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Your Interest Rate Update

October 16, 2009

Happy Halloween! Trick or Treat?

That's one way to look at the US economy during the third quarter where GDP growth beat most analysts expectations with a 3.5% annualized growth rate. Was it a trick, or some kind of economic treat? It sort of depends on how you look at it, but either way, we probably won't know for sure for another quarter or two.

You can already hear one side touting it as a huge treat. The government stepped in when consumers and businesses were reeling most, and spurred some spending. Those in the trick camp will tell you that we just got an injection of government steroids, and once those shots stop, so will the economic growth.

There's no doubt that the government stimulus drove the economic engine in the third quarter. Of the $787 billion stimulus plan, about $207 billion has been spent (www.recovery.gov). And, of the 3.5% GDP number for Q3, most of the boost came from housing (driven by the tax incentive) and autos (due to cash for clunkers). Without that, it's very likely GDP would have been flat, or maybe even negative.

The question is, was it worth it? I tend to think so. Without the intervention, both economic momentum and psychology would have continued their downward trend, making recovery even harder.

As we move into Q4, it'll be interesting to see if the increased consumption fueled by government stimulus can continue. Personally, I'm skeptical, but at least the monetary and fiscal policies have put a floor under our economic slide. But, with unemployment likely rising further, I don't see how we can expect a strong consumer to come back that soon.

That's partially why we saw the stock market give up all of Thursday's gains yesterday. The hot GDP report got everyone fired up on Thursday, only to be dashed on Friday by the weak consumer spending number that posted a -.5%, dip, meeting analysts' expectations, but sliding back about 2% from the month prior's 1.4% mark, which was fueled by cash for clunkers and homebuyer tax credits.

This realization helped fuel a rally in bonds and mortgage backed securities, which is interesting because the waves of unprecedented supply continue to roll in. Yet rates on mortgages and yields on treasuries remain very low because the appetite to soak them up seems to be strong. Is money moving back into safety and income generation? Is it a story of supply creating demand? Or....are bonds, treasuries and mortgage backed securities over bought, meaning we could see a correction in the other direction in those markets?

As always, there are a lot more questions, than answers.

So, what will drive economic growth going forward? I think we'll continue plodding along. I don't put the recent GDP print as either a trick, nor a treat. It was the result of the necessary evil of massive government intervention.

The real trick is going to come as we try to wean off this government crutch, live within our means, and increase revenue without imposing crushing tax increases on businesses and individuals that could risk pushing a fragile economy back into recession.

I'm glad I'm not faced with making those choices. I'll just continue giving you my thoughts on how they may impact you and your finances. As much pain and discomfort this economic cycle has created, there are valuable lessons to learn, and some terrific opportunities to sieze.

As always, if you, your family, or friends have any questions about financing residential or commercial real estate, please call or email me. If you're in the market for a Jumbo ARM, the rates are screaming!! Happy Halloween! E

Conforming	Rates	Points	APR	Loan Amt	Payment
30 yr fixed mortgage	4.875%	1	5.075%	$300,000.00	$ 1,588
15 yr fixed mortgage	4.375%	1	4.575%	$300,000.00	$ 2,276
3/1 ARM	4.000%	1	4.190%	$300,000.00	$ 1,432
5/1 ARM	4.000%	1	4.210%	$300,000.00	$ 1,432
5/1 ARM Int Only	4.125%	1	4.385%	$300,000.00	$ 1,031
Jumbo (ask me about the new limit, per your zip code)
30 yr fixed mortgage	6.625%	1	6.751%	$550,000.00	$ 3,522
15 yr fixed mortgage	5.250%	1	5.505%	$550,000.00	$ 4,421
3/1 ARM	3.875%	1	4.055%	$550,000.00	$ 2,586
5/1 ARM	4.875%	1	5.095%	$550,000.00	$ 2,911
5/1 ARM Int Only	5.000%	1	5.250%	$550,000.00	$ 2,292
Rates subject to change without notice.
These rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.