The Federal Reserve is stumping hard on inflation this week, creating speculation that Fed Funds Rate hikes may be in store for later this month.
This is a counter-intuitive development because increases to the Fed Funds Rate are typically associated with periods of rapid economic expansion.
Lately, we’ve seen anything but.
Despite the downbeat news, though, multiple Fed members are taking a hard line on inflation, adding that a strong dollar support the economy and help to offset high oil prices.
A rate hike could help accomplish that goal.
If the Federal Reserve votes to raise the Fed Funds Rate, Prime Rate will rise in tandem. Prime Rate is the basis of interest rates for credit cards and home equity credit lines. Holders of each debt type, therefore, would face higher monthly payments.
Mortgage rates, by contrast, would be expected to fall, but how the market would actually react to a rate hike is anyone’s guess.
The Federal Reserve meets 8 times annually. Its next meeting is a two-day affair beginning June 24.
(Image courtesy: The New York Times)
Dateline: Tucson Mortgage News, Tyler Ford and Todd Abelson
There was no rest for the mortgage-rate weary last week.
As mortgage bonds sold off early in the week, sharp rate hikes followed. A steady stream of better-than-expected economic reports had re-ignited inflation fears, drawing money from the bond market.
On Friday, however, the money flow reversed on a triple threat to the U.S. economy:
- The Unemployment Rate took its biggest one-month jump in 22 years
- Oil made its biggest one-day gain
- The U.S. dollar lost a lot of value
By themselves, each of these events normally would be bad for mortgage rates but the Friday combination of all three led to a huge stock sell-off and renewed demand for bonds — including the mortgage-backed kind.
Despite Friday’s reversal, mortgage rates were higher on the week, overall.
This week, there won’t be much economic data this week but there will be six Federal Reserve members making speeches to the public.
The most anticipated of the set is Fed Chairman Ben Bernanke’s address Monday evening on the topic of “inflation”. Markets will be closed when Bernanke speaks so expect a delayed market reaction Tuesday morning.
Throughout the week, markets should continue their long-standing battle between the fears of inflation and the fear of recession. It’s the same back-and-forth that we’ve seen since late-2007.
It’s also the primary reason why mortgage rates rarely stay still anymore.
(Image courtesy: The Wall Street Journal Online)
On the first Friday of every month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.
More commonly called the “jobs report”, today’s 2-page analysis of May 2008 shows that the economy shed jobs and that unemployment surged.
This is terrific news for home affordability.
That may sound counter-intuitive, so let’s dig deeper into the jobs report and what it really tells us about the U.S. economy.
Over the last year, rising food and energy costs have chipped away at household budgets, leaving Americans with two basic choices:
- Spend less on discretionary items like vacations and dining out
- Demand more pay at work so they can vacation and dine out
If Americans choose to spend less, the economy eventually slows down because two-thirds of it is tied to Consumer Spending. This is anti-inflationary.
But, if Americans demand pay raises instead, businesses eventually pass those higher wage costs back to consumers in the form of higher prices.
This is called a “wage-price spiral” and it’s very inflationary.
So, because today’s jobs report showed unemployment surging by a half-percent to 5.5%, Americans really have no choice but to follow the “Spend Less” path — they’re not in a position to demand more pay at work.
Today’s jobs data is good for home affordability because it relieves inflationary pressures in the economy and when inflation is falling, mortgage rates tend to do the same.
Better mortgage rates mean less expensive housing payments.
Employment Situation Summary
BLS.gov, June 6, 2008
(Image courtesy: Wall Street Journal)
Mortgage rates are a big deal when you’re buying a home.
With even the slighest uptick in rates, 30 years of mortgage payments can get substantially more expensive and one of the most substantial threats to mortgage rates is an economic event called inflation.
Inflation’s influence on mortgage rates is so large that markets can get jarred on just the mention of it and that’s exactly what happened Wednesday when Fed Chairman Ben Bernanke uttered “inflation” 55 times in a 5-page speech at Harvard.
The speech started at 2:45 P.M. ET and by 2:53 P.M., the damage was done.
Market players interpreted Bernanke’s remarks to mean that inflation may be worse that previously expected and mortgage rates moved up by 0.125 percent, or $8 per $100,000 borrowed.
This equates to $2,880 in extra payments over 30 years.
If you’re actively shopping for a home loan and rapid rate movements make you nervous, consider locking in your mortgage rate today; rates have been especially jumpy all year and don’t look to smooth out anytime soon.
(Image courtesy: ABC News)
When a home buyer is gifted cash for a downpayment, there is a right way and a wrong way to receive the funds.
The right way includes:
- Completing an acceptable gift letter
- Documenting the withdrawal of funds with receipts
- Documenting the deposit of funds with receipts
The wrong way is to ignore the rules that mortgage lenders clearly spell out for you.
Mortgage lenders watch gifts closely because they want to make sure that the “gift” is not really a loan-in-disguise. If it’s a loan, the total dollar amount must be counted against the home’s total loan-to-value and higher loan-to-values typically increase lender risk.
If it’s a gift, a signed and dated gift letter should accompany the home loan application. An example:
I am the [relationship to recipient] of [name of recipient] and this letter serves as evidence that I am gifting [name of recipient] [amount of gift] to be used for the purchase of the home at [complete address of property].
This is a gift — not a loan — and there is no expectation of repayment.
[Signature of donor]
For additional evidence that the gift is legitimate, the recipient should make sure that deposited funds are not commingled at the bank. If the gift is for $12,000, for example, then the recipient’s bank deposit receipt should indicate that a $12,000 deposit was made.
There may be legal and tax liabilities when gifting funds between family members so if you’re unsure about how donating or receiving a gift may impact you, call or email me. If I can’t answer your question, I can certainly refer you to somebody that can.
For your home mortgage needs call Tyler Ford or Todd Abelson; Tucson Leading Home Mortgage Team.
Mortgage approvals don’t last forever.
A conforming mortgage approval from Fannie Mae or Freddie Mac has a shelf-life of 120 days.
After 120 days, the approval expires and a mortgage applicant must re-submit his application for consideration.
In addition, a mortgage approval can “expire” within the 120-day period for other reasons:
- Change of job status or income
- Newly-acquired monthly debt (i.e. car payment, student loan)
- Change in asset levels
If your current mortgage approval (or pre-approval) is dated prior to February 3, 2008, it is now expired and your new approval may be subject to Fannie Mae’s new, more strict, underwriting guidelines.
Mortgage rates rocketed higher last week, stunning active home buyers and mortgage rate shoppers.
Some conforming mortgage rates rose by as much as three-quarters of a percent before Friday’s closing.
Even in a year in which mortgage rates have been extremely volatile, last week’s spike was a large one.
The main driver of last week’s increase was additional evidence that the U.S. economy was never in a recession at all; only that it was “weak”.
From last week:
- New Homes Sales (including cancellations) reported strong
- Durable Goods showed surprising strength
- The Chicago “Business Barometer” showed confidence
All three data points run opposite to what market players believed just six weeks ago and the reversal in mortgage rates is, in part, related to those traders selling out of bonds and moving into something else.
Another part of the shift is weak demand foreign for U.S. treasuries. Lackluster support from buyers drove down prices last week and helped push up yields.
It all adds up to mean that this is a dangerous time to float a mortgage rate and this week shouldn’t be safer than last. Friday is Jobs Reports Day and that always swings a big stick in the mortgage markets.
Until Friday, though, mortgage rates are expected to exhibit the same volatility that they have all year — some days up, some days down and most days by a lot.
Falling oil prices may create some downward pressure this week, but the overall momentum is higher.
(Image courtesy: Wall Street Journal Online)
Mortgage financier Fannie Mae is toughening its mortgage application decision-making process effective Monday, June 2, 2008.
The new guidelines will force many Americans to face higher mortgage rates, higher loan fees, or to be shut out from “prime” mortgage rates altogether.
The new “mortgage rules” include the following changes:
- Higher income levels required for basic approvals
- Interest only loans are now considered high-risk
- Condos are now considered high-risk
- 60-day mortgage lates within 6 months are a major red flag
Not all of the changes are for the worse, though.
In the new guidelines, self-employed borrowers will no longer be viewed as more risky than a W-2 employee. This will help small business owners and commission salespeople get more mortgage approvals than in the past.
Fannie Mae agreed to honor all mortgage approvals granted prior to its changes, so if you’ve been putting off that pre-approval, consider talking to your loan officer before the weekend starts.
Your mortgage approval will be much more lenient today than if you wait until Monday.
The monthly S&P/Case-Shiller Housing Price Index is a popular and often-quoted measurement of the housing market’s health. The chart above is sourced from report published yesterday.
In 18 of the 20 largest metropolitan areas, home values declined at a slower pace than in the previously measured month. The report also showed that national home prices are down 14.4 percent from March 2007.
Unfortunately, it’s the more sensation “14.4” figure that newspapers chose to report this morning. If you never went further than the headline, you’d miss a key piece of analysis.
Comparing today’s market to last year’s market is a lot less valuable than comparing it to last month’s market. That’s a better way to analyze the market’s health.
If we look beyond the headline and examine the data behind it, we see that housing may still be sagging in some areas, but it’s not sagging nearly as much as it used to.
(Image courtesy: Standard & Poor’s)
Brought to you by Tyler Ford and Todd Abelson, Tucson’s leading home mortgage team.
The market optimism that had pushed mortgage rates lower since late-March reversed last week on ever-rising oil prices and a bleak outlook from the Federal Reserve.
When gas prices reached $3.93 Friday, it re-ignited inflation concerns and inflation, you’ll remember, is the enemy of mortgage rates.
As expected, mortgage rates spiked into Friday’s market close.
Markets were closed for Memorial Day but re-open this morning with traders feeling apprehensive about mortgage market investments. There are many reasons to park money elsewhere, after all.
- The U.S. dollar is trolling near all-time lows against the Euro
- Oil markets are returning incredibly high rates of return
- Big banks are still writing off large mortgage losses
All three of these reasons reduce demand for mortgage bonds and — because mortgage rates move in the opposite direction of mortgage bond prices — mortgage rates rise.
This week, a few inflation-related data points will cross the wires including the Fed’s preferred inflation gauge — PCE.
PCE stands for Personal Consumption Expenditures and it measures the cost of living for ordinary people. It’s the Fed’s preferred measurement because PCE accounts for Americans buying more chicken when meat gets expensive, or buying more fruits when vegetables get expensive, et cetera.
PCE is different from the Consumer Price Index because CPI is a “fixed” basket of products.
If PCE is running high, expect the exodus from mortgage bonds to continue and rates to run higher. If PCE is flat or lower, mortgage rates should fall.
(Image courtesy: www.gasbuddy.com )
Dateline: Mortgage market news, Tucson, Arizona, Tyler Ford and Todd Abelson