Looking Back And Looking Ahead : May 5, 2008

Mortgage rates ended higher last week on stronger-than-expected jobs data, strong consumer spending, and an appetite for riskier investments.

But, investors were most excited about the Federal Reserve's hint that its rate-cutting cycle may be over.

The week was quiet until Wednesday when the Federal Reserve voted to lower the Fed Funds Rate by a quarter-percent.

The rate cut wasn't the big news, however.

Market players were most interested in Fed's press release in which it confirmed that the economy is struggling, but improving. The remarks were both soothing and a strong contrast to the Alarmist Analysts -- the ones that make for better television than analysis sometimes.

The Fed's statement also forced investors to rethink their economic outlook for the short- and long-term and when investors change their outlook, markets can be volatile.

One of the more important shifts in thinking now is the attitude towards the U.S. Dollar. An improving economy tends to be good for the dollar and that can help lead to lower mortgage rates.

The dollar's gains last week, incidentally, helped lower gas prices nationwide for the first time in almost 3 weeks. In the 18 days leading up to Friday, gas prices had made 18 consecutive record-highs.

This week, with very little new data and with few companies reporting earnings, expect market momentum to determine in which direction mortgage rates will go.

Because momentum can change quickly, be prepared to lock your mortgage rate if you see one that fits your budget -- it may not last long.

Why Mortgage Rates Aren't Falling Even Though the Economy is Shedding Jobs

According to the Bureau of Labor Statistics, the U.S. economy shed 20,000 jobs in April 2008. The labor force now counts at 146 million people as employed.

Normally, a loss of jobs would foretell economic weakness and would be a good thing for mortgage rate shoppers. Today, though, traders had been expecting a larger loss of 70,000 jobs.
In other words, today's jobs report looks surprisingly strong.

The stock market is now rallying on optimism that "the worst is over" for the U.S. economy and evidence supporting the Federal Reserve's remarks that its rate cuts were starting to take hold.

The stock market's gains are the bond market's losses. Mortgage rates are up today because the cash that is fueling the stock market is coming from the sale of all types of bonds -- including mortgage bonds. This is unwelcome news for people doing mortgage comparisons today, or buying a home this weekend.

In general, interest rates on adjustable-rate mortgages are increasing more than on fixed-rate mortgages.

(Image courtesy: Wall Street Journal Online)

Making English Out Of Fed-Speak (April 2008 Edition)

The Fed lowered the Fed Funds Rate by a quarter-percent to 2.000% yesterday afternoon. Because it is tied to the Fed Funds Rate, Prime Rate also fell by a quarter-percent. Prime Rate is now 5.000%.

Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month's statements.

Mortgage rate shoppers are also benefitting.

Each time the Federal Reserve cuts the Fed Funds Rate, it's meant to stimulate the economy in growth. Too much stimulation can create too much growth and that often leads to inflation (which causes mortgage rates to rise).

This is one reason why mortgage rates had not fallen over the past few months. Each Fed Funds Rate cut made it more likely that the economy would overheat in the second half of 2008.

So, because the Federal Reserve signaled that a rate-cutting "pause" may be ahead, investors are reducing expectations for a Fed-induced inflation cycle for later this year, pushing rates lower.

The FOMC's next scheduled get-together is a two-day meeting June 24-25, 2008.

SourceParsing the Fed StatementThe Wall Street Journal OnlineApril 30, 2008http://online.wsj.com/internal/mdc/info-fedparse0804.html

Memo to Fed: Remember the Fool in the Shower

The Federal Reserve announced yet another rate cut of .25% to the Federal Funds Rate this afternoon -- its 7th since September 2007. University of Chicago Economist and Nobel-laureate Milton Friedman had a favorite way of describing what the Federal Reserve did this afternoon. He called it the Fool in the Shower, and it goes like this:

When the fool turns on the shower, the water is very cold. So, he turns on the hot water. Only the hot water doesn't come on right away so he turns it on full blast. Before long, the water gets very hot, very fast and scalds him. Reflexively, he dials back the heat only to find that he's too cold again.

By cutting its key rate by only .25%, the Fed may be signaling its desire to "test the water" -- waiting to see the impact of prior rate cuts and fiscal stimulus actions. With energy prices at record levels and the dollar at historic lows, the Fed wants to balance the risk of slower economic growth with the need to prevent higher future inflation.

Despite today's news, what matters most is not what the Fed does but what the Fed says, particularly about inflation.

The key point from a mortgage perspective is to remember an often overlooked fact:
The Federal Reserve does not directly control mortgage rates.

With rates at their lowest in years and home prices declining, there are still many opportunities for buyers and borrowers. Contact me for a quick and easy review of your current mortgage and capture for yourself what today's market has to offer.

Simple Real Estate Term: Discount Points

More commonly called "points", discount points are up-front fees charged by mortgage lenders in exchange for lower mortgage rates.

The cost of one point is one percent on the loan size and discount points appear on Line 802 of the HUD-1 Settlement Statement.
As a general guideline, each point paid lowers a mortgage lender's offered interest rate by0.250%.

For example, a $200,000 home loan offered at 6.000% can be had for 5.750% if the borrower agrees to make an up-front payment of one point ($2,000).

In addition to lowering your interest rate, discount points (as well as other closing costs) may be tax-deductible, too. Therefore, be sure to provide any settlement statements from the previous calendar year to your accountant during Tax Season.