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

Thinking about making improvements to your home? Keep the following things in mind:

• COST DOESN’T EQUAL VALUE. If you finished off your basement six months ago for $12,000,  said improvement doesn’t necessarily add $12,000 to value in the eyes of the buyer.
• PUT YOUR MONEY WHERE BUYERS WILL SEE IT. Examples of good returns might be a fresh coat of paint and sprucing up your front door and entry way. Don’t expect to get as good a return on insulation or new wiring (these fall under item #4)
• DON’T OVER IMPROVE! We see this happen all the time. The addition of a fifth bedroom to a house in a subdivision of 3-4 bedroom homes may not give you the return you would like. Use typical improvements for your area as a guide.
• MOST QUALITY HOME IMPROVMENTS CAUSE A PROPERTY TO SELL QUICKER BUT NOT NECESSARILY FOR MORE MONEY. A timely sale will lessen the carrying costs and stress. Don’t underestimate the overall value of “smart” improvements (i.e. updated wiring, new furnace, etc.) 

Thinking points for buyers…

• The doom and gloom you’re hearing about in the mass media should not affect your decision to act if you are ready, willing, able, and eager to do so.
• Prices may still go lower, but as soon as they hit bottom, they will rebound with a vengeance, quickly wiping out any advantage you might gain by waiting.
• Right now, you have an unusually wide selection of properties to choose from, including those owned by people highly motivated to sell immediately.
• With so many potential buyers holding off, you have a much smaller number of people competing with you for the available properties.
• When the turnaround comes, those “waiters” will be your competitors, making your offer less attractive to those selling their homes.
• Financing is still available at historically low interest rates, but are sure to escalate when activity resumes at more normal levels.
• Even if you SHOULD pay a little more than you would if you actually hit the “bottom” of the market, normal appreciation would make the difference irrelevant within a few short years.
• If you as an individual ARE ready willing, able, and eager to make a move, the time for action is NOW!

The Economic Stimulus Package will be law

This afternoon President Bush will sign the Economic Stimulus package into law. Last week, Congress gave overwhelming final approval to the Economic Stimulus Package supported by NAR and REALTORS® across the country. As a result, the government will be sending payments to most American households and grant tax incentives for business investment.

 

The legislation includes the requested GSE and FHA limit increases strongly backed and lobbied by NAR. The increased GSE loan limits means borrowers will see immediate relief with new liquidity in the mortgage market and the nation will see an additional 300,000 home sales. The increased FHA loan limits means an additional 138,000 Americans will purchase homes, and with the needed FHA reforms means 200,000 families can refinance their homes safely and affordably.

Northwest Michigan Single Family Home Sales for January 2008

Total Listed 638; Total Sold 114; Average List Price Sold $207,677; Average Sale Price Sold $190,461; Average Days on Market 169