Daily Mortgage Gazette

The Federal Open Market Committee voted to leave the Fed Funds Rate unchanged today within its target range of 0.000-0.250 percent. The Fed also reiterated its plan to support the mortgage market to the tune of $1.5 trillion.

In its press release, the FOMC noted that the economy may still be contracting, but that it’s not happening with the same speed as in prior months. Household spending is stabilizing and financial markets are “easing”.

Nevertheless, threats to the recovery are everywhere with the following items on the Fed’s short list:

• The growing ranks of unemployed workers
• The reduction of housing wealth nationally
• Reduced inventories and investment from business

Furthermore, the FOMC fingered today’s inflation levels as too low to support economic growth. This justifies the Fed’s plan to hold the Fed Funds Rate near zero percent “for an extended period”.

For home buyers and refinancing homeowners, today’s press release was not favorable.

After the Fed’s announcement, stock markets rallied on the idea that the worst of the economy really is over and that led to a broad bond market sell-off. Mortgage rates spiked in response, adding as much as 0.125 percent, in some cases.

The FOMC’s next scheduled meeting is June 23-24, 2009.

Source
Parsing the Fed Statement
The Wall Street Journal Online
April 29, 2009
http://online.wsj.com/public/resources/documents/info-fedparse0904.html

The Federal Reserve adjourns from its two-day meeting this afternoon. It’s one of 8 scheduled meetings each year for the Federal Open Market Committee.

Like all FOMC get-togethers, the purpose of the meeting is to discuss financial and economic conditions in the U.S., and to make new policy to stimulate or retard economic growth, when necessary.

The Federal Reserve’s main tool for reaching this goal is the Fed Funds Rate.

When the Fed lowers the Fed Funds Rate, growth is stimulated. When the Fed raises it, growth is slowed. The Fed has other tools at its disposal, of course, but the Fed Funds Rate is the most common and most well-known.

Fed meetings are highly anticipated events to markets because the central bank’s can change the course of the U.S. economy with just a statement. As a result, traders tend to get jittery in advance of a Fed press release which often leads to erratic trading patterns.

With the economy continuing to teeter between growth and recession, the Fed has pledged to hold the Fed Funds Rate steady for as long as necessary. Therefore, it won’t be what the Fed does that could move mortgage rates this afternoon; it’ll be what the Fed says.

Post-meeting, the Federal Reserve will publish a press release summarizing the current economic conditions and the biggest longer-term risks that exist. If growth and inflation are identified as threats for late-2009 and 2010, mortgage rates will rise. This is because inflation is linked to higher mortgage rates.

The Fed’s press release hits the wires at 2:15 PM ET today. If you’re the cautious type, consider locking your mortgage rate prior to the release.

Monday, mortgage markets improved with news of new Swine Flu cases.

It’s a classic example of Safe Haven buying and today’s rate shoppers will see the benefits.

Mortgage rates improved about 0.125 percent Monday.

It’s not an official term, but “Safe Haven buying” describes the trading patterns in which large numbers of investors move money away from risky investments and toward safer ones. As a general rule in Safe Haven buying, stocks sell off and bonds make gains, including mortgage-backed bonds.

Fears that a global Swine Flu outbreak would slow the global recovery is a major reason why mortgage rates improved Monday.

Dumping risk is a common reaction on Wall Street when unexpected events occur. Because the future is uncertain, traders prefer to play it safe. Hence the jargon-like term, “Safe Haven buying”.

If nothing else, Monday’s mortgage rate action reminds us that the biggest influences on the market are often not the events we can prepare for. It’s the events we never saw coming.

This morning, with known Swine Flu cases spreading to Asia and a Phase 4 Alert from the World Health Organization, Safe Haven buying is continuing. However, with the Federal Reserve meeting today and tomorrow, markets could be ripe for a correction.

(Image courtesy: Niman and Google Maps)

Last week, like the 3 weeks prior, mortgage markets were all over the place from day-to-day.

But, also like the 3 weeks prior, when the week ended Friday, rates were right back where they started from Monday.

For the 4th straight week, mortgage rates started and ended the week essentially unchanged.

Whether or not this is good news depends on your perspective.

For active home buyers who have yet to find the “right home”, long-term flatness like this is terrific. While interest rates stay even, buyer purchasing power holds flat and pre-approval letters stay valid.

For buyers under contract or homeowners looking to refinance, though, the market’s pattern is a little more rough. Although rates are holding steady week-to-week, the day-to-day action is quite different. Bond markets are volatile and rate swings of a quarter-percent in a day have been common.

How good of a rate you get depends on day on which you shop. This complicates the process of “locking a rate” and makes it very hard for people trying to time a market bottom.

This week, though, the market may finally make a run and break its range.

Aside from it being an unusually data-heavy week, the Federal Reserve meets Tuesday and Wednesday to discuss monetary policy. The data combined with the Fedspeak may push the markets one way or the other towards economic optimism or pessimism for the latter half of 2009.

Lately, it’s been a combination of the two — a “cautious optimism” — and that’s a big reason why mortgage rates have held in a tight range for so long.

Understand, though, that when mortgage rates finally do move, they’re going to move in a big way. So, if you’re among the crowd looking for lower rates, the best possible outcomes you can hope for this week are:

• Weak consumer confidence data (Tuesday, Friday)
• Weak consumer spending data (Thursday)
• Falling “cost of living” calculations (Thursday)
• Fed concerns about deflation and/or recession (Wednesday)

Any of these four events would likely temper hope for a quick economic revival, sending mortgage rates lower. On the other hand, if confidence or spending is strong, or the Fed has no regard for deflation or recession, expect mortgage rates to rise.

The days of rock-bottom housing prices may be reaching an end.

According to the National Association of REALTORS, the number of Existing Home Sales fell by a modest 140,000 units last month. It’s the fifth straight month in which home sales straddled the 4.5 million mark.

The national housing inventory is down 900,000 from its July 2008 peak.

These are two encouraging signs.

Meanwhile, in a separate report, the Commerce Department said the supply of newly-built homes for sale is at a 7-year low. This, too, is a positive signal for housing.

Home values are based on supply and demand. If the number of homes for sales falls while the number of buyers stays constant, home prices will rise. This is because the same number of buyers are competing for fewer properties. It’s basic economics and that may be what we’re seeing right now in the marketplace.

But the balance could shift further. Remember: the March housing data doesn’t account for first-time home buyers that used the $8,000 First-Time Homebuyer Tax Credit. Because the stimulus package didn’t pass until February, buyers on the program likely hadn’t closed on their respective homes before March data was released.

There’s a big piece of the demand side of the equation unaccounted for, in other words, and if you’re an active home buyer now, you’re probably hearing a lot about multiple-offer situations and seeing this action first-hand.

Data from the housing market hasn’t been outstanding, but it’s definitely not looking worse. Sales levels, inventories and home prices appear to be leveling off nationally and the number of active seems to rising.

Overall, it points to higher home values ahead.

If falling home values is what prompted Fannie Mae and Freddie Mac to tighten mortgage guidelines in 2007 and 2008, America’s mortgage applicants may get their long-awaiting loosening within the next 18 months.

According to a government report, the values of homes financed with conforming mortgages rose for the third straight month in February.

This is an important piece of data because as values rise on the homes against which conforming mortgages are made, Fannie Mae and Freddie Mac’s respective loan portfolios get less risky.

With less risk related to home values, there’s an opening for the agencies to assume more risk on individual borrowers.

A guideline loosening would help home loan applicants that currently find themselves ineligible for conforming mortgage financing — often the least costly source for mortgage money.

Pressed for profitability, it’s unlikely that Fannie Mae or Freddie Mac will loosen their respective guidelines prior to 2010, but if the Home Price Index continues to show improvement, it’s good news for the agencies which, in turn, is good news for people in want of a home loan.

HPI shows February 2009 home values on par with the values of April 2005.

National real estate data helps economists identify trends in the housing market. It shapes policy and influences markets.

For active home buyers and home sellers, though, national real estate data is irrevelant. This is because national data says nothing for the factors determining home prices in any given zip code.

See, national real estate news is mash-up of data. It’s 128,203,000 homes from all 50 states. Each of these states has its own economy and there are different factors that drive home values in each

Most Americans understand this.

But, if we dig deeper, we see that within those states, there are more than 19,000 incorporated cities — plus thousands of unincorporated ones. And like the 50 states, city-to-city home values vary by economy, too.

Furthermore, each city is comprised of areas, and those areas can be broken down into neighborhoods and then sub-divided again into streets, with blocks.

It’s apparent that a random home in Alabama can’t be compared to a random home in California. Yet, that comparison is exactly what you’re getting with national real estate data and why we can’t rely on it to say “values are up” or “values are down”.

Values depend on what’s happening locally.

For buyers and sellers, the underlying goal is to meet at “the right price”. To reach that sort of price discovery, you have to look local.

It’s not as easy as it sounds.

Local real estate trends is a topic that’s too narrow to be covered by the national press. It’s even too narrow for local papers. Therefore, buyers and sellers have two places to turn:

1. A general real estate website
2. A practicing real estate agent

Using both sources for local data is common among today’s buyers and sellers.

National real estate news offers little value with respect to home price negotiation. Because all real estate is local, your real estate data should be, too.

The Federal Reserve meets next week for a policy-setting meeting.

It’s one of 8 scheduled Fed meetings this year in which the Federal Open Market Committee votes on whether to raise, lower, or leave unchanged the Fed Funds Rate.

Based on data compiled by the Federal Reserve Bank of Cleveland, Wall Street’s expectations of the Fed Funds Rate post-meeting are as follows:

• 97 percent probability that the Fed Funds Rate holds at 0.000 to 0.250%
• 3 percent probability that the Fed Funds Rate is raised to 0.750%.

There is no expectation for a 0.500% Fed Funds Rate.

The Fed Funds Rate influences the economy by changing borrowing costs for banks, businesses, and consumers. When the Fed Funds Rate is lowered, “cheaper money” is meant to speed the economy forward. When the Fed Funds Rate is raised, by contrast, costly borrowing tends to slow the economy down.

Changes to the Fed Funds Rate do not directly correlate to changes in mortgage rates.

Because Wall Street is nearly unanimous in its Fed Funds Rate prediction, though, expect the market’s FOMC focus to be on what the Fed says rather than what it does.

If Ben Bernanke & Co. express concerns about long-term inflation and the need to contain growth, mortgage rates will rise in response. On the other hand, if the Fed says that growth is expected to be within a tolerable range, mortgage rates should idle.

In other words, there’s little benefit in waiting for the Fed’s meeting to make your “Float or Lock” mortgage rate decision. In a worst-case scenario, mortgage rates rise. In a best-case scenario, they likely stay the same.

The Fed’s two-day meeting adjourns Tuesday, April 29 at 2:15 PM ET.

For the third week in a row, mortgage markets improved early in the week, only to give back the gains before Friday’s close.

Mortgage rates ended last week exactly where they started. However, if you locked your mortgage rate Tuesday, you got a rate decidedly lower than someone who waited until Friday.

Last week, one of the biggest mortgage rate drivers was a series of surprisingly strong corporate earning reports, including those from financial firms Goldman Sachs and Citigroup.

The positive reports pushed the Dow Jones Industrial Average to its 6th consecutive weekly gain. This is the market’s longest winning streak in two years and its best 6-week rally since 1938, in percentage terms.

In part, the rally is boosting Consumer Sentiment, too. According to a survey, Americans are feeling better about the economy than at any time since last September’s meltdown.

But while stock market rallies and rising consumer sentiment can be good for our investment portfolios, they’re not always welcome when we’re shopping for mortgage rates. This is because the bond market is considered a “safe place” for money, an alternative for when stock markets are risky.

When market risk is reduced like, say, following 6 consecutive weeks of gains, the safe haven of bonds loses some of its importance to investors.

As a result, bonds start to sell-off so more cash is available to invest in equities. Bond prices suffer when this happens and, because mortgage rates are based on the price of mortgage bonds, mortgage rates suffer, too.

This week, there are a number of large corporations reporting first quarter earnings including banking behemoths Bank of America and US Bank, plus companies like IBM, AT&T and McDonald’s. Strong earnings may — again — lead mortgage rates higher.

If you’re among the thousands of Americans still waiting for mortgage rates to “bottom out”, consider that the bottom may have already been touched.

It’s tough to follow mortgage rates in real-time so, at least in the short-term, you can find some clues in the stock market. If stock markets are rising this week, it’s likely mortgage rates are, too.

With respect to housing data, news is rarely positive or negative on a universal level. There’s always two perspectives to consider, after all.

1. The home buyer’s perspective
2. The home seller’s perspective

Usually, when data is beneficial to one group, it’s less beneficial to the other. This is true for rising home prices, average days on market and so forth.

Today, the group that gets the most benefit from data is the home seller group.

Published Thursday, a government report showed that Housing Starts fell 11 percent nationwide in March and also fell short of analyst expectations. A “Housing Start” is a new housing unit on which construction has started.

The press is calling this a stumbling block for the economy, but that’s not exactly true.

Fewer Housing Starts last month means that fewer new homes will come on the market later this year. This is not necessarily bad news. Especially if you’re planning to sell your home in the latter half of the year. With fewer homes for sale, the supply-and-demand curve should shift in favor of home sellers. This helps stabilize home prices at a time when they might otherwise be prone to fall.

If it’s true that stable housing markets are key in an economic recovery, then fewer Housing Starts is actually a push in the right direction.

But there’s more to the story (as always).

As footnoted in the Commerce Department’s report, a statistical disclaimer states that the Housing Starts data’s Margin of Error was so high that the report’s conclusion is just a guess. Technically, the entire report is invalid anyway

So, the government won’t issue its final March 2009 Housing Starts data for months, but if the initial figures stick, home sellers may be in position to command higher sale prices later this year to the detriment of home buyers. It’s basic economics.

And from a home seller’s perspective, that news is good.