Like the rest of the country, mortgage markets were on semi-vacation last week. The low trading volume led to wild rate swings.
After beginning the week vastly improved, and capped by a terrible late-Friday run, mortgage rates ended the week unchanged for the second week in a row.
This week, though, it's anyone's guess. Wall Street comes back to work in force and, in the time since they've left, there's been a lot going on:
Ironically, Wall Street will likely position the bad news as good for the stock market. This is because negative economic data pressures Congress to pass larger, more sweeping stimulus in 2009. However, what's good for stocks is often bad for bonds and that's the market from which mortgage rates are derived.
In fact, it was an exceptionally weak data point Friday that helped start the January 2 stock market rally that, consequently, caused mortgage rates to bulge.
This week, there's only one high-profile data point to watch -- Friday's jobs report. Economists are predicting the another 475,000 Americans lost their jobs in December and that the Unemployment Rate reached 7.0 percent.
If the actual numbers are in-line or worse than the predictions, mortgage rates could rise on the same "More Stimulus" line of thinking.
If the jobs data shows strength, however, don't expect that rates will fall. For now, markets are in a defensive stance about the economy and tends to work against rate shoppers and home buyers.
(Image courtesy: The Wall Street Journal Online)
As part of the Economic Stimulus Act of 2008, Congress authorized a conforming loan limit increase in "high-cost" areas around the country. Versus the national conforming loan limit of $417,000, for example, a Manhattan home buyer could secure a 2008 mortgage for $725,000 and still be within "conforming" guidelines.
Effective January 1, however, those limits rolled back. Conforming mortgages in the 59 designated high-cost regions are now capped at $625,500.
In non-high-cost areas, the 2009 conforming loan limits remain unchanged from 2008.
- 1-unit properties : $417,000
- 2-unit properties : $533,850
- 3-unit properties : $645,300
- 4-unit properties : $801,950
Loans in excess of these dollar amounts are often called "jumbo", or "super jumbo" home loans, depending on their size. Jumbo home loans tend to be more costly than their conforming-sized cousins.
For its last move in an action-filled year, the Federal Reserve announced it will begin buying its pledged $500 billion in mortgage-backed securities next month.
For home buyers and mortgage rate shoppers, the timing couldn't be better.
Because December 31 is one of Wall Street's most thinly-traded days of the year, low volume is exaggerating the announcement's impact on mortgage markets.
Mortgage rates are lower this morning.
However, you may not have much time to act. Few mortgage lenders permit after-hours rate locking and bond markets close at 2:00 PM ET for the holiday. If you miss today's Fed-fueled low rates, markets re-open Friday for your second chance.
Mortgage markets are like any other market -- in order for goods to change hands, a buyer and a seller must first reach an agreement to "trade" at a specific price point.
In general, the more buyers and sellers there are for a particular item, the easier it is to find that "fair value" and make the deal.
An abundant number of buyers and sellers often creates a liquid market in which assets -- in this case, mortgage bonds -- can be sold rapidly with minimal loss.
This week, though -- with so many traders on vacation -- the "liquid market" has gone illiquid. The treasury market posted just 41 percent of its normal, daily volume Monday, leading to erratic pricing in the mortgage bond market which, in turn, caused mortgage rates to follow.
For example, mortgage rates started the day lower yesterday before sprinting higher over a 30-minute, early-afternoon span. Markets were largely unprovoked by economic data, geopolitical developments, or technical factors. It just, kind of, "happened" and the move left mortgage rate shoppers in the dust.
That could happen a lot this week. So, if you're in the market for a mortgage, be ready to lock quickly. With low liquidity, rates rarely sit still for long.
(Image courtesy: Purdue BCM)
In a week defined by low volume and lack of conviction, mortgage markets idled ahead of the holiday last week. Friday's post-holiday action was even slower.
After falling for two consecutive weeks, mortgage rates held flat last week.
It's somewhat surprising that mortgage rates didn't rise considering the flow of negative economic news last week:
Lately, each of these elements has played a role in mortgage rate movement but it's the last bullet point that could throw home buyers and refinancing Americans for fits.
It's because of the relationship between mortgage rates and the strength of the U.S. Dollar.
All things equal, a strong dollar pressures mortgage rates lower whereas a weak dollar pressures mortgage rates up. And, because the dollar's recent beat-down has been swift, it wouldn't be unexpected to see similar mortgage market movement at any time.
This week, like last, is interrupted for the holiday. Regardless, there's much going on. Aside from two economic reports, there is nothing else for markets to digest and no planned speeches by members of the Fed.
Expect just a small number of traders to show up for work this week. This means volume will be especially light. But don't be lulled into taking your eyes off the market -- low volume on Wall Street is sometimes accompanied by high levels of volatility.
For now, mortgage rates are hovering near their 2008-lows. Given the path of the dollar and low-volume trading, that could all change in a flash.
(Image courtesy: The Wall Street Journal)
With home prices falling across most parts of the country, investors in real estate are finding good value in certain rental properties. Unfortunately, they're also finding it harder to get approved for a home loan.
After getting stung by defaults, conforming mortgage standards for non-owner occupied home loans tightened dramatically last quarter.
One major change was the reduction in the total number of homes Fannie Mae or Freddie Mac will finance for any one borrower.
Prior to the chance, the number of financed properties could be as high as 10. Today, that number is 4, stinging investors with large real estate portfolios. Going forward, buying properties isn't the problem; financing them with conforming mortgage money is.
Another guideline change mandates larger downpayments.
Versus early-2008, when a real estate investor could buy a home with 10 percent down, today's investor is required to pay 15. But, as an added wrinkle, few private mortgage insurers write policies against rental homes anymore, rendering the 15 percent downpayment insufficient. The de facto requirement, therefore, is now 20 percent down.
And then came the fees.
As part of its "pay-for-risk" pricing model, Fannie Mae added mandatory fees to all of its investor property mortgages this year. Based on loan-to-value, the fees are:
- 75% LTV or less: 1.750 percent of the borrowed amount
- 75.01 - 80.00% LTV : 3.000 percent of the borrowed amount
- Greater than 80% LTV : 3.750 percent of the borrowed amount
So, if your personal plan includes the purchase of investment properties in 2009, consider the impact that tighter conforming guidelines, larger downpayments and higher fees will have on your bottom line.
All things considered, now may be a good time to make that rental property bid. Sure, prices may fall going forward, but increased acquisition costs may wipe out the long-term gains.
For the first time in over a year, the sales of "used homes" fell below the 5-million unit trendline, helping to push the total home inventory higher by 0.1 percent nationwide.
Based on the rate at which homes are selling nationwide, it would take 11.2 months for the existing housing supply to be exhausted.
For home buyers, this is an opportune time for negative news on housing.
First, sellers know that between now and the Super Bowl, housing activity will be light. The general scarcity of buyers may force a seller to accept a bid he wouldn't have accepted otherwise.
Second, the economy is showing weakness and that, too, can concern a home seller. Buyers are less likely to extend themselves during times of economic uncertainty, further reducing the buyer pool and, again, putting pressure on the seller to "make a deal".
And lastly, because the government has been trying to force mortgage rates down as a way to stimulate the economy, the weak housing data is actually making it cheaper to finance a home. This means that a well-qualified home buyer can better stay within budget.
Each 0.500 percent rate reduction saves $33 per $100,000 borrowed.
It is important to remember, though, that the U.S. housing market is not national -- it's highly localized. This is one reason why national real estate reports can be misleading. Just as figures from Phoenix have little to do with statistics from St. Paul, even data from neighboring ZIP codes can vary.
The universal truth, however, is that a home that is priced fairly will sell more quickly than a home that is not. And, until the Super Bowl passes in 45 days, expect fewer buyers to be out there competing for them.
(Image courtesy: The Wall Street Journal Online)
In late-November, the Federal Reserve pledged $600 billion to buy mortgage-backed securities. The announcement drove down mortgage rates and started the Refi Boom.
Then, the Federal Reserve made a second series of statements after its scheduled meeting last Tuesday, causing mortgage rates to plunge again. This started the Refi Boom's second wave.
Because of the surge in refinance activity, mortgage lenders are "backed up"; initial file reviews are taking up to 12 business days in some cases.
Typically, this process takes 2 days.
Underwriting delays are problem for refinancing Americans because when a mortgage rate is locked, it's most often locked for 30 calendar days -- the standard Rate Lock Agreement contract length. If the mortgage doesn't close within those 30 days, the applicant must either pay an "extension fee" to preserve the lock, or risk losing the rate altogether.
30 days may seem like a long time, but let's consider a few external variables:
- December 24, 25, and 26 plus January 1 and 2 are lost to holiday
- December 27, 28 plus January 3, 4, 10, 11, 17, and 18 are lost to weekends
- January 19 is lost to federal holiday
- 3 days are lost to the Right To Cancel clause
This leaves 13 days to get from Application to Closing, and of those 13 days, 12 of them are being spent on the initial review. A 30-day rate lock, in other words, may be an inadequate agreement with some mortgage lenders. A 45-day agreement may be required instead.
Typically, 45-day rate locks carry higher rates or higher fees, versus their 30-day counterparts. This amounts to a "tax" on borrowers, a result of the nation's rush to refinance en masse.
As always, the best way to preserve a rate lock is to be as responsive as possible to the process. Return paperwork when asked, schedule appraisals immediately, and arrange to signing closing paperwork on the first available day.
With mortgage rates low, application volume -- and underwriting turntimes -- should remain high into early-2009.
Mortgage markets improved last week for the second week in row. After the Federal Reserve said it would use "all available tools" to stimulate the economy, traders responded by driving mortgage rates to 50-year lows.
It didn't last long, however.
After bottoming out early-Wednesday morning, mortgage rates trended higher all the way into Friday's closing. It was the third time in 2008 that a sharp mortgage rate drop lasted less than one full day of trading.
Many Americans took advantage of the historically-low mortgage rates, locking in new home loans below 5 percent. And, in general, these homeowners shared 4 characteristics:
- Credit scores of at least 720
- At least 20 percent equity
- Relatively low debt versus household income
- Ongoing relationship with a loan officer
Now, the first 3 bullet points are easy-to-understand but it's the fourth one that really mattered -- it's the trait that got people "real-time access" to low rates the moment they published.
After all, it wasn't until Thursday morning that the press ran its stories about "4.5 percent mortgage rates" and, by that time, mortgage rates had already retreated -- by as much as a full percentage point in some cases. Thursday morning's news was a half-day too late.
Still, mortgage rates do remain low.
This week is trade-shortened and thick with data. In addition to two pieces of housing news and a consumer sentiment survey, we'll get a look at the Federal Reserve's preferred Cost of Living index. All four data points are expected to validate the recession, so don't expect mortgage rates to move much.
Instead, the biggest threat to mortgage rates this week is momentum. If mortgage rates tick higher Monday and Tuesday, expect that to continue Wednesday into the 2:00 P.M. market close and then to resume again Friday.
Markets are closed Thursday for the federal holiday.
(Image courtesy: The Wall Street Journal Online)
During the holiday season, retailers bombard shoppers with at-the-register offers to "open a charge card and save 15%".
It's an immediate money-saver, but for Americans in the market for a new home loan, taking advantage of the in-store savings could be a long-term loser.
This is because new credit card applications are damaging to credit scores. According to myFICO.com, "new credit" accounts for 10 percent of a credit score; recent applications may signal weakness in a borrower's profile.
Meanwhile, conforming mortgage lenders make rate adjustments for low credit scoring applicants. As an example, a home buyer with a 20 downpayment and a 715 credit score would face an interest rate adjustment of 0.125%.
Below 700, the adjustments are even worse.
It's okay to take advantage of in-store savings during the holiday season, but be aware of how it may impact your credit score. If you're not applying for a new home loan in the next six months, chances are that you'll be alright.
But, if you will need a new home loan, consider whether saving 15 percent on a $200 purchase is worth it if the long-term cost is paying an extra 0.125 percent on your new mortgage.
(Image courtesy: myFICO.com)
When it comes to mortgage rates, sometimes it's better to "act now".
On Tuesday, mortgage rates fell to their lowest levels in 4 years. It happened because the Fed said it would "employ all available tools" to resuscitate the economy.
On Wednesday, however, the markets had second thoughts.
After considering the long-term implications of a near-zero percent Fed Funds Rate and the cumulative cost of government intervention to-date, suddenly, traders grew fearful that U.S. government action would devalue the dollar and lead to inflation -- the enemy of low mortgage rates.
As a result, mortgage markets unwound.
At first, the exit was a slow and orderly. Then, without warning, investors began a full-on sprint for the exits. By the end of the day, mortgage rates were higher by as much as a half-percent. Nearly all of Tuesday's big gains were erased.
In hindsight, the reversal Wednesday wasn't all that surprising -- it's the same trading pattern we've seen twice already this year. The first time was after the Fed's "surprise" rate cut in January, and the second time was after the federal takeover of Fannie Mae and Freddie Mac in September.
Sharp rate drops tend to be followed by immediate bounce-backs, it seems.
But, unfortunately, not every would-be refinancing homeowner saw the increase coming. While those that locked at the first opportunity to save money are sitting pretty today, the rest that "waited for rates to go lower" are likely kicking themselves about it.
Going forward, mortgage rates may fall, or they may not. We can't possibly know. But we've now seen the pattern 3 times now -- when mortgage rates plunge like they did Tuesday, they rarely stay that low for long. When you find a rate you like, get in and get locked as soon as possible.
Sleeping on it for even one night may end up costing you dearly.
(Image courtesy: The New York Times)
The Federal Open Market Committee voted to cut the Fed Funds Rate by at least three-quarters percent today. The benchmark rate now rests in a range of 0.000-0.250 percent.
In its press release, the FOMC identified three key economic sectors in which activity has weakened since October. The FOMC noted that:
- The U.S. job market is deteriorating
- Consumer spending levels are falling
- Business investment is contracting nationwide
The Fed intends its rate cut to provide stimulate to each of these areas.
In addition, the voting members of the FOMC singled out inflation as a diminishing threat to the economy. This is an important admission because it's well-known that cuts to the Fed Funds Rate can spark inflation. Rapidly falling oil prices and commodity costs, therefore, likely paved the way for today's historic cut.
In its announcement to markets, the Fed gave The People what they wanted -- a reassurance that the policy-making group would "employ all available tools" to help turnaround the economy. Lowering the Fed Funds Rate to an all-time low is one such step; its plan to purchase mortgage-backed debt in the open market is another.
After the announcement, stock markets rallied and mortgage bonds did, too. Rates ended the day slightly lower.
Source
Parsing the Fed Statement
The Wall Street Journal Online
December 16, 2008
http://online.wsj.com/internal/mdc/info-fedparse0812.html
The Federal Open Market Committee adjourns from its 2-day meeting at 2:15 P.M. ET today.
It's widely expected that the Ben Bernanke-led FOMC will reduce the Fed Funds Rate by a half-percent to 0.500 percent.
Fed Funds Rate cuts are meant to stimulate the economy by lowering borrowing costs for businesses and consumers; interest rates on business credit lines and consumer credit cards are directly tied to the benchmark rate.
However, it won't be what the Fed does today that will be as important as what the Fed says. And the markets are listening closely.
See, this FOMC meeting was originally scheduled to last 1 day but on November 20, it was extended to 2. Presumably, the extra day was meant to give the FOMC a chance to review its options, but now it has the markets expecting "something big".
Wall Street wants Bernanke to outline credit-extenstion plan for banks, businesses and consumers. It wants the Fed to bolster markets to prevent the recession from become a depression. It wants action. Anything short of an explicit plan should push traders into ultra-safe U.S. Treasury bonds and that should lead mortgage rates higher.
If you are floating a mortgage rate today, it may make sense to lock prior to the Federal Open Market Committee's press release. Expect volatility beginning around 2:00 P.M. ET today.
(Image courtesy: The Wall Street Journal)
Mortgage markets improved last week, riding a steady stream of negative news into its best levels of the year.
Day-to-day, mortgage rates priced across a very wide range, but managed to close out the week lower overall.
Mortgage rates improving on "bad news" is a break from the trading patterns of September and October. Back then, even the slightly evidence of a recession caused mortgage rates to soar.
Now, however, markets have accepted economic weakness and have started to look to the future. Not even sagging retail sales and the rising ranks of the unemployed could quell market optimism.
Indeed, the incoming administration may be leading the sudden sentiment shift; its stimulus package is expected to top $1 trillion over the next 24 months and put thousands of unemployed Americans back to work. The widespread press coverage of this story may be one reason why Consumer Sentiment rose off its all-time low, despite the economic evidence that tougher times may still be ahead.
So, as markets shift their attention away from fundamentals and towards the government, mortgage rates are benefiting and refinance activity is gaining steam.
This week, the government should be the top story again. On Tuesday, the Federal Open Market Committee will adjourn from its 2-day meeting and is widely expected to lower the Fed Funds Rate by a half-percent to an all-time low of 0.500 percent. This move, too, is meant to stimulate the economy.
But it won't be what the Fed does that matters; it will be what the Fed says.
In the 2:15 P.M. press release, Fed Chairman Ben Bernanke is expected to outline measures by which the Federal Reserve will stabilize the economy. If markets consider the moves to be "enough", stock markets should soar and mortgage rates should suffer. However, there may be specific verbiage for providing mortgage relief, in which case, mortgage rates would fall.
Other noteworthy data scheduled for this week include the Cost of Living Index and Housing Starts, but neither should matter much to mortgage rates. For now, it's all eyes on the government.
(Image courtesy: The Wall Street Journal Online)
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A mortgage is a contract between a bank and borrower, defining the terms by which a home loan must be repaid.
The paperwork, signed by both parties, includes provisions for things like:
- The interest rate
- The length of the loan
- The amount of money to be borrowed
But, like all loans, a mortgage loan can be paid off at any time. So, when market interest rates fall, homeowners will often exercise their right to an "early payoff" by securing a new loan that pays off the old one.
This process is most commonly known as a refinance.
A refinance is the changing of the loan terms against a property, often for a better interest rate or a lower monthly payment. When the refinance process is complete, the original lender's loan is paid in full using the money from the new lender's loan and the former's relationship is officially terminated.
There's no rule against how many times a person can refinance, nor is there an easy way to determine whether or not a refinance makes sense. In general, if you can reduce your monthly payment while limiting your closing costs, to refinance is a smart decision.
However, there are other reasons to refinance, too, including:
- To convert from an ARM into a fixed rate mortgage (or vice versa)
- To extract equity for paying off third-party debts or for cash
- To extend a loan from 15 years to 30 year for payment relief
Because there are fewer third-parties involved with a refinance, it's often simpler and less expensive than a comparable purchase transaction. The paperwork stack is often smaller, too.
It's the age-old question for home buyers in need of a mortgage:
Which is better: Fixed or ARM?
Historically, the answer has hinged on a homebuyer's desire to meet one of two mutually-exclusive mortgage financing goals:
-
Get low mortgage payments for better cash flow
-
Get long-term payment stability for better budget planning
But because of government intervention and lingering questions about the economy, fixed-rate mortgages are now pricing cheaper than their adjustable-rate counterparts.
Based on today's mortgage market, therefore, home buyers can get both.
Versus a comparable 5-year ARM, conforming fixed-mortgage rates are priced roughly 0.250 percent lower and have been over the past 19 days. The quarter-percent difference equates to $33 saved per month on a $200,000 home loan.
Mortgage markets are ever-changing so rates we can't know if this pricing anomaly will last. But, while it does, the decision to choose Fixed over ARM is a lot simpler.
For most Americans, mortgage interest paid on a home loan is tax-deductible in the year in which it was paid.
With advance planning, therefore, homeowners can increase their 2008 tax deductions and limit their tax liability on April 15.
The key is to make the January 2009 mortgage payment before the New Year begins.
In making the payment in 2008, the payment's mortgage interest is applied against this year's tax deductions instead of next year's. And lest you think you're paying "in advance", remember that mortgage interest is paid in arrears; a payment due January 1 accounts for interest that accumulated in December 2008 anyway.
Tax planning is a complicated issue and not all homeowners will qualify for mortgage interest tax deductions. Check with your tax professional before making tax planning decisions.
If you don't have an accountant you trust, call or email me anytime; I'm happy to make a recommendation to you.
Earlier this year and under pressure from the government, mortgage lenders made more than 200,000 loan modifications to delinquent homeowners.
The modifications came in one of three forms, or a combination:
- Interest rate reduction
- Loan term extension
- Principal forgiveness
But despite the modifications, as of October 1, more than half of the homeowners that received assistance were already two months behind on their modified monthly payments.
This late-pay statistic was a focal point on Capitol Hill yesterday as the government admitted delinquencies "were larger than [they] thought they'd be". Loan modifications are proving inadequate at slowing foreclosures and yesterday's session opened the door to more effective foreclosure prevention measures.
However, of all of the statistics published, there was one of particular interest.
Based on its loan modifications to-date, the FDIC has found that modified borrowers default far less when new monthly payments are less than 38 percent of monthly household income. This is important because Freddie Mac guidelines for ordinary mortgage applicants currently cap that rate at 45 percent.
If the 38 percent figure holds up long-term, it may lead mortgage lenders to permenantly reduce maximum debt-to-income allowances. Already, mortgage insurers have taken this step so it's not out of the question for lenders. Tighter guidelines mean fewer mortgage approvals.
If you're unsure of whether now is a good time to buy a home, consider that mortgage rates are low, mortgage guidelines are tightening, and foreclosure prevention efforts reduce the supply of available homes.
Prices may not have bottomed, but the market is giving everyone a lot of reasons to consider buying now.
(Image courtesy: The Wall Street Journal)
In a week in which mortgage markets struggled to find direction, mortgage rates edged higher overall. The weekly increase was the first since mid-November and it may signal higher rates as we head into 2009.
The week's most talked-about story hit the wires Friday.
According to the government, the U.S. economy shed 533,000 jobs last month and the national Unemployment Rate rose to 6.7%. This was the largest number of jobs lost in any one month since the recession of 1974.
In a normal market, job losses of this magnitude would have caused stock markets and mortgage rates to fall. But stocks and rates didn't fall Friday. To the contrary, both rose. This is because -- while the jobs reports was the most talked-about story last week -- it wasn't the most important one. That story had already been told.
Last Monday -- officially -- we learned that U.S. economy is in recession.
Although most of Wall Street knew it already, the official determination was an acknowledgement that "bad economic data" is not only acceptable, but normal given the current conditions.
In other words, when the jobs data was released Friday morning, one reason why mortgage rates rose was because markets somewhat shrugged off the data, saying: "Yeah, of course job losses are up -- we're in a recession, after all."
This is an unfortunate development for rate shoppers because bad data usually anchors mortgage rates lower. Going forward, that won't likely be the case -- at least until the recession is declared to be over.
This week, without much new data being released, markets should trade largely on news of federal intervention and expectations for the U.S. economy. As retail sales figures drip in from the weekend, be wary of stronger-than-expected numbers as that could pull mortgage rates higher. The same goes for Friday's official Retail Sales data for November.
Either way, expect volatility throughout the week -- same as we've seen all year long.
(Image courtesy: Wall Street Journal Online)
According to the government, American businesses are cutting staff at an accelerated pace, most recently paring 533,000 jobs this past November.
It's the largest one-month decline since December 1974 and raises the year-to-date job losses to 1.9 million workers.
However, there is a silver lining in the data for all Americans -- both employed and unemployed.
With each piece of negative news about the economy, Washington is more likely to pass new stimulus packages to the benefit of household budgets.
On one front, Federal Reserve Chairman Ben Bernanke has already alluded to further Fed Funds Rate cuts at the Fed's two-day meeting starting December 15. Because the Fed Funds Rate is directly tied to Prime Rate, any cut in the benchmark lending rate would lead "floating" interest rates lower on home equity credit lines and other revolving debt.
And this talk from the Fed comes on the heels of its $500 billion pledge to buy mortgage-backed bonds. That demand-shifting move was announced last week and drove mortgage rates lower. It also marked the official start of the refinancing boom.
And, lastly, Capitol Hill is already responding to the jobs data with calls for "urgent" action. It's a vague term, to be sure, but history has shown that Congress could pass any number of measures, each meant to put more money into household budgets nationwide.
The U.S. is in a verified recession and Washington is throwing the kitchen sink at it.
The end result is that today's job data is a non-event of sorts for active home buyers. Mortgage markets expected a poor reading and they got it. Normally, data like this would cause mortgage rates to spike but this is not a normal market.
Now, with markets expecting additional stimulus, mortgage rates are edging lower today with hopes of an economic rebound.
Source
Employers cut 533,000 jobs in Nov., most since 1974
Barbara Hagenbaugh
December 5, 2008, USA Today
Business television is abuzz this morning with talk of "four-point-five percent mortgage rates"; the clip above ran on NBC Today. The news stems from a leaked story that the U.S. Treasury will intervene in the mortgage market, lowering rates a full percentage point below their current levels.
As cited by every journalist in every publication, however, the story is 100% speculation. Naturally, that doesn't stop the press from covering it. When hope for homeowners gets spread in this manner, it's important to remember some facts:
- The Treasury doesn't set mortgage rates -- Wall Street traders do. Historically, rates are based on the Supply and Demand for mortgage-backed bonds.
- Treasury intervention doesn't guarantee low rates. That mortgage rates are up by a half-percent since last week proves it.
- Zero details about the plan have been confirmed, quoting CNBC. Everything you've heard about 4.5 percent rates is a guess at this point.
But, perhaps most importantly, nearly every analyst interviewed has expressed a belief that a Treasury-sponsored stimulus would apply to home buyers only. Homeowners wanting a refinance, in other words, would be ineligible.
Mortgage rates are very low today compared to where they've been in 2006, 2007 and 2008. If you think your mortgage rate is too high for this market, reach out to your loan officer to review all of your options. If rates really do reach 4.500 percent, you can always refinance again later.
For the 78th consecutive day, gas prices fell nationwide yesterday. At $1.81 per gallon, the average price at the pump is less than half what it was at its peak in July.
And although gas prices vary by locale, the cost of a fill-up is worthy of national news.
The main reason why national gas prices matter is because of something called the Wealth Effect -- people's tendency to spend more money when they have a perceived feeling of being worth more.
Low gas prices can amplify the Wealth Effect, leading to higher levels of consumer spending nationwide -- the primary driver of the U.S. economy.
But more important than the Wealth Effect is the reverse Wealth Effect. That's when consumers have a perceived feeling of being worth less and their spending reflects it. This past summer is a terrific example of it.
Soaring gas prices, Wall Street troubles, and negative campaigning constantly reminded Americans of what was wrong with the economy. It follows, therefore, that retail sales figures plunged in September and October. Once the election passed, however, and gas prices fell, a gentle optimism returned.
Not surprisingly, consumer confidence rose in November.
All of this matters to real estate because as Americans regain their confidence and feel more "wealthy", they will be more likely to make "move up" purchase, buy new home appliances, and take other actions that propel the economy forward.
Oh, and mortgage rates trolling at 3-year lows certainly helps, too.
(Image courtesy: GasBuddy.com)
Each Wednesday, the Mortgage Bankers Association releases its Weekly Applications Survey, a detailed look at new mortgage applications submitted over the previous 7 days.
This week's report will reveal what most of us already know -- plunging mortgage rates created a flood of mortgage activity.
If you're among the many Americans taking advantage of today's low rates, don't forget that when your rate was "locked", it was locked with an expiration date.
Most likely, that rate lock is for 30 days.
And, while 30 days may seem like a long time, it's not. Especially because rate locks made prior to Thanksgiving lose a combined 14 days to weekends and holidays, plus another 4 days to the Right To Cancel clause.
A 30-day rate lock, therefore, yields just 12 "working" days in which to underwrite and approve the mortgage and that's not a lot of time at all.
Making matters more difficult, many lenders are ill-equipped for boom.
Not only has staff been pared down in expectation of a slowing economy, but December a prime vacationing month, too. Lenders are short-staffed at a very inopportune time.
So, for active refinancing homeowners, the best way to preserve a 30-day rate lock is to be as responsive as possible to the process:
- If paystubs are requested, return them on the same day
- If a home appraisal is needed, schedule the appraisal immediately
- If a closing date is scheduled, don't postpone it by a day
As mortgage rates hang near 3-year lows, the number of refinancing homeowners nationwide will grow, further taxing lenders and their staff. If you already have a loan in process, be pro-active about it to prevent your 30-day rate lock from expiring.
Government action fueled a mortgage market rally last week, leading mortgage rates lower for the second consecutive week.
Despite soft housing numbers and evidence of a slowing economy, mortgage rate shoppers found reason to celebrate:
- Citigroup was "rescued"
- Wall Street liked the new economic team
- The government pledged $600 billion to buy investment-grade mortgage bonds
These 3 elements helped drive mortgage rates to their lowest levels since January 2008 -- in some cases shaving a full percentage point off the offered rate.
Homeowners responded to the dip and refinance activity reached "a frenzy". As evidence, at least one national mortgage bank reported more loans were locked on Tuesday, November 25 than for the first 24 days of the month combined. Anecdotally, other lenders saw similar action.
However, low rates rarely stick around.
The last time that rates like they did last week, markets recovered within a week and rates returned to "normal". This week provides ample chance for that to happen again.
Throughout the early part of the week, 5 members of the Fed will make public appearances, including Fed Chairman Ben Bernanke. With the Fed's next meeting scheduled for December 15, markets will be looking for clues about how the Fed may change the Fed Funds Rate.
When the Fed Funds Rate falls, mortgage rates tend to rise on the news.
Then, on Thursday, retailers start announcing their "same store" sales figures for November. This will clue us in to the true health of the economy because consumer spending accounts for two-thirds of it. If same-store sales are dramatically lower, expect calls for a large Fed Funds Rate cut.
And lastly, Friday brings us the jobs report. As terrible as the employment reports have been this year, it will take an especially higher number of jobs lost in November, or an exceedingly high Unemployment Rate to have much of an impact on mortgage rates.
This month, weak jobs data should be harmful to mortgage rates because more out-of-work Americans may lead to more mortgage defaults nationwide, plus additional Fed Funds Rate cuts.
(Image courtesy: The Wall Street Journal Online)
The day after Thanksgiving is a busy shopping day nationwide and, this year, analysts are paying extra attention to sales figures.
Dubbed "Black Friday" in reference to red ink representing loss and black ink representing gain, today's start to the Holiday Shopping season is believed to be the day that retailer balance sheets finally cross over to profitability.
But the accounting connotation of the phrase "Black Friday" wasn't its original usage -- it's a media-coined term.
When the phrase was first used in Philadelphia in 1975, it was in reference to the day after Thanksgiving being the busiest shopping and traffic day of the year.
There's other Black Friday trivia out there, too:
Did you know? Black Friday is neither the largest, nor the most profitable, shopping day of the year. Contrary to popular wisdom, it's the 5th biggest, not the first. The two weekends before Christmas are usually the "biggest" series of days.
Did you know? In an attempt to spur the economy in 1939, President Franklin D. Roosevelt proposed to move Thanksgiving ahead by 7 days. 7 more days of shopping, he thought, would help retailers and help the economy. Eventually, the idea dubbed "Franksgiving" failed.
Did you know? To protect competitors from price matching "deals", some retailers copyright their Black Friday advertising. Others won't print prices at all.
Did you know? Last year, 14 percent of Black Friday shoppers had made a purchase prior to 4:00 A.M. with an average ticket of $347.
Black Friday is of special significance this year because consumer spending accounts for two-thirds of the U.S. economy. If Americans are shopping in full force, expect economic optimism and a mild rebound in the stock market. Unfortunately for home buyers, this should also lead mortgage rates higher.
By contrast, if sales figures are weak, expect talk of recession to grow.
Sources
Black Friday (Shopping)
Wikipedia
http://en.wikipedia.org/wiki/Black_Friday_%28shopping%29
Geek Trivia: Early bird special
Tech Republic
Jay Garmon, Nov 22, 2005
http://articles.techrepublic.com.com/5100-10878_11-5958978.html
(Image courtesy: Give Congress Back)
Like everything else on Wall Street, mortgage markets are based on supply and demand. When demand outweighs supply, mortgage rates fall.
So, Tuesday, when the government unexpectedly announced a $500 billion budget for buying mortgage debt from Fannie Mae and Freddie Mac, the demand side of the mortgage market ballooned.
The surprise demand helped push mortgage rates to their lowest levels since January 22, 2008. 30-year fixed mortgage rates were down by as much as three-quarters of a percent Tuesday before retreating higher.
Not coincidentally, January 22, 2008, was the date of another unexpected government intervention -- a surprise 0.750 percent Fed Funds Rate cut that was meant to spur the economy forward.
Interventions like these are a big reason why predicting mortgage rates is tough business -- just when you discover the market's balance point, an outside force shifts that balance, creating tremendous amounts of uncertainty about the future.
Uncertainty on Wall Street is typically bad for mortgage rate shoppers because it leads to high levels of volatility. Look at the trading pattern from Market Open to Market Close yesterday:
- 8:30 AM ET: Markets open with rates falling on the news
- 10:00 AM ET : Rates fall more on momentum trading
- 12:00 PM ET : Rates level at their lowest levels of the day
- 2:00 PM ET : Rates rise as profit-taking begins
- 3:30 PM ET : Rates rise more on momentum trading
- 4:00 PM ET : Markets close with rates down by half
Again, not coincidentally, this is the exact trading pattern from January 22, 2008. On that day, rates were at their lowest about 3 hours into trading, and then consistently rose all the way into Market Close -- just like we saw Tuesday.
Unfortunately, in the 30 days that followed January 22, mortgage rates rose from a 3-year low to a 3-year high. And, it's not to say that the same thing will happen from now through December 25, but trading patterns have a tendency to repeat themselves over time.
Mortgage markets seek balance and when there's a dramatic shift, chaos can creates opportunity. Tuesday's $500 billion pledge added new demand and shocked the mortgage market system. Before long, it recovered to find balance.
As of today, mortgage rates are still hovering near their 3-year lows so if you haven't spoken to your loan officer about a refinance, consider calling today.
In real estate, the term existing home refers to a "used" property; one that can't be classified as new construction.
The number of existing homes sold each month is tracked by the National Association of REALTORS. The report is often used as a gauge for the health of the real estate market nationwide.
In October, nearly 5 million existing homes sold across the U.S. This figure represents a slight drop from September's reading, and a equally slight drop from the October 2007 data.
But, October's Existing Home Sales figures marked the 14th straight month in which Existing Home Sales straddled 5-million units. This is a remarkable statistic because 14 months of anything is a pattern, not a blip. Despite what the news tells us, Americans are buying and selling real estate at a somewhat steady clip.
As we head into the Holiday Season, buyer activity should slow, reducing demand for homes. At the same time, however, widespread foreclosure moratoriums should reduce the number of homes available to buy. These forces should counter-act to help keep the market (and prices) in balance.
(Image courtesy: USA Today)
As the stock market retraced to its 1997 level, mortgage markets improved last week -- but not by much.
Mortgage rates closed out the week slightly lower, but the week wasn't without fireworks.
- Calls of deflation grew louder
- The automakers left Washington without a bailout
- Citigroup's stock price fell to the equivalent of its ATM fee
Separately, each of these elements would have created confusion on Wall Street. Together, they created near chaos. Stocks traded at a pace last week that has never been equaled.
As a result, mortgage rates were volatile, too.
Over the 5-day workweek, multiple mortgage lenders issued 11 distinct rate sheets, meaning that consumer mortgage rates changed every 3 hours, 38 minutes on average last week.
This is why home buyers should rate shop quickly. Wait too long and the mortgage rate is gone. And this week doesn't figure to be any less volatile.
To start, it's a holiday-shortened week. Fewer traders will be working as the week moves forward, making the Price Discovery process more difficult. With fewer active buyers and sellers, wild price swings are likely and mortgage rates should feel the impact.
Next, markets will debate the Citigroup Bailout, wondering whether this will (finally) mark the market bottom. It's a conversation about which Wall Street never tires and with each bit of optimism, money should flow into stocks to the detriment of mortgage bonds and mortgage rates.
And lastly, there are 9 economic releases crammed into Monday, Tuesday, and Wednesday of this week, including two housing reports and an inflationary gauge behind which the Fed puts a lot of credence.
Signs of stabilization should buoy both stock markets and mortgage rates -- Wall Street is craving balance of some sort to carry it into the New Year.
There are no Fed speakers scheduled for this week so watch for data and market sentiment to lead the markets. For rate shoppers, this means more rate sheets.
(Image courtesy: The Wall Street Journal)
Business television and newspapers have made deflation a hot topic this week and, since Monday, Google has tracked 13,000 mentions of it.
Deflation is a recurring cycle in which the prices of goods and services fall. Isolated to one industry or sector, falling prices is the natural result of competition.
For example, when DVD players were first introduced, they were tagged at $800.
Today, you can buy them for less than $20
.
Across many industries, however, and happening at the same time, falling prices can shut down the economy. Rather than buy things on the cheap, people stop buying anything at all. And why would they? The same items will cost less tomorrow.
And this is the problem with deflation -- it halts consumer spending and consumer spending makes up two-thirds of the U.S. economy. When it stops, the economic result is dwindling corporate revenues which leads to:
- Layoffs of the workforce, which leads to...
- Less consumer spending, which leads to...
- Dwindling corporate revenues, which leads to...
And the spiral continues.
Deflation can be much more insidious that its expansionary counterpart -- inflation. Inflation is when the prices generally rise over time and it's an economic condition through which governments can comfortably navigate. Deflation, on the other hand, is more rare and, therefore, fewer practical control measures exist.
Whether the U.S. economy will slip into deflation is a matter of debate.
The Fed has cut the Fed Funds Rate to promote economic growth and those changes can take up to 12 months to work their way through the economy. Deflationary pressures we're seeing today, in other words, may have already been addressed and corrected by Ben Bernanke's 10 rate cuts in the last 14 months.
Until the market figures it out, though, expect that each mention of deflation will hurt the stock market and help the bond market -- including the mortgage-backed variety. This should help lower mortgage rates and make homes more affordable.
(Image courtesy: The Wall Street Journal)
