For the week of Jan 26, 2009 --- Vol. 7, Issue 4
Last Week in Review
"IT'S A CRUEL, CRUEL SUMMER...LEAVING ME HERE ON MY OWN."--from 80's band Bananarama
And that's exactly what potential home buyers and refinancers who stay on the sidelines might be singing.
Although home loan rates are very attractive now, the picture could be quite different as some inflationary factors will likely come to light heading into summer. Oil prices may be on the rise as we approach the summer driving season, some of the economic stimulus might begin to take hold, corporate cost-cutting measures could start to bear fruit, and, perhaps most importantly, the Fed will no longer be a buyer of Mortgage Bonds. These are ingredients in a recipe that could very easily result in significantly higher interest rates this summer...so if you have been thinking about acting on a home loan, do not delay.
But with no hint of inflation in the current market, why would Bond traders be fearful now? Are they listening to strange voices and what did they say? The forward looking markets got an earful from Fed Governor Frederic Mishkin last week...and he's not the only one. Mishkin said that "inflation could come to the forefront, given all of the government programs", and "once the economy recovers, liquidity must be taken out of the markets"...meaning the Fed may need to rapidly hike rates down the road to control the potential of inflation.
In other news, Stocks around the globe faced heavy selling pressure last week on renewed fears of the deepening worldwide economic slump...and this despite better than expected earnings from Google and IBM, as well as GE meeting earnings expectations. Even with the downward pressure on Stocks which can sometimes benefit Bonds, the mention of the "I" word left its mark, with home loan rates ending the week around .25% higher than where they began.
READY TO MOVE ON THAT HOME PURCHASE OR REFINANCE BEFORE THE LOW RATES GET AWAY? READ THIS WEEK'S MORTGAGE MARKET VIEW FOR A FEW IMPORTANT TIPS ON UNDERSTANDING TODAY'S LENDING CLIMATE, AND KNOWING THE SMART MOVES TO MAKE RIGHT NOW.
Forecast for the Week
Inflation chatter could come around again this week, as the Fed will be holding their regularly scheduled meetings on Tuesday and Wednesday, with their Policy Statement and decision regarding the Fed Funds Rate coming on Wednesday. Remember, the Fed made history last month when they slashed the Fed Funds Rate by .75% to the lowest target range in history of 0% to .25%. The chart below shows an interesting history of the Fed Funds Rate since 1955.
Other potential market movers include Friday's Gross Domestic Product (GDP) Report. GDP is the broadest measure of economic activity, and given the state of our economy, a negative report might not be too much of a surprise. In addition, Thursday's Durable Goods Report (i.e. items that are non-disposable, like cars, furniture, appliances, games, cameras, business equipment, etc) will give us a read on consumer and business consumption and buying behavior. We'll also get a look at the housing market this week with Monday's Existing Home Sales Report and Thursday's New Home Sales Report.
Remember: Inflation is the arch enemy of Bonds and home loan rates, and even the mention of it can have negative ramifications. We will be watching very closely to see how Bonds and rates respond to all the news of the week.
The Mortgage Market View...
The Heat is On
Homes are on sale, sellers are motivated, and interest rates are at historic lows...but may not stay that way, which means it makes sense to get moving on that home purchase or refinance you've been contemplating. But if you or one of your clients is among the smart individuals who are going ahead and taking advantage of the low home loan rates to be had right now, there are a few things to be aware of.
With interest rates at record lows, all lenders in the US have recently seen a sharp increase in loan applications - right at the time that many lenders have cut headcount to save money in a challenging economy. This means that timeframes needed for underwriting, approvals and closing have become longer than normal. Some companies have chosen to actually raise rates just to slow down the volume to a manageable level.
Sound crazy? No crazier than when you go to buy that hot new vehicle...only to find that there is no price negotiation. In fact, you wind up lucky to just pay the sticker price, as the demand usually allows the Dealer to add a markup to the price. And you don't get the car right away; you have to wait on a list for your turn to come up.
Right now, home loans are like that hot new car - but with the timer ticking on interest rates locks, there are a few things you can do to protect yourself.
First, longer lock in time frames than might normally have been considered are a necessity, to ensure that the file has time to be processed, underwritten, approved and closed in time to protect the rate lock in this extremely volatile climate. And that longer, safer lock-in period may be a bit more costly - but it's money well spent. Overall, the mind set here should not be one of greed. Don't try to squeeze every last drop out of rates. If you are within a quarter percent of the lowest rates offered in the history of this country, you did very well. And rates always shoot up higher at a much faster pace than when then dip lower. So if the savings or opportunity make sense - grab it.
Next, responding quickly to requests for information or documentation is important - the faster the file is submitted and approved, the better off we are to keep that great interest rate protected.
Finally, be aware that it may be a smart idea to pay points to gain the best interest rate - and sometimes is even necessary in today's market. Giant mortgage buyers Fannie Mae and Freddie Mac have recently imposed more "risk-based pricing adjustments", meaning that even credit scores and loan to values which in the past would have been considered very low risk, may now be subject to mandated fees by Fannie and Freddie. And based on the way lenders have changed their rate sheets over time, there is now very little "premium pricing", which used to allow options for fees like these, points or other closing costs to be covered in return for a slightly higher interest rate.
Right now is still an excellent time to act, before the great low rates of today get away from us. But let's be smart - call us for information on how we can get started right away.
The material contained in this newsletter is provided by a third party to real estate, financial services and other professionals only for their use and the use of their clients. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, we do not make any representations as to its accuracy or completeness and as a result, there is no guarantee it is not without errors.
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