Report by Gina Kemsley – Loan Consultant, Terra Mortgage Banking
LAST WEEK IN REVIEW
“All good things must come to an end…” or so the popular saying goes. And right now, many people are wondering if this sentiment holds true for the historic low rates we’ve seen this year. Here’s what last week’s news suggests.
First, it’s important to understand that home loan rates are based on Mortgage Backed Securities, which is a type of Bond. Bonds typically help provide some built in “assistance” when the nation is suffering economic headwinds. For example, negative economic news serves to help Bond prices improve and rates decline, including home loan rates. This is helpful to have when the economy is struggling, as buyers of all products – including homes – need the extra incentive of low rates to be encouraged to buy.
But now, the sharply higher expectations for future economic growth has caused rates to climb – particularly including home loan rates, since the Fed announced its second round of “Quantitative Easing” or QE2 on November 3rd. With QE2, the Fed will purchase $600 Billion in Treasury Securities through mid-2011 to keep our economic recovery on track.
But is there any likelihood rates can rebound? Many experts expect that home loan rates will continue to move higher over time because:
- At its meeting last week, the Fed left the door open for further QE programs if our economic recovery requires which, like QE2, could hurt Bonds and home loan rates.
- Congress passed the $858 Billion Tax Cut Bill, and while this is a good economic stimulus, in the short run it adds to the ever-growing deficit – also bad for Bonds and home loan rates.
- Last week’s Producer Price Index and Consumer Price Index Reports showed that the Fed appears to be on track with their goal of stimulating a bit more inflation. Inflation erodes the value of the fixed return provided by a Bond, which causes home loan rates to rise.
It’s important to understand that rates don’t simply rise in a straight line. In fact, Bonds and home loan rates did have a late-week rally last week, and that trend of rates worsening with improving dips here and there like we saw last week may be what’s in store for us in the weeks and months ahead. At the end of the day, the ongoing and potential addition of further stimulus from the Fed, combined with the stimulus from the tax cuts, will make it tough for Bonds and home loan rates to return to the levels seen earlier this year.
But the good news is that home loan rates are still extremely attractive right now. If you have been thinking about purchasing or refinancing a home, call or email me now to get started. Or forward this post on to someone you know who may benefit from today’s historically low rates.
FORECAST FOR THE WEEK
It will be a holiday shortened week, with the Bond Market closing at 2:00pm ET Thursday and both the Stock and Bond Markets closed Friday in honor of the Christmas holiday. But there will be plenty of action first, including:
- A double dose of housing news with Wednesday’s Existing Home Sales Report and Thursday’s New Home Sales Report.
- Wednesday also brings a read on the economy with the Gross Domestic Product Report, which is the broadest measure of economic activity.
- Big inflation news comes on Thursday with the Personal Consumption Expenditure (PCE) Index, which is the Fed’s favorite gauge of inflation, plus there’s also the Personal Income and Personal Spending Reports, which give us some information on the consumer perspective of the economy.
- Thursday’s Initial and Continuing Jobless Claims Reports will also tell us if the good trend continues – last week’s Initial Claims was the second lowest number seen during 2010, and also the third decline in four weeks.
Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.
Bonds and home loan rates rallied at the end of last week. Now would be a great time to call or email me if you have any questions about your situation!
Economic Calendar for the Week of December 20-24, 2010
Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.
|Wed. December 22||08:30||Gross Domestic Product (GDP)||Q3||2.7%||2.6%||2.5%||Moderate|
|Wed. December 22||08:30||Auto Sales||Q3||2.3%||2.1%||2.3%||Moderate|
|Wed. December 22||08:30||Existing Home Sales||Nov||4.65M||4.68M||4.43M||Moderate|
|Thu. December 23||08:30||Jobless Claims (Initial)||12/18||424K||420K||Moderate|
|Thu. December 23||08:30||Personal Consumption Expenditures and Core PCE||Nov||NA||0.9%||HIGH|
|Thu. December 23||08:30||Personal Consumption Expenditures and Core PCE||Nov||0.1%||0.0%||HIGH|
|Thu. December 23||08:30||Personal Spending||Nov||0.5%||0.4%||Moderate|
|Thu. December 23||08:30||Personal Income||Nov||0.2%||0.5%||Moderate|
|Thu. December 23||10:00||Consumer Sentiment Index (UoM)||Dec||75.0||74.2||Moderate|
|Thu. December 23||10:00||New Home Sales||Nov||303K||283K||Moderate|