LAST WEEK IN REVIEW

by GINA KEMSLEY of TERRA MORTGAGE BANKING

“Where do we go from here?” That question from Alicia Keys’ song is on the minds of many Americans, as they wonder where home loan rates are headed after the recent negative news for Bonds.

Last week, Congress was busy at work on negotiations to extend the Bush-era tax cuts. That news kept a lid on any improvement for Bonds and home loan rates, due to the prospect of an ever-increasing deficit.

And adding to the troubles for Bonds and home loan rates last week was news that inflation is growing in China… and growing fast. How does that impact us? Remember, it’s a global economy, so Bond prices all over the world worsen on news of inflation, which is bad for home loan rates.

So the big question is: Will home loan rates go back down?

Although rates are still near historic lows, they have been headed up… and indications are that those unbelievably low home loan rates may be behind us. In fact, there are only a few things that would bring back the lows that we saw in early November:

• If the tax cut package doesn’t get passed, it would be very bad news for the economy and Stock market – but it would help interest rates.
• If the Fed’s recent round of Quantitative Easing falls on its face and doesn’t meet its mission of creating inflation, boosting Stock prices, lowering unemployment and creating consumer demand – Bond prices could make some gains as the threat of deflation reemerges. But this is a long shot.
• If the financial problems in Europe worsen significantly – which would drive investors into the safe haven of the US Bond market – it could help Bond prices, but probably only modestly.

Realistically, the chances of these events happening are unlikely – and in the end, rates may see some brief and fleeting improvements, but many experts believe they will likely continue to creep up over time. And when you include the stimulative action of extending the present tax rates and adding further cuts, it’s tough to see Bonds or home loan rates improving much.

The good news is that home loan rates are still extremely attractive and are still near historic lows for now. If you or someone you know has been

thinking about purchasing or refinancing a home, NOW is the time to call or email to get started.

FORECAST FOR THE WEEK

Get ready for a busy week of economic reports and news that could impact home loan rates!

• We’ll start off Tuesday morning with the Retail Sales report for November, as well as the Fed’s final FOMC Meeting and Policy Statement of the year.
• We’ll also see new inflation reports starting on Tuesday with the Producer Price Index (PPI), which measures inflation at the wholesale level. The very next day, we’ll see the Consumer Price Index (CPI) with a look at inflation on the consumer level. With all of the recent talk over inflation concerns in the future, it will be important to see what these reports reveal – since inflation is the archenemy of Bonds and home loan rates.
• We’ll also get a dose of manufacturing news in the Empire State Index, which looks at New York State’s manufacturing sector, and is a good gauge of manufacturing overall. On Thursday, we’ll also see the Philadelphia Fed Index, which is another important manufacturing report. Those two indices have the potential to impact the market, since they indicate the health of the manufacturing sector in the US.
• Thursday brings the Initial and Continuing Jobless Claims Report. Last week, Initial Jobless Claims came in at 421,000, which was below expectations. That was encouraging news, but we still need to see consistent readings below 400,000 before real confidence in the labor market can take hold.
• Finally, we’ll see more housing news this week, when reports on Housing Starts and Building Permits in November are released on Thursday.

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.

Fortunately, there’s still time to lock in at near historic lows. It only takes a few minutes to see if this makes sense for you, or one of your friends, family members, neighbors, clients or coworkers. Call or email today, and I’ll be happy to help right away.

Contact Gina Kemsley of Terra Mortgage Banking today! She can be reached at (415) 464-3144 or gkemsley@terramb.com

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Mortgage applications to purchase homes increased 14.4 percent last week on an adjusted basis compared to the previous week, according to the Mortgage Bankers Association weekly survey.

The unadjusted Purchase Index increased 9.6 percent compared with the previous week and was down 7.4 percent compared to the same week a year ago.

On a seasonally adjusted basis, this is the highest Purchase Index recorded since the week ending May 7, 2010 in the middle of the tax-rebate push.

“The increase in purchase applications last week aligns with other incoming data suggesting that consumers are feeling somewhat more confident with their financial situation,” said Michael Fratantoni, the association’s vice president of research and economics.

“The level of purchase applications on a seasonally adjusted basis is now at its highest level since the expiration of the homebuyer tax credit,” Fratantoni concluded.

Interest rates were mixed, with 30-year fixed-rate mortgages rising to 4.50 percent from 4.46 percent and 15-year fixed-rate mortgages decreasing to 3.83 percent from 3.87 percent.

Source: Mortgage Bankers Association (11/24/2010)

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Alarm Bell:  Mortgage Interest Rates Are Heading Up.

Perhaps it’s early to ring alarm bells when rates are still in the 4s, but they’re up .375% since October 7-8, which means a borrower pays $110 more per month on a $500,000 loan.

Back then, mortgage bonds hit record price levels on rumors the Fed would announce billions more in mortgage bond buying to keep prices high and yields (or rates) low. But the actual Fed news on November 3 was that they’d only buy Treasuries and no mortgages. Buy the rumor, sell the news. Cliche for good reason: it’s exactly what happened.

That and mortgage bonds got spooked this week by higher inflation in China (consumer +4.4%yr, Oct. business +5%yr, Oct.) and a U.S. debt downgrade by a top Chinese ratings firm. Here’s what they said about the Fed’s heavy bond buying to lower rates (known as Quantitative Easing): “in the long run, it will be proven to be a practice resembling drinking poison to quench thirst.”

Cynical words on the U.S. devaluing the dollar by printing money to buy bonds. But whether one agrees with the Fed or not, let’s understand their theory vs. market action: The Fed thinks low rates will trigger economic growth and then inflation. Markets will react to that inflation long before the Fed does, bonds would sell off, and rates would rise.

The next inflation readings come Tuesday and Wednesday with business and consumer inflation respectively. We also have October retail sales Monday, key manufacturing activity reports Monday and Thursday, and housing reports Tuesday and Thursday. There will also be lots more quantitative easing chatter with eight public speeches throughout next week by senior members of the Fed’s rate policy committee.

Here is an alarm bell for you: Markets trade while economists and Fed bigwigs chatter, and the record low rate trade probably already happened.

Source: Gina Kemsley of Terra Mortgage Banking

Contact her at (415) 464-3144 or gkemsley@terramb.com. Call her today to help answer any of your financing questions!

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“DOUBLE, DOUBLE TOIL AND TROUBLE; FIRE BURN AND CAULDRON BUBBLE…” No, the witches from Shakespeare’s “Macbeth” weren’t talking about the economy or the labor market – but economic reports of late are indeed swirling about as if in a cauldron, with a potent mix of both tricks and treats. One report will show improvement for the economy, while another tells a more negative tale. So what news came about this week, and what impact did it have on home loan rates?

Last week, there was reasonably good news on the housing front, as Housing Starts for September were up 0.3%, to a seasonally adjusted 610,000 unit pace, which was higher than expectations of 579,000. The good news is that this represents the third consecutive month of expansion and actually the highest level of Housing Starts since April.

Yet, while this is an encouraging sign and does suggest some stabilization in housing, we can’t break out the party hats just yet. The improvement in Housing Starts is coming off of very depressed levels… and additionally, Building Permits, which are a sign of future construction, came in at 539,000, which was below expectations and also the lowest level we’ve seen in more than a year. The bottom line for housing is that people need to gain back real confidence and security about their job and economic prospects before we’ll see a marked turn around.

Speaking of that important job market, last week’s Initial Jobless Claims were 452,000 – and Jobless Claims have been stuck near that 450,000 mark for a long time – and there will be no meaningful decrease in the Unemployment Rate until Initial Jobless Claims reach and start moving below the 400,000 level. Overall, we still have 8.5 million people collecting some sort of unemployment benefits, so we’ve still got a ways to go before we’re out of the woods.

Reports on housing, manufacturing, jobs, and inflation are a big part of what will guide the Fed’s ultimate decision regarding the next round of Quantitative Easing (QE2), and a formal announcement is expected during the Fed’s next meeting of the Federal Open Market Committee on November 3rd. Remember that QE is the concept of the Fed becoming a buyer of Treasuries and Bonds, in a bid to keep interest rates low and therefore stimulate the economy. It’s important to note that QE may also devalue the Dollar, and boost our economy through making our exports relatively cheaper for foreign buyers. And this is not a bad thing, but we have to be aware that while more QE might provide an initial decline for home loan rates, the devaluation of the Dollar will ultimately drive rates higher. I will be watching this situation closely in the weeks ahead.

Meanwhile, last week’s news caused both ups and downs for Bonds and home loan rates, and they ultimately ended the week about the same as where they began. If you – or a client, friend, family member, neighbor, coworker – would like to learn more about taking advantage of historically low home loan rates, please don’t hesitate to call or email me. It would be an honor to provide a free consultation for you or any of your contacts.

FORECAST FOR THE WEEK

More housing news is in store this week, with both Monday’s Existing Home Sales Report and Wednesday’s New Home Sales Report. But whether these reports will show a move forward or backwards in the housing arena remains to be seen. Again, a marked improvement in the labor market will be necessary in order to see a marked improvement in housing nationwide.

Also, we’ll get a read on the health of the economy with Wednesday’s Durable Goods Report, which gives us an update on consumer and business buying behavior on big-ticket items that are designed to last for an extended period of time, like furniture, televisions, appliances, sporting equipment, vehicles, copy machines… all manner of things. It’s an interesting report, as people tend to hold back on these types of purchases when they are feeling a need to be extra conservative with their finances, or feel insecure about their employment. Meanwhile, Friday will bring another read on the economy with the Gross Domestic Product Report, which is the broadest measure of economic activity.

And not to be missed is the Initial and Continuing Jobless Claims Report on Thursday, as well as earnings reports from Proctor & Gamble, 3M, Exxon Mobile and more.

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 moved up and down due to movement in the Stock market and other economic news. I’ll be watching closely to see what happens this week.

By Gina Kemsley, Terra Mortgage Banking

Contact: gkemsley@terramb.com, 415-464-3144

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It’s been said there’s a pot of gold at the end of every rainbow. Yet, after last week’s regularly scheduled meeting of the Federal Open Market Committee, the Fed helped gold seem more “charmed” than ever. What happened, and what does this mean for home loan rates? Read on for details.

As expected, last week the Fed decided to keep the Fed Funds Rate (which is the lending rate banks charge each other for the use of overnight funds, and it is used as a base rate that many other lending rates are based on) at 0.25%. The Fed also reiterated that economic conditions warrant keeping the Fed Funds Rate low for an “extended period”.

But the Fed’s Policy Statement was clearly more downbeat on the economy and showed greater deflationary concerns than the previous Fed Statement. It also gave the feeling that the Fed will jump in with more Quantitative Easing (QE) if necessary. QE means the Fed is prepared to create Dollars through Treasury purchases, which in turn causes the Dollar to weaken. And last week, in response to the Fed’s statement, we saw precious metals like Gold and Silver move higher as a hedge against a weaker US Dollar.

But, the Fed’s Statement is also significant because another round of QE by the Fed could mean continued good news for Bonds and home loan rates. What’s more, last Friday, respected hedge fund manager, David Tepper, noted that the shift in the Fed’s statement also puts Stocks in an almost “no lose” position.

Why is this? Should the economy improve, Stocks go up. But should the economy weaken, and the Fed jumps in with more QE, Stocks could also benefit because more QE alongside a weaker economy brings the Dollar index down, making our exports more attractive. This will greatly help large US multi-national corporations, which have a high influence on the major US Stock indices. The Fed clearly has some big decisions to make in the coming weeks and months to help ensure our continued recovery, and I’ll be watching closely to see how Bonds and home rates are affected. Last week, for instance, Bonds and home loan rates ended the week about .125 percent better than where they began.

Another thing to note – there was a mix of housing news last week. Housing Starts rose 10.5% in August from July, which was above expectations and was the highest level in 4 months. Building Permits, a sign of future construction, gained 1.8% and were also better than anticipated. In addition, New Home Sales came in near expectations, while Existing Home Sales were slightly above expectations – but still 19% below the sales pace of a year ago. Also, the inventory of unsold homes was reported at an 11.6 month supply for existing homes and an 8.6 month supply for new homes. Remember: The level of improvement in housing is a big indication of the strength of our economic recovery.

If you or anyone you know would like to learn more about taking advantage of historically low home loan rates and a great supply of available homes, please don’t hesitate to call or email me as soon as possible. Or forward this blog on to anyone you think may benefit and I’d be happy to talk to them free of charge.

 FORECAST FOR THE WEEK

Will any of this week’s reports be good luck charms for home loan rates? Wednesday’s Gross Domestic Product (GDP) Report is an important one to watch, since GDP is the broadest measure of economic activity.

Information about the Labor Market is also important these days, which is why the Labor Department has decided to delay the Jobs Report for September one week, until Friday, October 8. However, this Thursday does bring another Initial and Continuing Jobless Claims Report. Last week’s report was disappointing, as Initial Jobless Claims were above expectations and represented the first rise in 5 weeks.

Friday we’ll get a read on the consumer perspective of the economy with reports on Personal Income and Personal Spending as well as the Personal Consumption Expenditure (PCE) Index, which is the Fed’s favorite gauge of inflation. Given the deflationary concerns in the Fed’s Policy Statement last week that we discussed above, the Fed will certainly be watching this report closely.

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.

While Bonds and home loan rates ended the week better than where they began, they were unable to improve above a key resistance level. I’ll be watching to see if they can break through this level this week.

By Gina Kemsley, Loan Consultant at Terra Mortgage Banking

For additional information, please contact Gina at gkemsley@terramb.com or 415-464-3144

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