Archive for the ‘Inflation’ Category

Whoever wins… we lose

February 3, 2009

That was the tagline of the famous/infamous (depending on your point of view) movie “Alien versus Predator” from 2004.  Take a look at that picture.  Talk about ugly.  On that note, there are two other equally ugly and possibly terrifying things in the news that regardless of who wins out, we all lose – inflation and deflation.

For now, inflation is definitely not a factor in the market.  The closely watched Core Personal Consumption Expenditure Index (Core PCE) came in at 0.0% for January.  This left the year-over-year Core Rate at 1.7%, which is well inside the Fed’s preferred range of 1 – 2%. 

I bet if inflation and deflation were each given a face, they would look about as scary as these two characters.

I bet if inflation and deflation were each given a face, they would look about as scary as these two characters.

 

It seems the “scary” inflation news from just a few weeks ago was slightly exaggerated.  While there could be some issues with inflation toward the end of 2009 (impacts of all the stimulus attempts, low interest rate environment, and the Federal Funding Rate virtually at 0%), it is definitely not something that needs worrying about today. 

 

But in this market, what is a day without worry?  Thankfully, we have deflation to keep us up at night.  What is deflation?  Investorwords.com defines inflation as:

          A decline in general price levels, often caused by a reduction in the supply of money or credit.

          Direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending.

          The side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy.

 

I know what you are thinking, “declining prices, that is good, right? So why is deflation bad?

 

We all know inflation is a bad thing and the Feds meticulously fight against it.  If you don’t believe me, Google “inflation calculator” and play around with some of the calculators you can find online.  If you do, you’ll discover that it takes almost $2 to buy the item that was just a dollar twenty years ago.  At this rate, that means the today’s $50,000 Lexus will cost $100,000 in 2029!  Inflation means spend today because it will cost more tomorrow. 

 

So inflation is bad, but is deflation worse?  Actually, yeah, it is.  Deflation kills the overall economy.  There is no incentive to spend today since prices will be cheaper tomorrow.  This destroys product sales and increases unemployment, which in turn intensifies this downward spiral.

 

Monday’s economic reports offered proof of deflation.  Consumer spending fell for the sixth consecutive month to -1.0% and rose just 3.6% in 2008 – the smallest gain in nearly 50 years.  Another report showed Personal Income fell by -0.2%.  Americans increased their savings rate to 3.6% of their after-tax incomes in December.  While saving is a good thing, it’s not a good thing for our consumer spending based economy. 

 

Couple high unemployment rates with the summary of those reports – lower energy prices, decline in investment spending, and reduced consumer spending – and you get signs that all point to deflation.

 

How does this affect interest rates?  From reading this blog, we all know that inflation hurts mortgage rates, but what about deflation?  Deflation is bad for economy, which is good for rates.  However, deflation also causes loads of volatility in the market, which creates an uncertain environment for all parties involved (stocks, bonds, rates, etc.). 

 

Anyone looking to buy a home should find a lender that has a float-down option on a rate lock.  If rates improve, use the float down option to make up the difference.  If you are in the market for a refinance, talk to a professional that watches the markets to find your ideal target refinance rate and time to lock in that rate!

 

Inflation and deflation… they are both a pain to deal with, and it isn’t like one is better for the economy than they other.  Regardless of who wins, the economy loses.

 

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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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.

A year in review

December 31, 2008

What a year it has been! I am sure many people are glad to see 2008 coming to an end. With such a hectic and unprecedented year, I thought it would be a good idea to take a look at what we’ve been through and where we could be headed.

– Tightening guidelines for lenders: 2008 saw the end of many loan programs that quite honestly never should have existed. Lenders didn’t stop there. 100% financing is gone and so too was 97% financing for a better part of the year. There are now rate adjustment for credit scores in the low 700s when “back in the day” any score over 700 (sometimes 680) was considered as good as it gets.

– Inflation appears and disappears: 2008 also witnessed some of the highest inflation figures in the last 10-20 years. Inflation was pressured by several factors including increases in food costs, high gas prices, and cuts to the Federal Funding rate. Inflation put pressure on interest rates and caused them to rise into the mid to high 6% range. Rates looked to continue to climb until…

– Oil prices go crazy: The biggest influence on inflation this year was high oil prices (over $150 a barrel) which created high gas prices (over $4 a gallon). Once the balloon burst on $150 oil, the price per barrel plummeted to its present levels of less than $40. The drop in oil caused the price of gas to go from $4.00+ to $1.61 a gallon (according to AAA) at the time of this post. With the price of gas lower than it has been in several years, inflation numbers decreased easing the pressure put on interest rates allowing them to fall back from their yearly highs.

– Bailouts, bailouts, and more bailouts: 2008, the year of the bailouts. It seemed that almost every company that came asking for a bailout got it in 2008. The taxpayers got a bailout in May, Fannie Mae, Freddie Mac, AIG, an endless number of banks, the big 3 in Detroit, and more got bailouts over the rest of the year. The U.S. government went crazy (Democrats and Republicans alike) offering money to try and stimulate the economy.

– The Federal Reserve: 2008 was a busy year for the Feds as they continued to cut the Federal Funding rate down to its present level, which is virtually at 0%. The Feds main weapon (cutting the Fed rate) for stimulating the economy is now gone since the Federal Funding Rate cannot go any lower. Because of this, the Fed shifted gears to prop up mortgage backed securities. In November, the Federal Reserve bought billions of dollars of mortgaged backed securities causing rates to drop a half point over night. At their most recent meeting, they indicated they would continue to buy more mortgage backed securities, and rates got as low as 4.5% before rebounding higher.

As we end 2008, I could go on-and-on with this post about the details of every bailout, goals of Obama, interest rates setting yearly highs and then historical lows, property values declining at alarming rates in some parts of the country, etc. To sum it all up, 2008 was an exciting, tough, and hard fought year.

Now for the million dollar question, where exactly are we going in 2009? Some are projecting growth in the second half of the year. Other are saying “doom-and-gloom” for all of 2009. A more realistic thought, at least for the time being, would be to expect more of the same – bad economic news, volatility in both stocks and bonds, more attempts by the Federal Reserve and Washington to help stimulate the economy, and endless promises and blame shifting by politicians.

If moving toward a home purchase or refinance in 2009, be sure keep in touch with a mortgage broker who follows the market and is up to date on all the changes taking place. If you are in the state of Georgia, I have a great referral for you :-). Keep reading into the “disclaimer” below for ways to reach me in order to get prequalified to purchase or refinance a home.

Happy New Year!!

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.

nowhere to go for one rate

December 16, 2008

The Federal Reserve lowered the Federal Funding Rate by 0.75% today making its effective trading range from 0.00% – 0.25%.  The Feds also said that the rate would need to remain at this level “for some time.”

With the Fed rate almost at 0%, the Federal Reserve’s main weapon for stimulating the economy is now effectively off the table.  There is no more room for future rate cuts.  The Feds policy heading forward will be to ensure there is ample capital in the markets shifting the focus from the “price of borrowing money” to the “quantity of money available.”  Yes, that is right.  The Fed is going to start (literally) printing money. 

That subject easily deserves its own post (or posts).  For now, let’s focus on where will interest rates go from here?  The answer lies in the market reaction to today’s news. 

– Stocks typically respond favorably to Federal Funding Rate cuts, and today was no exception.  Stocks finished up over 350 points.

– Bonds typically respond negatively to Federal Funding rate cuts, and today was an exception.  Why? The Feds statement also indicated they would be purchasing more mortgage backed securities — the driving force behind interest rates.  With an increasing demand for bonds and no more future rate cuts possible, bond prices rose instantly and ended the day up over 100 points.

So, the questions… will rates get better?  should I lock in my rate today?  As volatile as the market is right now, no one knows for sure.  The answer depends on your own disposition.  If you have the stomach for it, wait it out and see what happens.  You could wind up with the best rate of anyone during this refinance boom OR miss out entirely.  If you prefer a sure thing, go ahead and lock in your rate to ensure you won’t miss out and enjoy all the monthly savings that come with your new mortgage payment.  Which option do you prefer? 

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.

nowhere to go?

December 12, 2008

“Will rates go lower? Will rates go lower?”  From the news, I bet you already knew I am hearing that question a lot these days.  The possible answer, it seems, is that rates have nowhere else to go.

Well, rates always have one direction to go – up.  However, interest rates may be as low as they possibly can go, and there are several different factors emerging this trading week that support this statement.

– There is almost no difference between the rates on a 15 year fixed loan and a 30 year fixed loan.  Typically, you will see as much as a half point difference in rate between the two programs. Lenders offer lower rates on a 15 year loan because they loan will be repaid twice as fast as a 30 year loan.  Today, those rates are virtually the same. This shows that the 15 year rate isn’t getting better regardless of how the bond market performs.  If that is the case, how much better will 30 year fixed rates get?

– Inflation will prevent rates from improving too much more.  Why?  For a 30 year fixed loan at 5% or less, year-over-year inflation will consume the profit on the interest rate long before the mortgage is paid off.  Meaning well before 30 years has passed, inflation will exceed the interest rate and the bank will begin losing money on that loan.  Luckily for banks, no one keeps a loan for 30 years anymore, but the principle is the same – banks can’t afford for rates to drop much further and stay in the business of lending money.

– There are technical factors at work too.  See the daily bond movement in the chart below.  For over two weeks, bonds have tried to break through the “R1” barrier and failed.  Even with the terrible job reports, economic news, and losses in stocks, bonds prices can’t seem to push through this line.  This seems to be a technical ceiling that may never be broken*.

 

12-12-08-chart1*on a side note, even on the days where the market did improve, rates didn’t improve much (if at all) and remained at the 4.875%-5.000% range for a 30 year fixed

– Even bad economic news isn’t helping bonds as much as normal.  News released late last night that the bailout for the Big 3 in Detroit failed.  This not only hurt our stock market, but stocks around the world.  Typically, bonds would respond strongly to this kind of news.  The result… bonds still couldn’t push through this R1/R2 barrier.  You see the small tip of the “green candlestick” on the right.  That shows how high bond values reached only to drop down by the end of the trading day.

– Bonds are in a state of “oversold.”  Bond traders are also noticing this possible trading ceiling and figures this may be as good as it gets.  Traders are moving to a “selling” mode to take advantage of the current gains in the market.  As the mood changes from “buying” to “selling”, the value of bonds drops and interest rates rise.

By no means am I predicting the future, but when you consider factors such as the 15 year and 30 year rates being almost identical, inflation, and some technical aspects of trading, this may be as good as it gets for rates. 

Some borrowers out there are still holding out for 4.5%, but that is no guarantee.  Who knows if the government will actually go through with its proposed idea to try and reach 4.5%, and even if they do, the Feds have clearly stated it will be for purchases only.

During the last refinance boom of 2003, some borrowers kept holding out for rates to get better, and the rally finally stopped and turned.  Many missed out on the low rates hoping they would get better.  We are still at historically low rates on a 30 year fixed.  Don’t miss out in 2008!

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.

 

 

How low will they (rates) go?

December 6, 2008

We have all seen a fair share of nasty headlines for the housing and lending industries in 2008.  Finally, there is some great news coming out in regards to interest rates.  When the Feds announced they would purchase $600 billion dollars in mortgage related assets, interest rates plummeted a half a point in one day.

On a side note, if you are a client of mine and we have not discussed your optimum target refi rate and entered it in to the myRateTrack.com system, then we need to talk as soon as possible.  To start tracking your mortgage refinance options and to set a target refi rate so that you will be alerted when it’s time to take action, use the PROMO code “HSL” to enter the myRateTrack.com system for free.

Back to the post at hand… rates in the low 5’s are good, but how low will they really go?  I know most of you have probably heard by now that the Feds are targeting 4.5%, but can that actually happen?  The answer is a little tricky.

The Feds believe that if they can do it once (week before Thanksgiving they caused rates to drop a half a point to the low 5’s), then they can do it again.  That may be true, but there are a few things to consider.

– Interest rates move with the market, and buying mortgage backed security bonds is not the only thing that impacts the market.  Other factors include economic news, how are stocks trading, and are bonds overbought/overpriced. All of these influence bond pricing.

– Some lenders may be as low as they can afford to go at 5%. Why?  If rates do drop to 4.5%, inflation would eat up any profit margin on that 30 year loan in its first 5-10 years.  Even if the bond market continues to improve, some lenders may not drop their rates too much more because of the inflationary risks.

– If the government does go through with their plan to buy more bonds, they will indeed own a majority of the bond market.  How will the market react if one entity (the US government) owns most of the mortgage backed security bond market?  Honestly, no one really knows.

Lastly, everyone should not get too excited about the possibility of rates at 4.5%. Why?  Well first, our government says lot of things but that doesn’t mean it will actually happen.

Second, it seems this plan pertains only to home purchases and NOT refinances.  This could be seen as a ploy to get people to buy homes.  Right now it seems that the more urgent need is for borrowers to refinance.

For now, anyone sitting on the fence for a refinance should take the low rate now instead of waiting and hoping for 4.5%.  Even if rates get there, 4.5% may not be an option if you are refinancing.

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.

Finally, some good news

November 6, 2008

Finally, mortgage rates are catching a break.  Recently, several factors weighed heavily on rates and you can read about those here.  Even so, there are now many favorable signs for mortgage rates.  Let’s run through a couple of those.

– Stocks are cooling off:  After setting records days last week, some of those gains are disappearing and investors are moving back into mortgage backed security bonds (MBS bonds).  Why the cool on stocks?  Third quarter GDP numbers showed that the economy regressed.  Some analysts argue that without the economic stimulus package in the second quarter, we may have seen GDP regression for consecutive quarters. Regardless of what the numbers show, most people feel we are already in a recession (see any article at CNN, MSNBC, FOX, etc.) and that is actually good news for MBS bonds and interest rates.

– Economic data:  All the recent economic reports have been terrible news for the economy, which (again) is great news for MBS bonds.  Bond prices increased over the past few days and interest rates are down below 6% again.

– Jobs report: While this is technically part of the “economic data” category, the Larbor Department’s Jobs Report is due out tomorrow.  It is expected to be really bad.  This would only continue the trend of poor economic data that is boosting bond prices and lowering interest rates.

– Bank of England and Eurpoean Central Bank:  These are Europe’s Federal Reserve entities, and they are finally cutting their equivialent of our Federal Funding Rate.  In fact, the rate of the Bank of England hasn’t been this low (3%) since 1955.  How does this help mortgage rates?  As Europe lowers their key rates, this hurts the value of the Sterling Pound and Euro.  As the value of European currencies declines, the value of the Dollar climbs.  A stronger Dollar reduces inflation and lowers oil prices – both are GREAT for MBS bonds.  This further enhances bond prices and helps push interest rates down.

– 200 day moving average: Previous posts on this blog discuss the importance of the 200 day movnig average.  Today, bond prices find themselves sitting above the 200 day moving average and that line is acting as a floor of support.  As long as bond prices stay north of the 200 day moving average, rates should stay below 6%.

Cheer up Eyeore, I'm sure things will get bad again soon!

Don't get too excited Eeyore, I'm sure things will be bad again soon enough!

 

So, some good news for rates.  It’s about time.  Sadly, good news for rates means bad news for the economy, but good news is good news right?  Well, if you don’t agree, don’t worry, in this market you probably won’t have to wait long for things to completely change!

That said, anyone looking to refinance should consider moving while rates are below 6% because there is no guarantee they will stay here forever.  For instance, rates for a 30 year fixed mortgage got as low as 5.25% one time this year – for only 3 hours in January.  By the end of that day, rates had climbed to 5.875%.

To ensure you never miss out on a rate drop again, sign up for myRateTrack.com.  MyRateTrack.com is an automated refinance monitoring service.  Answer a few questions about your current mortgage, put in a target refinance rate, and let it go.  When rates drop, you will receive an email from the myRateTrack notifier and you will never miss out again.  Email me to find out more infromation about myRateTrack.com and how you can sign up for FREE.

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.

Shaping interest rates

October 14, 2008

 

Everyone wants to know what the interest rates are for the day, but what shapes interest rates?  What factor or factors do lenders use to determine interest rates?

 

 

I’ve heard several theories on factors that shape interest rates such as being the end of the week, the beginning of the week, lenders “needing” to do loans before the end of the year, lenders “wanting” to do loans at the beginning of the year, seasonal changes, etc. Rates change everyday, but it doesn’t have anything to do with it being a “Monday” or a “Friday.”

 

The dominant factor in shaping interest rates is the mortgage-backed security bond market.  Interest rates are based on the value of mortgage-backed security bonds, and they share an inverse relationship.  As the value of those bonds rise, mortgage rates fall, and vice-versa.

 

Lenders create rate sheets based on the first two hours of bond performance everyday.  If bond prices have gone up from the previous day, interest rates go down.  If bond prices plummeted from the previous day, interest rates go up. 

 

I watch the market everyday, and sure enough, this is not a correlation.  In fact, let me give you an example.

 

– Say bonds prices have a sharp decrease in value after lenders release their interest rates for the day. Under that scenario, I would quickly receive updated rate sheets with higher interest rates. 

– If bonds prices radically improve during the day, then I would receive an updated rate sheets with lower interest rates.

 

So bonds determine rates.  OK, that’s great. Now a better question, what determines the value of bonds?  Let’s take a look at a few of them.

 

Stocks:  We all know there is a limited supply of money.  Therefore, if money is going into stocks, then there is less money available to go into bonds.  Stock prices rise, and bond prices go down – this scenario would cause rates to increase.

 

Inflation:  Bonds hate inflation.  Investors buy bonds because they are a safer investment.  The rate of return is lower, but so is the risk when compared to stocks.  However, high inflation reduces the return value of a bond, which pushes their value down – this would cause rates to increase.

 

Economic News:  Everyone knows investors pay close attention to all economic news releases.  Bad economy = less money available = less to invest = be careful how one invests. When there is bad news for the economy, investors typically take money out of stocks (higher risk) and put them into bonds (lower risk) – this would cause rates to decrease.

 

Technical Aspects:  When there is little economic news, stocks and bonds take their cues from the technicalities of trading – where is the 200 day moving average?… are stocks overbought?… are bonds overbought?….  It’s anyone’s guess on what will happen on these days, but stocks and bonds may experience a calm day of trading when this occurs – a “calm” day would cause rates to stay flat.

 

You may be thinking “if this is true, why doesn’t stocks or inflation determine rate?” While there may be a correlation between some of those and changes in interest rates, correlation does not imply causationAs bond prices move, rates move, but…

 

– Do bonds always have a bad day if stocks are having a good day? 

– Do bonds always lose their value with bad news concerning inflation? 

 

The answer is no.  This past year has shown that even in times of higher inflation (like we are now experiencing), bond prices may fluctuate but ultimately hold their current high-level of value, which is keeping mortgage rates near historic lows — currently under 6% for a 30 year fixed mortgage.

 

While there are several factors that indirectly influence interest rates, only one thing directly shapes rates – mortgage-backed security bonds.  The difference between bonds and the other factors is causation.  Interest rates may or may not move due to stock performances or economic news, but they will always move as bond prices move.

 

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.

Déjà Vu – haven’t we been here before?

July 15, 2008

In the words of Neo, “Woah!”

It’s January 2008, and the Federal Reserve finds itself in the precarious position of being between a rock and a hard place. The Feds need to decide between helping to spur the economy through continued cuts to the Federal Funds Rate versus a potential increase in inflation due to those rate cuts.

Fast forward to July 15, 2008 where the Federal Reserve finds itself (once again) in an unenviable position.  The concerns over inflation have been met. The series of rate cuts designed to help stimulate the economy are now hampering it as the Dollar loses value, oil prices are at record levels, energy costs rise, and the cost of food is increasing as well. The year-over-year inflation report had its largest jump in a year-to-year comparison since 1981.  

Why is this happening?  See this previous post for more details, but for a quick summary:

— When the Feds lower rates, the value of the Dollar goes down. A decrease in the value of the Dollar means it takes more Dollars to buy the same amount goods.

— Oil is traded in Dollars and as the value of the Dollar decreases, oil prices go up. We are now seeing record oil prices and gas prices over $4 a gallon.

— A gas prices go up, food costs rise because it costs more money to get food to the local grocery store.

This doesn’t even take into consideration how oil prices are affecting the price of corn. To help reduce gas consumption, ethanol is now being used as an additive to gas. Corn is used to produce ethanol, and corn prices have increased from about $3.50 in 2007 to over $7 in 2008. This increases the cost of feed for cows and chickens, which increases the cost of dairy products.

What can the Feds do to combat inflation? Begin raising the federal funds rate. Easy, right? Well, not exactly.

While rates do need to be increased to combat inflation, increases to the federal funds rate will put more pressure on banks and the lending market. This, in turn, would put more pressure Fannie Mae and Freddie Mac, who are the linchpins for the lending world (more on Fannie and Freddie later this week).

So, what will the Federal Reserve do? Increase rates to fight inflation at the possible cost of putting more pressure on the lending market, or keep rates steady resulting in less pressure on banks but at the potential cost of more inflation.

Either way, the Feds could hurt the economy as they try to help it. Glad this is a decision I don’t have to make.

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.

More inflation troubles?!?

May 21, 2008

The minutes from the recent Federal Reserve meeting were released today and they continue to support the notion that our economy is slowing down. In fact, the minutes said there is an expectation for the economy to shrink over the first half of the year.

For an in depth review of the minutes, check out this article by Chris Isidore, a CNNMoney.com senior writer. To quickly summarize, the Feds posted negative revisions to their 2008 forecasts on economic growth, unemployment rates, and inflation. Specifically on inflation, the Feds said “it now expects personal consumption expenditures (PCE) to rise between 3.1% and 3.4% in 2008, a full percentage point more than its earlier expectation.”

What does that mean? The Fed’s target area for PCE (one of its favorite tools to measure inflation) is 2%. In April, that figure was at 2.1%. That means the Feds expect to see the PCE increase an entire percentage point by the end of 2008. I know what you may be thinking, “what is the big deal about 1%?” As an example, let’s use the cost of a gallon of milk with the time frame of 30 years.

This past weekend, I bought a gallon of milk for $4. Under the Feds preferred PCE target of 2%, in 30 years that same gallon of milk will cost $7 a gallon. At 3.4% (the high end forecast for inflation this year), the price of milk goes up to $11a gallon! This of course is inflation only and makes no assumptions on the cost of producing milk, food for cows, etc, but you can see why inflation is such a big priority for the Federal Reserve.

…for a sobering example of the increased cost on big ticket items, see this previous post using the MSRP price on a Toyota Corolla…

Inflation will also have a negative impact on mortgage rates. As inflation figures continue to climb, you can also expect to see an increase in rates. Now the increase could be tempered with bad economic reports/forecasts, but expect inflation to cause an increase to rates as we continue to move through 2008.

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.