Archive for the 'Interest Rates' Category
When mortgage rates change rapidly, it’s a fiscal challenge to shop for a home and/or home loan.
Lately, mortgage rates have been especially volatile, mirroring the wild moves of the stock market.
Here’s how up-and-down stock markets have been in 2008: Through last week, the S&P 500 Index changed more than 1 percent per day on 28 separate days.
This represents 52 percent of all trading days and is the most volatile measurement since 1938.
Mortgage financing is impacted by stock market changes because when money flows into stocks, it tends to come from bond markets. And, when money leaves stocks, it tends to “gets parked” in bond markets.
Because mortgage bonds set mortgage rates, you can understand how stock market volatility can make it difficult to predict what home loan payments might look like.
Volatility is expected to continue for the next several quarters so if you see a mortgage rate you like today, consider locking it right away — it probably won’t last long.
Source
U.S. Stock Volatility Climbs to Highest in 70 Years, S&P Says
Jeff Kearns
Bloomberg, March 20, 2008
https://www.bloomberg.com/apps/news?pid=20601213&sid=av840GLwE4UA&refer=home
The Federal Open Market Committee meets today and will issue a press release in addition to cutting the Fed Funds Rate at 2:15 P.M. ET.
The verbiage of the press release will be as widely watched as the rate cut itself because markets are curious about how far the Federal Reserve will go to lessen the impact of an economic recession.
With every Fed Funds Rate cut, recession becomes less likely, but the other side of the equation is that the probability of long-term inflation grows.
Like recession, inflation can be bad for the economy, too.
The Fed Funds Rate now stands at 3.000% this morning and the FOMC is expected to lower it by 0.750% or more this afternoon.
Mortgage rates are rising today because cuts to the Fed Funds Rate weaken the U.S. dollar which, in turn, makes mortgage re-payments less valuable to investors.
After briefly exceeding its all-time high, oil closed Monday at $102.45.
Rising energy costs can lead to inflation because American Business eventually passes on its higher costs to American Consumers.
When consumers have to spend more money for the same amount of product, it’s called “inflation”.
Another way to look at inflation is like an erosion in the value of a dollar.
The presence of inflation causes mortgage rates to rise because mortgage debts are repaid in dollars. If those dollars are losing their value, the rates tied to those debts have to increase to “cancel out” the erosion.
This is why mortgage rates spiked Monday. As oil prices rose, the fear of inflation grew larger.
Over the next few weeks, expect mortgage rates to be highly sensitive to oil prices. As oil prices rise, mortgage rates should, too. As oil prices fall, mortgage rates should follow.
(Image courtesy: New York Times)
Federal Reserve Chairman Ben Bernanke testified to Congress Wednesday, alluded to further rate cuts to support an ailing U.S. economy.
Already, the Federal Reserve has lowered the Fed Funds Rate by 2.250% since September 2007.
The graph at right comes from the Wall Street Journal and it highlights a very important correlation between the Fed Funds Rate and mortgage rates.
The correlation is that there is no correlation.
Since the Fed began cutting rates five months ago, mortgage rates on 30-year fixed mortgages are higher, as are jumbo mortgage rates. ARMs, however, are lower.
Especially noteworthy is how 30-year fixed rates started to spike as the Fed cut rates through January. Another half-point cut in March could have a similar impact.
Mortgage markets are conflicted about the U.S. economy and the confusion is impacting home buyers.
If you’ve recently tried to lock a mortgage rate, you’ve probably experienced it personally.
On one hand, reports of plunging sales suggest that the economy is slowing more quickly than expected.
This is recessionary and tends to be good for mortgage rates. So, some days, rates have been down.
On the other hand, some pundits (including a Federal Reserve official) are saying that recent Fed cuts may stoke inflation in the second half of 2008.
This is inflationary and tends to be bad for mortgage rates. So, some days, rates have been up.
Neither side is wrong — 2008 will likely show signs of both recession and inflation at some point. Markets are waking up to this fact.
And this is why mortgage rates have changed so much from day-to-day — investors can’t agree upon exactly when the Fed rate cuts will work their way through the economy. With each “target date” change, mortgage rates change.
This week, expect more of the same volatility with January’s Retail Sales data being released and five Fed speakers (including Fed Chairman Ben Bernanke) stumping.
The spoken word of the Fed Chief can be a very powerful influence on markets.
If you’ve recently gone under contract for a home, you may find peace of mind by concentrating on a mortgage payment as opposed to a mortgage rate; rates could change multiple times each day and timing a market-bottom can be futile.
(Image courtesy: CNN)
The Fed lowered the Fed Funds Rate by 0.500% to 3.000% yesterday. The move was widely anticipated and so Wall Street’s reaction was muted.
Because it is tied to the Fed Funds Rate, Prime Rate also fell by 0.500% yesterday. Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month’s statements.
In the statement above — as explained by The Wall Street Journal — the Fed expresses concern about the housing and jobs markets, while noting that inflation is less of a worry. This leaves the possibility of future Fed Funds Rate cuts open.
Source
Parsing the Fed Statement
The Wall Street Journal Online
January 30, 2008
https://online.wsj.com/public/resources/documents/info-fedparse0801b.html
When the Federal Open Market Committee adjourns from its two-day meeting today, it is widely expected to lower the Fed Funds Rate.
This does not mean that mortgage rates will fall.
In fact, using history as an indicator, we should expect mortgage rates to rise if the Fed Funds Rate falls.
Remember: The Fed Funds Rate is an overnight interest rate between banks; mortgage rates are long-term rates based on the bond market. These are two very different animals.
The FOMC’s press release hits the wires at 2:15 P.M. ET.
The Dow Jones Industrial Average surged 631.86 points in the last three hours of trading yesterday as traders piled into equities.
Fueling the rally? The bond market.
For as much as stocks gained today, bonds lost. Including mortgage bonds. The dramatic sell-off created a huge swing in mortgage rates and erased nearly all of 2008’s rate improvements.
This is one reason why it pays to be aware of your home loan. That way, when markets change and a doorway to payment reduction opens, you can quickly step through it.
As yesterday illustrated, with mortgage rates, opportunity is often fleeting.
With stocks poised to rise again today, it should likely happen at the expense of bonds. Mortgage rates are trending higher, too.
(Image courtesy: The Wall Street Journal Online)
In a surprise move yesterday, the Federal Reserve cut the benchmark Fed Funds Rate by three-quarters of a percent. Mortgage rates fell only slightly as the surprise quickly wore off.
To understand how the element of surprise works in mortgage markets, think about a Jack-in-the-Box.
Everybody knows that the clown is coming, they just don’t know how many turns of the crank it will take. When it pops out, there’s an immediate shock. Then it’s back to business.
This simplified analogy is similar to what happened yesterday, post-rate cut. It’s why many people that expected rates to fall further were dissappointed. Read the rest of this entry »
When the Federal Reserve lowered the Fed Funds Rate by 0.75% yesterday, it was in response to economic weakness that mounted since its last meeting December 11, 2007.
By contrast, the mortgage markets meet every day.
Because of this, mortgage rates had already “priced in” the weakness to which the Fed was reacting.
This is why mortgage rates did not fall by the same 0.75% yesterday — they only fell slightly. Read the rest of this entry »
