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Mortgage Rate and Real Estate Update – Week of 12/17/12

Tired of hearing about the fiscal cliff and quantitative easing (QE)?   Me too.  However, there are some key things on the table in Congress that may affect the house that you own or are thinking about buying.

Fiscal Cliff and the Impact on Mortgage Rates and Deductions

Another week has passed without resolution to the ‘fiscal cliff’ that is ahead of us.  In short, the ‘fiscal cliff’, a term coined by Fed Chief Bernanke, describes a massive shortfall in revenues (taxes) in comparison to the budget.  Last year, Congress spent $3.6 trillion and only brought in $2.3 trillion in revenue, a shortfall of over 56%.  If a family were to budget their finances in the same manner, they may have earned $100k in income for the year but ended up spending every dime they earned, saved zero dollars and would have racked up over $56,000 in additional credit card debt.  No bueno, especially when the spending has been that way for years and years.  Sorry U.S. government, no home loan for you!

So with a $1.3 trillion shortfall going forward, cuts must be made to the budget and tax revenues must be increased.  Easy targets could be things like Homeland security, Energy or the Interior budget (No, not home furnishing for the White House), but these items are so small and would only account for less than 2.5% of the overall budget.  The cuts will have to come from bigger components, things like Social Security, Health and Human Services, or Defense, each of which is held close to the heart of one of the powers in Congress, whether the Defense for the GOP or social programs for the Dems.  Therein lies the stalemate so far.  Two ways of thought and two ways of spending that must reach a common ground.

However, regardless of where the cuts come from, the Tax revenues will have to be increased.  One sure way will be to raise taxes for those considered to be the ‘wealthiest Americans’, but the definition of those ‘wealthiest Americans’  is vastly different between party lines.  Republicans have acknowledged these Americans to be earning $1 million and higher where the President stands behind his definition as those earning upwards of $250k.  Whatever the collective definition ends up becoming, there will be additional tax revenue to help reduce the shortfall.

Aside from tax hikes for the wealthy, additional revenues will likely come from the elimination of certain tax deductions.  The one near and dear to our hearts is the mortgage interest tax deduction, which currently allows owners of a primary residence to deduct the interest that they pay each year from their overall income, thus reducing their tax liability.  Millions of American families are able to apply this deduction to their taxes each year and save on average $5,459 on their tax bill.  Will this cause a slowdown for housing as home buyers see less incentive to buy instead of rent?

Other tax deduction caps are likely to come into the fold, possibly placing a cap on the total deductions that someone can take.  For most individuals, the caps will be a non-issue, but for self-employed and small business owners, the caps will change the way their businesses and accounting practices are structured.

The Fed Introduces More Easing to Keep Rates Low

Amidst the talks of the fiscal cliff, the Fed held is closed-door meetings last week and announced its Fed Policy Change on Wednesday 12/12/12.  Fed Chairman Bernanke announced that the Fed will begin spending an additional $45 billion per month, targeting longer term Treasury securities, replacing ‘Operation Twist’ which expires at year-end.  The big twist came when the Fed decided to no longer use a specific timetable to indicate an end to the monetary policy.  Instead the Fed has decided that they will not start tightening monetary policy until unemployment hits 6.5% and/or inflation between 1 and 2 years ahead is projected to be no more than one half percentage point above the committee’s 2% threshold and longer term inflation figures continue to be well anchored.  The good news is that this shift in policy now allows the markets to make their own projections about when these thresholds will be reached and can adjust their trading and investment strategies accordingly.

The Fed’s Monetary Policy and How it Can Impact Mortgage Rates

Fed Chairman Bernanke announced that the Fed will continue their threshold to spend $40 billion per month targeting Mortgage Backed Securities, reiterating the early message that improvement in the housing market through a low-rate environment will be most effective path to improve the economy.  The big change comes in the decision to start changing monetary policy (heavily through interest rates) once inflation is projected to be 2.5% or higher over the next 1 or 2 years.  Since inflation has a direct relationship with mortgage interest rates, it’s highly probable that once projected inflation reaches/exceeds those levels, interest rates will go up.  The Fed will do all in its power to keep inflation with a target range.  How does the Fed control inflation?  They increase interest rates that they allow Banks to borrow money, which increases the rates that Banks have to charge to their clients.

Ahem… (raises hand).  Is it possible that all of the printing of money to be able to spend the $85 billion on mortgage and long term securities possible a risk for higher inflation and higher interest rates?

Fed’s likely response:  We have yet to be able to determine the efficacy of the quantitative easement.

Down the rabbit hole we go.  Let’s just go ahead and pretend that printing $1 trillion a year is a cause for higher inflation….just pretending though.

If the projected inflation triggers the Fed to change its monetary policy, the Fed would immediately start to increase interest rates as a way to combat inflationary pressures and reduce the supply of money in the market (make it cost more to borrow).  The end result is that the interest rates for consumers start to go up until the Fed sees inflation readings get back into the target range of 1.8% – 2%.  By that time, investors around the globe are starting say, “Wait a minute, you’ve sold me these securities on long-term mortgage and other things and they’re paying me a rate of return of 1.5%-2% but based on projected inflation, my dollar is going to be losing 3% or more per year?  So I’ll be losing money?  No thanks, I’m out.”

So what happens, investors sell their long-term securities and the only way to entice them back into the market is to….that’s right, Raise the rate or yield that they are receiving on that security.  In other words, we have to raise mortgage rates to a level that still gives investors a way to outpace inflation and make money.

The days of a 30 year fixed rate in the 3% – 4% range could be long gone, trending back to a level of normalcy of who knows, 6% or 7%?  Only time will tell.  Food for thought – if interest rates go up by one percent, a buyer looking in the $250,000 price range will have lost $30,000 in purchasing power.  If interest rates go up to 6% (last seen less than 5 years ago), the same budget would only allow a $175,000 loan amount.  That’s a difference of $75,000 in purchasing power.   It’s time to start thinking seriously about your home buying and/or home selling strategy.

Our Strategy for Home Loan Interest Rates Going Forward

Home loan rates continue to trade near historic lows and should continue to stay in its trading range for the coming weeks and possibly months.  At the same time, we do not see any reason that interest rates should get much lower than they are now, so if you are waiting around for a 2% rate on a 30 yr, we wish you the best of luck.  If it were me, I would take advantage of interest rates sooner rather than later. While the Fed maintains its goal of keeping home loan rates low for the foreseeable future, the Fed cannot control the entire market.  The $40 billion a month being used to target mortgage backed securities can help support the market, but overall market direction is based on many bigger picture items (ie.  inflation, strength of global economy, Credit ratings, etc.).

Historically, interest rates tend to be lower in the winter and creep higher during the peak home buying season in the spring and through summer.  We expect this trend to continue but will remain proactive with our clients and their home loan strategy.  If you’re happy with your home loan options, take them while you can.  Whether in 2013 or 2014, we are potentially only one bad inflation reading away from  higher interest rates.

We maintain an ongoing dialogue with our clients about the market and interest rates throughout their financing experience so we can take advantage of the lowest rates when they present themselves. We all want the lowest rate, and the best way to ensure that you get the lowest rate, is to build a relationship with your mortgage planner, so they can best advise you on when to lock in your rate. Call us today for a complimentary mortgage review or Apply Online.

fiscal cliff ahead. impact on home loan rates and mortgage interest rates

Mortgage Rate and Real Estate Update – Week of 12/03/12

No deal yet on the Fiscal Cliff and we know you’re getting tired of hearing about it.  However, home ownership is a big part of the plan.  Find out if home mortgage deductions are going away and how other news from the Fiscal Cliff talks will likely drive home loan interest rates for the coming weeks.

Mortgage interest rate and real estate news from last week:

Talks of the fiscal cliff issues continue to dominate the newswires and the mindsets of traders.  The past week has seen mortgage backed securities hold strong near historic lows and above the 50 day moving average.  The volatility picked up last Tuesday as progress was reported surrounding the fiscal cliff issues.  The positive rumored news immediately helped Stocks rally over 200 points, taking the wind out of the sails of mortgage backed securities.  This was just a glimpse of how big of an impact the fiscal cliff news will be going forward.  The good news for home loan rates came when they were able to hold on to support at the 50 day-moving-average, proving this level to be a very strong floor of support and a benchmark worse-case scenario for the near-term.

What’s coming up this week on the economic calendar and what’s the impact on interest rates?

All eyes and ears will continue to be on news coming from the Fiscal Cliff talks.  It’s all a matter of raising revenues and reducing costs, unfortunately for homeowners and prospective home buyers, eliminating the mortgage interest tax deduction would be a major source of tax revenue.  If any changes are made to the tax deductions of mortgage interest, they are likely to be phased out over many years.

With the fiscal cliff talks ongoing, the economic calendar is full of employment and jobs data.  Starting on Wednesday with the release of the ADP National Employment Report and rounding out with the Jobs Report on Friday, there is little ‘good’ news expected.  Given the impact of storms on the East coast, there will likely be an increase in the Unemployment Rate and Initial jobless claims.

Here’s our strategy for the days and weeks ahead…

As home loan rates hover near historic lows and above support at the 25 and 50 day moving average, home loan rates are not expected to make a large move in either direction.  As trading slows into the holiday season, any volatility that would drive home loan rates is likely to come from the fiscal cliff talks.  We will recommend to cautiously float interest rates in the near term.  However, should Congress find a resolution and back away from the cliff, expect the volatility to resurface at the possible expense of an increase in mortgage rates.

We maintain an ongoing dialogue with our clients about the market and interest rates throughout their financing experience so we can take advantage of the lowest rates when they present themselves. We all want the lowest rate, and the best way to ensure that you get the lowest rate, is to build a relationship with your mortgage planner, so they can best advise you on when to lock in your rate. Call us today for a complimentary mortgage review or Apply Online.

Mortgage Rate and Real Estate Update – Week of 11/26/12

It’s not a cyber Monday sale, home loan rates have actually been this low for a while now.  Thanks to the fiscal cliff issues and Eurozone drama being front and center, interest rates are holding strong near historic lows.

Mortgage interest rate and real estate news from last week:

In a holiday shortened trading week, home loan interest rates and mortgage bonds were mostly unchanged.   News that Europe is now in the midst of its second recession in four years and the U.S. weekly jobless claims coming it at their highest level in 18 months would typically spark more volatility, but interest rates seem to be comfortable in the current trading range established over the last month near historic lows.  The low volume trading and friendly Bond news allows the Fed to keep their QE3 stimulus funds available for any major volatility that may come to the markets.

What’s coming up this week on the economic calendar and what’s the impact on interest rates?

With no major economic reports due for release this week, most attention will be placed on talks of a lawmakers reaching a resolution on the fiscal cliff issues.  The markets will also be closely watching a meeting of finance ministers in the Eurozone as they digest news of the recession.  The battle grows deeper as major Euro countries like Germany, refuse to participate in further “bail-outs” of Greece unless they can make further budget cuts and commit to repay some of their debt.

In the midst of the global economic soap opera, the Treasury will be auctioning off $99 Billion in Notes this week.  Depending on the investor appetite of the 2, 5, and 7 year Note auctions, we could see volatility creep back into the Bond markets.  On the flip side, should the auction go well, the S&P 500 could slip further from its 200 day moving average, allowing home loan rates to move closer to all time lows.

Here’s our strategy for the days and weeks ahead…

Interest rates for home loans have found a comfortable trading range over the last 30 days and have managed to create a solid level of support just beneath current levels.  As long as mortgage Bonds can manage to remain above this key technical support, interest rates have a great chance to rally and move closer to all time lows for interest rates.  Our advice would be to float in the near term unless something changes, causing pricing to break through support.  With the amazingly low interest rates available to homeowners and home buyers, the time is now to consider their options for a refinance or start their planning for a home purchase.

We maintain an ongoing dialogue with our clients about the market and interest rates throughout their financing experience so we can take advantage of the lowest rates when they present themselves. We all want the lowest rate, and the best way to ensure that you get the lowest rate, is to build a relationship with your mortgage planner, so they can best advise you on when to lock in your rate. Call us today for a complimentary mortgage review or Apply Online.

Mortgage Rate and Real Estate Update – Week of 10/29/12

NYSE closed and Bond Markets closing early with Hurricane Sandy bearing down on the Northeast.  Zillow launches its “Foreclosure Center” for prospective home buyers.

Mortgage interest rate and real estate news from last week:

  • Zillow reports that U.S. home values saw their largest gain since 2006 with values jumping 1.3 percent in the third quarter
  • Zillow launches its “Foreclosure Center” to give prospective home buyers access to pre-foreclosures, foreclosures and auctions in their area – http://www.zillow.com/foreclosures/
  • Fed policy statement hints of continued slow growth with QE3 bond buying until the U.S. economy can support itself
  • Third quarter GDP grew compared to the second quarter.  Increased home buying helped fuel the growth
  • Japan launches stimulus of $9.4 billion to increase growth and avoid “the risk of a Japanese fiscal cliff”
  • Bank of America’s $4 billion purchase of Countrywide costs B of A more than $40 billion after write-downs, legal expenses, and settlements

What’s coming up this week on the economic calendar and what’s the impact on interest rates?

With the Bond Markets closing early on Monday in the wake of Hurricane Sandy, prices of mortgage backed securities opened higher but light trading is expected until the storm passes.  SIFMA, who oversees the Bond markets, has announced that Bond markets will also be closed on Tuesday.

Core PCE was released upon market opening on Monday and showed a slight increase, a signal that inflation is starting to creep into the picture.  However, the Fed still maintains a stance that inflation is not a concern.  Halloween on Wednesday could prove to be a spooky trading day as investors hope to be back in action after a weather induced trading hiatus.

Weighing heavy on their trading direction will be the ADP Employment Report, Employment Cost Index and Chicago PMI, all scheduled for release on Wednesday morning.    The reports continue on Thursday with Initial Jobless Claims and the national manufacturing index, ISM.  ISM measures expansion or contraction in national manufacturing with a number over 50 signaling expansion and a number below 50 signaling contraction.  The week closes with the Friday morning release of a highly anticipated Jobs Report.  Having shown signs of growth and lower unemployment, more of the same is expected for the last Jobs Report before the election.

Here’s our strategy for the days and weeks ahead…

Bond prices and home loan rates won’t see much activity over the coming days, but we will be on guard when the markets reopen on Wednesday.  With a heavy dose of Bond impacting news and shorter window to accomplish their Bond purchasing for the week, we could see home loan rates make an attempt to get back to their best levels ever.  We will be watching the market reports closely throughout the week.  Should pricing fall below current levels of support, we will recommend locking.

We maintain an ongoing dialogue with our clients about the market and interest rates throughout their financing experience so we can take advantage of the lowest rates when they present themselves. We all want the lowest rate, and the best way to ensure that you get the lowest rate, is to build a relationship with your mortgage planner, so they can best advise you on when to lock in your rate. Call us today for a complimentary mortgage review or Apply Online.