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

 

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

What is Appraised Value?

It’s an objective opinion of value, but it’s not an exact science so appraisals may differ.

For buying and selling purposes, appraisals are usually based on market value—what the property could probably be sold for. Other types of value include insurance value, replacement value, and assessed value for property tax purposes.  Appraised value is not a constant number. Changes in market conditions can dramatically alter appraised value.  Appraised value doesn’t consider special considerations, like the need to sell rapidly.

Lenders usually use either the appraised value or the sale price, whichever is less, to determine the amount of the mortgage they will offer.

Fannie, Freddie, and Bernanke

The biggest economic news of the week was expected to come from Fed Chief Bernanke, but a surprise announcement from OFHEO had the greatest impact on mortgage markets. Wednesday, OFHEO, the government regulator of Fannie Mae and Freddie Mac, announced that it will remove the limits placed on the portfolio sizes of the two companies as of March 1. This will enable the two companies to make or guarantee more loans. The limits had been instituted to constrain the growth of the companies while they fixed accounting errors. To make significantly more loans, the companies will have to raise additional capital, which will take some time. The regulators also announced that they are considering a reduction in the capital requirements the firms must hold for each loan, and this would accelerate the ramp up in loan volume. This measure follows the recent temporary increase in the conforming loan limits for Fannie and Freddie. The potential for Fannie and Freddie to increase their activity drove down mortgage rates. After rising Monday and Tuesday, the OFHEO news turned mortgage rates around on Wednesday. They continued to decline for the remainder of the week, finishing moderately lower than the prior week.

Also on Wednesday, Fed Chief Bernanke presented his semi-annual testimony before Congress. Overall, there were few surprises. Bernanke painted a grimmer picture of the risks to the economy than he had in the past. While he acknowledged that higher inflation is a threat, he expressed greater concern about slower economic growth. He sees housing market activity stabilizing later this year, while adding that home prices may continue to decline into next year. Bernanke also suggested that FHA modernization and Freddie Mac and Fannie Mae regulatory changes are “crucial” going forward.

 In the housing sector, the news was mixed. January Existing Home Sales fell by less than expected, but inventories of unsold homes rose by more than forecasted. Median existing home prices fell by 5% from one year ago. Meanwhile, January New Home Sales fell to a 13-year low. The Mortgage Bankers Association (MBA) activity index, which is released every Wednesday, showed a decline in the level of refinancing activity due to the rise in mortgage rates. Mortgage rates have declined since the data was collected, however, meaning that increases may be more likely next week.

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