prices from eroding and mortgage rates rising.

If the usual suspects aren’t helping rates, what is influencing them? Here are a couple of items that could have caused to slow erosion over the past few weeks.

– Historical Lows:  They don’t call them historical lows for fun.  Rates were indeed at historical lows.  Remember, “what goes up must come down.”  Well… except that um… reverse that.  You know what I mean!  Rates won’t stay at historic lows forever and were bound to go up.  This more than anything else seems to be the reason for the slow rise in rates.

– The Federal Reserve:  A previous post theorized that the market may be developing immunity to the Fed’s purchasing of mbs bonds.  The Feds announced on Wednesday that they would continue with this strategy and bond values immediately declined forcing interest rates higher.  Maybe the market does know that these prices are inflated?   

– Inflation:  I know you are thinking, “inflation is so low no one cares about it right now.”  That is 110% accurate.  Inflation is crazy low right now and no one is really talking about it at all, but we can’t discount its potential effects.  Some are forecasting inflation to play a major role toward the end of 2009.  Why?  The Feds have the Federal Funding rate at 0% and will keep it there for the foreseeable future.  The longer it stays at 0%, the odds of higher inflation increase.  Will it happen?  Who knows, but since speculation and emotion drive the markets, we were bound to see a reaction to this “potential” disaster a year down the road. 

 

 

“Everyone else is doing it, so I’m freaking out too!”

“Everyone else is doing it, so I’m freaking out too!”

 

 

 

Will interest rates improve?  Probably so.  Rates move with an ebb-and-flow.  They tend to gradually get better, then worse, then better, etc.  That said, if rates got back into the 4’s, I wouldn’t necessarily hope and wait for 4.5%.  I would go ahead and refi and make sure I don’t miss out!

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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Reading the signs in a volatile market

January 16, 2009

Anyone who says they know exactly what is going to happen these days is either guessing or a prophet.  Since true prophets can never be wrong in their predictions, there appears to be a lot of guessing taking place.  With that theme in mind, here are some of my thoughts and observations as we continue to live in this uncertain economic time.

Following up to my post the other day regarding the possibility of artificial rates, it seems mortgage backed security (mbs) bonds are tiring of their currently levels regardless of what the Feds do.  What do some of the recent signs tell us?  Let’s take a closer look at Thursday’s market action.

Almost all economic data released on Thursday was favorable for bonds.  In addition to the friendly news, the Feds pumped more money into the mbs bond market.  How much you ask?  Try a cool $23 billion.   One would expect bonds to have a fantastic trading day pushing rates lower.

The result? Not only did mbs bonds not gain any ground, they finished in the red for the day.  This pushed interest rates slightly higher by the end of the day on Thursday.

Just as bacteria builds resistance over time, the bond market is becoming increasingly immune to bond friendly data even WITH the Feds assisting by purchasing mbs bonds.

Currently, bonds sit in an overbought state and that puts upward pressure on interest rates.  Combine this with seven days of flat trading in the market, and we have all the makings of a potential swing in the WRONG direction for mortgage rates.

What’s going to happen?  Again, the volatility of the market makes consistent forecasting next to impossible.  To try and choose a direction, we should ask ourselves “how much lower can interest rates go?”  If I had to put my own house on it, I’d say rates would more likely get a lot worse instead of a lot better.

otter-scratching-head

Scratching your head trying to figure out what to do?  Still waiting for 4.5%?  To make sure you don’t miss out, it may be better to move now while rates are still under 5%.  Rates this low won’t be here forever.

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.

 

Inflation is gone, gone, gone, and we are free! For now…

January 15, 2009

It is good to feel free. Free of some bad news.  Free from some worry. I mean, we can’t get through a single day without hearing bad news about something occurring in the world, our country, business, etc.  It seems we can never catch a break.  Luckily for everyone, inflation worries are gone for the time being. 

Inflation was all the rage last year as oil skyrocketed to record highs.  Since oil hit $140+ a barrel, its prices have plummeted to below $40.  This helped bring inflation figures back into an acceptable range for the Federal Reserve and gave them a green light to continue cutting the Federal Funding Rate.

Currently, the Federal Funding Rate is essentially at 0%.  Based on recent comments from Bernanke and Lockhart, it seems the Fed rate will sit at this level for the foreseeable future.  Their biggest concern? – To quote Bill Clinton, “the economy stupid!”  Honestly, who can blame them? 

Since the economy is our number one concern, and inflation figures are lower now than they were in 2008, then we should push full steam ahead and not worry about inflation anymore, right?  Right? …

As nice as that sounds, we can’t totally discount inflation.  A couple of things to consider:

  – Record high oil and food prices influenced inflation readings last year.  Most analysts agreed that $140+ oil was unsustainable and that the prices would fall, and boy did prices fall!  Now at $40 (or less) a barrel, those same analysts believe that oil is too low and that an adjustment will be coming down the line.  If the lower inflation readings are largely due to the dramatic drop in oil prices, expect inflation numbers to creep back into the headlines if oil prices increase throughout the year. 

  – The Fed’s main weapon for attacking a recession (lowering the funding rate) is gone.  Now what do they do?  Before the Fed rate reached 0%, the strategy was providing money at a cheap rate to stimulate the economy.  Now the policy is shifting to ensuring there is sufficient capital in the market.  How do you keep sufficient capital in the marketplace?  You print money!  Since the U.S. is not on a gold, silver, or any backing standard, the Feds can print all the money they want and deem its worth.  There is one problem with this strategy.  As more money enters the market, it loses some of its value – inflation could strike here too. 

  – The Dollar has made considerable strides against foreign currencies from their record lows of 2008.  The rate cuts offered by the “central banks” of the world have also helped to increase the value of the Dollar (decreasing inflation).  But what happens if the Fed rate stays at 0% for an extended period of time?  Will foreign investors once again leave the Dollar for the Euro or the Pound whose central banks are not at 0% in order to make higher yields on investment?  If so, this would put added pressure on the Dollar by reducing its value.  As the value of the Dollar decreases, expect inflation to increase.

While the Feds have done an admirable job combating this economic downturn, we cannot turn a blind eye on inflation.  If the Feds continue on their course of action – keeping the Fed rate at 0% along with ensuring there is plenty of capital in the market – we can expect to see inflation figures rise as 2009 progresses.  Once inflation goes up, it becomes tough to get it back into an acceptable range.  But what is the Fed to do? What I wrote last year still applies today; the Feds continue to find themselves in the unenviable position of being between a rock and a hard place. 

For more information on inflation and its importance to the Feds, see previous posts Between a rock and a hard place, Lurking under the surface, and Isn’t it ironic.

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.

Artificial Rates?

January 13, 2009

Rates are at historic lows.  It seems the entire country is refinancing and taking advantage of these low rates.  Will this last forever? Well, no. Rates change daily, even hourly, so this refinance window will not last forever, but how long it lasts is the key.

The driving factor of interest rates haven’t changed – mortgage backed security (mbs) bonds still determine interest rates.  However, the Federal Reserve is now a huge player in these bonds and are influencing rates and pushing them lower.  How are the Feds doing this?

During the week of Thanksgiving, the Feds stated they would become a major buyer of mbs bonds causing rates to drop a half a point overnight.  Following this announcement, the Fed’s statement from their most recent meeting indicated that they would continue as planned and would purchase mbs bonds between now and July 2009.  

These actions pushed rates down to our now historic lows, but are these current rates real?  The answer is both yes and no.  Yes, absolutely, these rates are real and plenty of people are taking advantage of them.  No, in a way, because mbs bonds may not be able to sustain their current levels once the Feds stop purchasing bonds.

We can see bits and pieces of this on trading days when the Feds do not get involved in purchasing mbs.  Even on days of poor economic news and bad trading for stocks (which are frequently occurring), bonds tend to lose value unless the Feds are also doing a little bit of buying in the market.  Typical bond reactions would be positive without the Feds when bad economic news is released causing money to come out of stocks. Yet investors seem reluctant to buy bonds unless the Feds are also buying bonds. 

What happens when the Feds stop buying mbs bonds?  Most likely, we will see a dramatic increase in rates, which will be the opposite reaction compared to when all of this began during the week of Thanksgiving.  

Now the Feds indicated they would buy mbs bonds through July 2009 (or when the money runs out), so it isn’t like this is going to happen today or tomorrow.  That said, as bond prices become more dependent on the Feds, the day the Feds do get out for good, expect a big adjustment on bond prices to follow.

What should you do?  Don’t wait too long if you are considering refinancing your home loan.  Interest rates for a 30 year fixed mortgage are in the mid to upper 4’s and as volatile as stocks and bonds have been for the past year, there is no guarantee they will stay for long. So contact your friendly neighborhood mortgage broker and get started on your refinance today.

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.

 

Best rates of the year!!

January 1, 2009

Bad news – Interest rates steadily climed in the month of December from the mid 4’s into the low 5’s. Ironic how 5% is now considered high!

Good news – without a shadow of a doubt, today’s rates are by far the best of 2010 🙂  To learn more about interest rates, loan programs, and qualifying to buy a home, feel free to call or email.