No Rate Change From Fed

Wednesday’s highly anticipated Fed meeting produced little reaction in mortgage markets, and mortgage rates barely changed during the week. As expected, the Fed ended its cycle of interest rate cuts and held the Fed Funds rate unchanged at 2.0%. In addition, there were no major surprises in the Fed statement, which was entirely consistent with Fed Chief Bernanke’s recent comments. According to the statement, the Fed expects inflation to moderate later this year and next, but uncertainty over the inflation outlook remains high. Meanwhile, the risk of slower economic growth has diminished. The Fed listed the credit crunch and higher energy prices as obstacles for the economy.   In reaction to the announcement, investors concluded that the Fed will wait longer to begin raising interest rates. The Fed’s challenge is still to promote economic growth while fighting inflation. For mortgage markets, the negative implications for inflation from higher energy prices were offset by the positive effect on inflation of a slower economy, keeping mortgage rates steady. The stock market did not take the news as well, since higher energy prices and a slower economy are both negative for equities, and the Dow fell to the lowest level of the year.   The current economic data on inflation remained relatively mild, but the threat of higher future inflation climbed. The May Core PCE price index, the Fed’s preferred inflation indicator, rose less than expected. On the other hand, Dow Chemical announced additional across the board price hikes of up to 25%, shortly after a similar 20% increase less than one month ago.   Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283 email: corey@frontstreetmtg.com

 

Bernanke Stirs Up Inflation Fears

Usually the monthly Employment report is the main event of the week, but Fed Chief Bernanke stole the show. Following the theme of other Fed officials in recent weeks, Bernanke focused on inflation risks in multiple speeches, and his comments were unexpectedly direct. According to him, inflation expectations are a “significant concern.” He explained that the decline in the value of the dollar and the increase in the cost of energy were adding to inflationary pressures. Inflation is negative for mortgage investors, and mortgage rates rose for the fourth straight week due to increased concern.

At the end of a volatile week, investors were closely watching Friday’s important Employment report. The headline number came in right on target, with a loss of -49K jobs in May. The big surprise came from the change in the Unemployment Rate. Expected to rise slightly to 5.1% from 5.0% in April, it instead jumped to 5.5%, the highest level since October 2004. Economists attributed the spike to an unusually large influx of young adults entering the labor force to find summer jobs, so the reaction in the mortgage market was modest.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, email: corey@frontstreetmtg.com

Fed Raises Inflation Outlook

This week, mortgage investors focused on the Fed, inflation, and oil prices. The week started off on a positive note, and mortgage rates fell on Monday and Tuesday. Even higher than expected levels of core inflation in Tuesday’s Producer Price Index had little impact. The atmosphere changed quickly on Wednesday, though, after the release of the FOMC minutes from the April 30 Fed meeting. In the minutes, the Fed lowered its forecast for economic growth in 2008, while raising the expected level of inflation. Also notable, Fed officials ruled out further rate cuts unless the outlook for the economy turns significantly worse. The Fed’s heightened inflation projections were bad news for mortgage markets, and rates ended the week a little higher.

Investors closely watched the continued climb in energy prices during the week. Rising energy prices are particularly bad for the stock market, while the impact on mortgage markets is less clear. In one sense, they act similar to a tax increase, since they result in less disposable income, and economic growth slows. An economist at a major investment bank pegged the added cost this year to US consumers and businesses at $300 billion, more than double the $130 billion in tax rebates being issued by the government. Normally a decline in economic activity reduces future inflationary pressures and is good for mortgage markets. In this case, however, higher energy prices are seen as adding to inflation by more than a slowing economy would reduce it.

In the housing sector, this week’s data was close to the expectations of investors. April Existing Home Sales fell slightly from March, while inventories of unsold homes rose to the highest level since June 1985. Separately, OFHEO, a government agency, announced that US home prices fell 3% during the first quarter compared to the same period one year ago. Prices fell in 43 states. Analysts suggested that the recent difficulty in obtaining jumbo mortgages has led to a smaller proportion of sales of more expensive homes, which has skewed the housing data somewhat lower.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, email: corey@frontstreetmtg.com

Tame Inflation Data Turns Rates Lower

Mortgage rates ended the week close to where they began the week, but the end result masked a lot of movement. The week began poorly for mortgage markets. Stronger than expected Retail Sales data and tough talk on inflation from Fed officials pushed mortgage rates higher on Monday and Tuesday. In particular, Tuesday’s Fed speakers suggested that the economy was beginning to recover - even if there is still a long way to go - and that inflation concerns have increased. The tide turned on Wednesday, however, when CPI, the most closely watched inflation report of the month, showed a lower than expected increase in inflation. Mortgage rates fell every day through the remainder of the week.

The April Core Consumer Price Index (CPI) rose at a 2.3% annual rate, below the consensus forecast of 2.4%. So far, higher food and energy prices have not been passed through in a large way to the prices of other goods. The Fed has been emphasizing inflation fears for a couple of weeks, which has had a negative impact on mortgage markets, so the good news on inflation was a relief to many investors. The Fed is generally considered to be comfortable with Core CPI readings below 2.5%.

In the housing sector, this week’s news was mixed. Against a consensus forecast of 940K, April Housing Starts rose 8% to an annual rate of 1,032K units. Building Permits, a leading indicator of housing market activity, rose 5%, the first increase in in five months. The construction of single family homes remained weak, however. The strength in the Housing Starts report came from new apartment construction, which is extremely volatile on a monthly basis. Separately, the National Association of Realtors (NAR) reported that median home prices fell 8% during the first quarter from the same period one year ago. The chief economist of the NAR suggested that the data may be a little misleading, since a smaller percentage of high end homes were sold during the period due to the difficulty in obtaining jumbo mortgages. In addition, the results varied in different parts of the country. 100 out of 149 metropolitan areas saw price declines during the first quarter.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, email: corey@frontstreetmtg.com

 

Oil Shoots Higher

With little economic data on the schedule, the major economic story during the week was the continued rise in oil prices, which hit a new record high of $126 per barrel. Oil prices have nearly doubled since last summer. A major Wall Street investment bank issued a forecast this week that predicted a spike in oil prices to between $150 and $200 per barrel, possibly before the end of the year. The impact of rising oil prices on mortgage markets could be either positive or negative, depending on a couple of factors. Rising oil prices leads to higher prices for goods and services, and higher inflation usually leads to higher mortgage rates. On the other hand, higher energy costs slow economic activity, which serves to reduce inflationary pressures. In general, stock investors don’t like to see higher oil prices, while mortgage investors are less concerned. Mortgage rates fell a little during the week.

In the housing sector, the March Pending Home Sales index fell slightly from February, matching expectations. Pending Home Sales are a leading indicator of future housing market activity, so the next Existing and New Home Sales reports may show small declines. The National Association of Realtors (NAR) latest forecast predicted that conditions will remain soft for the first half of 2008, but that activity will pick up during the second half of the year.

Other significant news for the housing sector came out during the week as well. Fannie Mae announced that it will buy the new Jumbo Conforming mortgages for the same prices as those below the old conforming loan limit, which should make some larger mortgages more affordable. In addition, a $300 billion FHA housing loan guarantee program passed a vote in the House. More hurdles remain, as the program must be approved by the Senate and the President. If passed, this program will assist troubled borrowers in refinancing into a mortgage with more affordable terms, resulting in a reduction in the number of foreclosures.

Compliments of Corey Phelps, Front Street Mortgage, email: corey@frontstreetmtg.com, (231) 360-7283

Looking Ahead to the Fed

With little scheduled economic news and a couple of major events on the horizon, there was little change in mortgage markets during the week. The daily volatility remained high, however. Mortgage rates ended a little higher than the prior week, and the stock market was almost flat. Investors were mostly preparing for next week’s Fed meeting and Employment data.   Investor sentiment for future Fed actions has shifted significantly over the last couple of weeks. Just weeks ago, investors were expecting an additional three quarters of a point of Fed rate cuts over the next two meetings. Now many believe that the Fed will cut rates by only one quarter point at Wednesday’s meeting and then will hold rates steady. The thinking is that the Fed will pause to consider the effects on the economy of prior rate cuts, other expansionary monetary policies, and fiscal stimulus packages (such as the tax rebates). 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. This path could be good for mortgage markets, as higher inflation would generally lead to higher mortgage rates.   In the housing sector, the market for existing home sales showed additional signs of stabilizing, while new home sales displayed weakness. Matching expectations, March Existing Home Sales fell a little from February. Median home prices fell 8% from one year ago, while inventories of unsold homes rose slightly. March New Home Sales fell 9% from February. The chief economist of the National Association of Realtors (NAR) suggested that housing market conditions varied greatly in different regions of the country. The NAR predicted that housing market activity will be flat for a few more months and then will pick up during the second half of the year. Compliments of Corey Phelps, Front Street Mortgage (231) 360-7283 email: corey@frontstreetmtg.com

Economic Weakness Lowers Mortgage Rates

Comments from Fed Chief Bernanke and weaker than expected data from the job market painted a grim picture of current economic conditions. Slower economic growth generally leads to lower inflation, which is good news for mortgage markets, and mortgage rates dropped moderately during the week.

 

Wednesday, Bernanke testified before Congress. The focus was on the Bear Stearns rescue plan rather than current economic conditions, but he did outline the Fed’s latest economic outlook. While acknowledging that the economy is in the midst of a downturn, he suggested that the economy will strengthen in the second half of the year, and he expects that growth will be positive in 2009. He believes that Fed rate cuts and government stimulus packages will help lift the economy. He also predicted that inflation will moderate in future months.

 

Friday’s Employment report fell short of even Wall Street’s reduced expectations. Against a consensus forecast for a loss of -50K jobs, the economy lost -80K jobs in March, and the figures from prior months were revised lower by an additional -67K. This marked the worst monthly results since March 2003. Once again, the construction and manufacturing sectors performed poorly. Average Hourly Earnings, a proxy for wages, rose at the expected rate. Overall, even though the job market performed very poorly during the first quarter of 2008, the current Unemployment Rate of 5.1% is still reasonably low by historical standards, and the Fed thinks that a recovery is not too far away.

Post Provided by: Corey Phelps, Front Street Mortgage, corey@frontstreetmtg.com

Mortgage Rates Higher

After two weeks of nice declines, mortgage rates rose during the week, back to the levels seen at the end of February. March was an extremely volatile month, with large daily swings a common occurrence. Investors bought mortgage backed securities during periods of increased concern about the stability of the credit markets. Just as quickly, they sold mortgage backed securities when the fears eased. Last week, investors generally felt that the Fed’s rate cuts and other actions were sufficient to combat the difficulties in credit markets, demand for mortgage investments fell, and mortgage rates rose.

 Mortgage rates were also hurt last week by a series of Fed officials who talked tough about inflation. Higher inflation is bad news for mortgage markets, as investors require a higher yield to offset the inflation. With all the attention on inflation, Friday’s release of the Fed’s preferred inflation indicator was highly anticipated. The February Core PCE price index rose at a 2.0% annual rate, as expected, which was at the upper boundary of the Fed’s perceived comfort zone.

 In the housing sector, the news was somewhat encouraging. February Existing Home Sales came in stronger than expected. The inventory of unsold homes declined modestly, while median prices fell. Sales activity has held in a narrow range since September, and the chief economist of the National Association of Realtors (NAR) suggested that the data was “another sign that the market is stabilizing”. February New Home Sales also came in a little higher than the consensus. Separately, the government’s OFHEO housing index showed that January prices were down 3% from one year earlier.

Compliments of Corey Phelps, Front Street Mortgage. email corey@frontstreetmtg.com

Investors Push Up Mortgage Rates

In a week packed with major economic news, the biggest story for mortgage markets was the widening spread between mortgage backed securities and Treasury bonds. Issued by the US government, Treasury bonds are generally considered to be the benchmark for a “safe” security, since the risk of default is extremely low. During the week, the economic news was mixed, and Treasury rates barely changed. Mortgage rates, however, jumped by about half a point. Investors are demanding a higher return from mortgage backed securities, and the result is higher mortgage rates. In another unusual reversal, the mortgage market has been more volatile than the Treasury market, and wide swings in mortgage rates have become a daily occurrence.

 On the economic front, the highly anticipated Employment report failed to meet even Wall Street’s reduced forecast. Against expectations for a gain of 25K new jobs, the economy lost -63K jobs in February, and the figures for January and December were revised lower as well. This marked the largest monthly decline since March 2003. The Unemployment Rate surprisingly fell to 4.8%, but that reflects a large number of people who stopped looking for a job last month, meaning that they officially left the labor pool. Once again, the manufacturing and construction sectors showed the greatest weakness. Until November, the service sector had been steadily producing job gains of 100K or more per month, but even that sector barely produced any new jobs in February.

 Big news came out from the Department of Housing and Urban Development (HUD). In accordance with the new legislation passed a couple of weeks ago, HUD released the new loan limits for FHA, Fannie Mae, and Freddie Mac, and they did it a week earlier than expected. The new minimum for FHA is $271,050 with a maximum of $729,750. The Fannie/Freddie minimum remains at $417,000 with a maximum of $729,750. The formula is based on 125% of each region’s median price within the posted limits. 250 regions will be eligible for higher caps, and more than 70 regions will be eligible for the maximum. As a practical matter, it will still take some time for Fannie Mae, Freddie Mac, and FHA to prepare their systems and implement the changes.

Compliments of Corey Phelps, Front Street Mortgage (231) 360-7283 email: corey@frontstreetmtg.com

Mortgage Market Report for Jan. 11, 2008

Provided by Corey Phelps, Front Street Mortgage 

Mortgage rates continued their recent trend lower on the perception that the economy is slowing even more than expected. Economic weakness generally leads to less inflation, which tends to produce lower mortgage rates. Confirmation of an economic slowdown was provided in a speech by Fed Chief Bernanke on Thursday. Calling the December Employment report “disappointing”, he suggested that the Fed is prepared to take “substantive” action and that further easing may well be necessary in light of the risks of a slowing economy. Investors interpreted his remarks to mean that the Fed will be likely to cut rates more aggressivly than previously expected, and they now price in a near certainty of a half point rate cut at the next meeting on January 30.

Bank of America announced that it had reached an agreement to acquire Countrywide Financial. The news came as concerns aboutCountrywide’s solvency were causing unease in the market, but the pending acquisition has helped to ease those fears. A bankruptcy of Countrywide would not have been a good thing for the mortgage industry and its ripple effects would have been felt throughout the economy.

In the housing sector, November Pending Home Sales fell slightly from the prior month, leaving them 19% lower than one year ago. Pending Home Sales are a leading indicator of future housing market activity, meaning that the next Existing and New Home Sales reports may show declines. Seperately, the National Association of Realtors (NAR ) released a revised forecast last week, in which they increased slightly their expectations for housing market activity in 2008.

For further expert mortgage advice please fell free to email me at corey@frontstreetmtg.com. or visit us at www.frontstreetmtg.com