Category: Economics & Interest Rates

Rate Update September 16, 2008

Posted on by Evan in Economics & Interest Rates, Rate Update, The Fed

Rates are effectively unchanged this morning.

There is A LOT to talk about this morning as crisis in the financial markets persists. Here is a summary of the major stories we’re falling that are likely to impact the direction of mortgage rates:

→ AIG: The nation’s largest insurer is close to insolvency. Analysts are suggesting that the troubled insurer needs to raise $75 billion in fresh capital to stay afloat. The failure of this firm would be unprecedented because of it’s vast reach & volume of obligations. AIG operates in 130 countries and is a major player in the credit default & life insurance sector. AIG’s failure would likely cause a major disruption in the financial markets which could drag other firms down with it. Although rates may benefit from this news in the near term, in the long run this would be a disaster.

→ Federal Funds Rate: The Fed is scheduled to announce their interest rate policy decision this afternoon. Last week at this time there was a 0% chance that the Fed would alter rates. However, analysts now assume a cut of at least .25% and possibly even .50%. Remember that in and of itself the Fed cutting rates will not directly impact mortgage rates. However, what they say following their announcement can.

→ Consumer Price Index: Finally, the Labor Department released the monthly CPI report. The report came in line with expectations reflecting a 5.4% increase year-over-year. When stripping out volatile food and energy prices year-over-year inflation rose by 2.5%. Although these figures are relatively high compared to the past couple years the announcement did not surprise the markets.

Current Outlook: floating

Kudos to Barron’s part II

Posted on by Evan in Credit Crisis, Economics & Interest Rates, General Mortgage Info., Housing & Real Estate

After reading and blogging about one article in Barron’s this weekend I came to another outstading one.  Here is a link.  Nice work Barron’s.

Among the points that I found interesting:

* If Fannie Mae [ticker: FNM] and Freddie Mac [FRE] stopped all of their activity — for a moment, forget about shutting them down and being insolvent — in order to sell off mortgages as normal loans without this guarantee, the interest rate would have to be around 9% or 10%.

* Q: What other negatives do you see?

A: Inflation risk down the line. [The federal government is] going to probably overstimulate and over support in an attempt to stem these deflationary forces. We are looking at a longer-term inflationary force that is pretty substantial. This has been my view for a long time. Interest rates went into a very long decline from the late ’70s and early ’80s until earlier this decade, when first we saw rates bottom out. Then rates went up a couple of times.

Basically, we are getting back down toward those low levels again. The multiyear bottom in interest rates that started around 2002 will probably last into 2009. Then we are going to see the inflationary aftermath of these government policies, and you might be surprised at how high interest rates go.

* Q: How much more pain are we going to feel in the housing market before things start to stabilize?

A: I think we are about half way through. There is high momentum in terms of home-price declines, so it is pretty clear they are going lower. It always looks a lot like the hills on a roller coaster. It starts out with a flattish period. Then it starts to go down, and then it really starts to drop, and we are clearly in that period. That period is going to be with us for about another year before it flattens out and bumps along in 2010.

The S&P/Case-Shiller Index is down a little more than 15% from its peak in 2006, and I’ve believed for some time that the index will have dropped 30% from its peak. That means some markets are going to drop by 50%. That includes Miami, Las Vegas and Phoenix, all of which were fueled by subprime lending. The foreclosure overhang is so big in those areas.

Gas prices expected to rise thanks to Ike

Posted on by Evan in Economics & Interest Rates, General Mortgage Info., Personal Finance

According to this article on CNN Money’s website gas prices are expected to climb back towards the $4/ gallon level.  Althugh there is still a lot of uncertainty about the extent of the damage to oil producing infastructure caused by Hurrican Ike it looks like gas prices will be increasing.  I’ll be filling up my tank today!

Keep in mind that higher energy prices can add inflationary pressure on the economy which is bad fro mortgage rates.

Phil Fisher on causes of inflation

Posted on by Evan in Economics & Interest Rates

In 1958 Phil Fisher wrote an investment classic called, “Common Stocks and Uncommon Profits”.  In the first chapter he wrote a very profound statement regarding the cause of inflation.  This seems to be extremely applicable in today’s economic environment:

“It seems to me that if this whole inflation mechanism is studied carefully it becomes clear that major inflationary spurts arise out of wholesale expansions of credit, which in turn result from large government deficits greatly enlarging the monetary base of the credit system.”- Phil Fisher

Rate Update September 10, 2008

Posted on by Evan in Economics & Interest Rates, Rate Update

Mortgage rates are essentially unchanged from yesterday although pricing on 30 year fixed loans are modestly worse.

We still believe that over the next few weeks mortgage rates will improve. Now that the federal government has assumed the guarantees of Fannie Mae & Freddie Mac’s mortgage-backed bonds investors will view these securities on par with US treasuries.

30-year treasury bonds are currently yielding 4.19% while 30-year mortgage backed bonds yield between 4.85%-5.15%. We would expect the spread between these yields to converge over the next few weeks. Although, it’s not likely that rates will move in a straight line so we still need to be careful on timing.

Watch today’s you tube video for information on two new blog postings featuring important information that real estate professionals should be aware of.

Post #1- What the bailout means for you

Post #2- Mortgage guidelines continue to be tightened

Current Outlook: neutral short-term, floating long-term

Credit crunch has “no end in sight”

Posted on by Evan in Economics & Interest Rates, For Professionals, General Mortgage Info., Housing & Real Estate, The Fed

According to this article on bloomberg.com banks continue to tighten their lending standards. 

The measurement in which this article focuses on are derivatives which are priced to reflect the market’s expectation of future spreads between the Fed’s daily effective Federal Funds Rate and the rate at which banks are actually lending money.  When spreads increase it is a sign that banks are reluctant to lend and therefore demand a higher return on their loans to pursuade them to lend.

According to the article:

* Banks are charging each other a premium of about 78 basis points…The spread is up from about 24 basis points in January, and may widen to 85 basis points, or 0.85 percentage point, by mid-December, prices in the forwards market show.

* “Things are going to get worse before they get better.”

*  The crisis is “not over and I’m not exactly sure when it’s going to end,” Nobel Prize-winning economist Myron Scholes.

Bernanke’s outlook & mortgage rates

Posted on by Evan in Economics & Interest Rates, General Mortgage Info., Rate Update, The Fed

In his speech to the worlds most powerful central bankers today Fed Chairman Ben Bernanke spoke briefly about inflation according to this NY Times article. 

From the article, “Mr. Bernanke, while acknowledging ‘an increase in inflationary pressure,’ reasserted his view that in the near future, the upswing in inflation from the oil and food shocks was likely to moderate.”

If his outlook proves correct this would be a good sign for mortgage rates.  Mortgage rates have ticked higher over the past few months in response to higher inflationary pressures (i.e. commodity &/ energy prices).  If these pressures to moderate then hopefully mortgage rates will also move lower.

 

Mortgage-backed bonds still attract investors

Posted on by Evan in Economics & Interest Rates, For Professionals, General Mortgage Info., Rate Update

I often reference “mortgage-backed bonds” (AKA MBS’s) in my daily rate updates.  If you follow rate update consistently then you know that when MBS prices fall interest rates rise and vice versa. 

The WSJ published a story today regarding investor confidence in high-quality MBS’s and how they remain attractive for bond investor guru Bill Gross & PIMCO. 

Here are a few good takeaways and what it may mean for interest rates in the near term:

* “Freddie’s mortgage bonds were trading at a risk premium of around 2.64 percentage points over the 10-year Treasury note’s yield, which was quoted late Thursday at 3.837%.” -A ‘risk premium’ is the spread that an investment earns above and beyond the 10-year US Treasury note (considered to be an extremely safe investment).  The idea is that the larger the spread the more risky the market perceives that investment.  The current spread between MBS’s & 10-year Treasury notes is relatively high compared to historical standards.  The good news is that in all likelihood we will see the spreads shrink in the future which means mortgage rates will have to come down or Treasury yields will have to move higher (or some combination of the two). 

* “Even though Congress passed legislation last month allowing the Treasury Department to provide liquidity to Fannie and Freddie, the Treasury has stopped short of announcing any immediate bailout plans. The uncertainty about the government’s plans have fueled sharp price swings in the companies’ stocks, bonds and mortgage bonds” -This helps to explain why mortgage rates have been as volatile as they have been over the past couple weeks.  This will likely persist for a few months.

* “Fannie and Freddie guarantee or own nearly half of the total $12 trillion U.S. mortgages outstanding. They have long been the mortgage-bond market’s backstop, stepping in to buy when other investors have failed to materialize. With their finances under pressure, however — both companies have reported losses as the housing market has weakened sharply — they have been curtailing their mortgage purchases.” -This is not terribly encouraging.  The housing market needs the two GSE’s to stabilize the secondary market for mortgages.

Fed’s forecast for inflation is encouraging

Posted on by Evan in Economics & Interest Rates

If you’re an avid reader of ‘rate update’ you know that inflation is the primary factor that drives long-term interest rates (including mortgage rates).  When inflation expectations rise mortgage rates also tend to rise and vice versa.

I came across the graph below in a recent Economist article which shows that the Fed believes that inflation will continue to move higher towards the end of 2008 (which means mortgage rates will likely also continue to rise) and then ease as we get into 2009.  According to their expectations they believe inflation will remain HIGHER than current levels up until the end of 2009.  From this we can reasonably assume that their forecast for mortgage rates would also be that they will be higher than current levels over the same time period. 

If their expectations hold true then year-over-year inflation won’t enter into the Fed’s comfort range of 1-2% until 2009-2010.  At that point there could be significant refinance opportunities.

Fed's forecast for inflation (L)/ unemployment (R)

Importance of the Employment Report on Mortgage Rates

Posted on by Evan in Economics & Interest Rates

We often stress the importance of the monthly “jobs report” in trying to forecast the direction of mortgage rates. The objective of this post is to provide an explanation of why this report is so important.

Let’s first have a look at what information can be found in the monthly “jobs report”. Here is a summary:

Employment Report
In the US, the employment report, also known as the labor report, is regarded as the most important among all economic indicators. The report provides the first comprehensive look at the economy, covering nine economic categories. Here are the three main components of the report:

1. Payroll Employment: Measures the change in number of workers in a given month and measures the number of jobs in more than 500 industries (ex-¬farming) in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation’s business and government establishments. This release is the most closely watched indicator because of its timeliness, accuracy and its comprehensiveness. It is important to compare this figure to a monthly moving average (6 or 9 months) to capture a true perspective of the trend in labor market strength. Equally important are the frequent revisions for the prior months, which are often significant.  The bottom line for this measurement is that if the number of news jobs created or lost is better than what the market had expected mortgage rates typically rise and vice-versa.

2. Unemployment Rate: The percentage of the civilian labor force actively looking for employment but unable to find jobs. Although it is a highly proclaimed figure (due to simplicity of the number and its political implications), the unemployment rate gets relatively less importance in the markets because it is known to be a lagging indicator — it usually falls behind economic turns.  The bottom line for this measurement is that if the unemployment rate is better than what the market had expected it can cause mortgage rates to rise and vice-versa.

3. Average Hourly Earnings Growth: The growth rate between one month’s average hourly rate and another’s sheds light on wage growth and, hence, assesses the potential of wage-push inflation. The year-on-year rate is also important in capturing the longer-term trend.  The bottom line for this measurement is that if earnings growth is reported to be greater than what the market expected it can cause mortgage rates to move higher and vice-versa.

And why is it important?
The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they’re getting paid and how many hours they are working. These numbers are the best way to gauge the current state and future direction of the economy. They also provide insight on wage trends and wage inflation. If wage inflation threatens, usually interest rates will rise, and bond and stock prices will fall. The Employment Report is scheduled for release at 8:30 (ET) on the first Friday of each month by the Bureau of Labor Statistics.