February 26, 2008

Inflation Watch

If the economy is slow, why would long-term rates be rising? There answer is found in one word: Inflation. As oil went past the $100 mark again, the government released a consumer inflation report which showed inflation had averaged 4.3% over the past 12 months and the core inflation rate which excludes food and energy had posted its largest one-month jump in 19 months. Meanwhile, the Federal Reserve Board was busy revising their forecast which called for no recession but a slower economic growth of below 2.0% for the year while raising their outlook for inflation. Even though the minutes of the past Fed meeting stated that they stood ready to decrease rates again, if there is indeed no recession and inflation continues to rear its ugly head, the markets do not feel that the Fed will be able to do much. Many times in the past year we have warned of the word "Stagflation" which describes a slow economy and high inflation. Ordinarily, inflation should die down when the economy slows.

There is one other explanation for rising long-term rates. And it is good news. The markets may feel that the crisis in the credit markets is close to coming to an end. Many investors have put their funds into Treasuries in a "flight to safety" and money will be moved to other "riskier" investments as the crisis lessens. Why is that good news? The secondary market for mortgages would be one place that benefits from this trend-including jumbo rates and adjustables. Will inflation slow and the credit crisis end? These are questions to be answered in the coming months.

The Markets. Fixed rates rose the past week. Freddie Mac announced that for the week ending February 21, 30-year fixed rates averaged 6.04% up from 5.72% the week before. The average for 15-year fixed rose to 5.64%. The average for one-year adjustables decreased to 4.98% and five-year adjustables rose to 5.37%. A year ago 30-year fixed rates were at 6.22%. "After trending up in the past two weeks, long-term fixed rates are back up to nearly where they were at the beginning of the year. In contrast, average rates on adjustables are about 0.5 percentage points below levels of the first week of this year," said Frank Nothaft, Freddie Mac vice president and chief economist. "As the spread between long-term fixed-rates and adjustable-rates widens, it's possible we could see a slight increase in the popularity of adjustable-rate mortgages. In Wednesday's release of the minutes of the Federal Open Market Committee's most recent meeting, the Federal Reserve reduced its forecast of economic growth for this year to a rate of 1.3 to 2.0 percent, down from the 1.8 to 2.5 percent forecast from last October. The sluggish housing market and tight credit conditions were among the factors contributing to lowered projections. Indeed, although January's housing starts showed an increase from December's level, the gains were from multifamily properties. Single-family construction in January fell to the lowest level since January 1991 and especially weak were single-family housing starts in the West, which experienced the slowest pace of construction since the beginning of the series in 1959."

Current Indices For Adjustable Rate Mortgages
Updated February 22, 2008

Choice summer vacation rentals are going fast all over the country, up 10 percent or more over last year, property managers say. Demand is particularly high in the most expensive resorts like Aspen, Colo,. and Malibu, Calif. In Amagansett on Long Island's east end, rentals are 50 percent filled, a month before the usual March rental season, says Rick Hoffman, regional vice president at Corcoran Group. Demand for rentals on Cape Cod, Mass., is running 30 percent ahead of last year, but rates are flat, says Bett McCarthy, vice president of Kinlin Grover, which manages about 2,000 summer properties. Housing experts say the health of this market is surprising considering the sagging economy. But Justin Halloran, vice president of U.S. operations for HomeAway, a classified Web site for private home rentals, is among those who say people are choosing rentals they can drive to as opposed to more exotic, and expensive, vacations. Source: The New York Times

Despite continuing turmoil in the housing and financial markets, a U.S. recession is not imminent, partly because the housing downturn is "nearly over," according to The Conference Board. Housing will likely reduce growth by about 0.4% this year, the board said, but housing affordability is improving and recent interest rate cuts and home price declines should improve it further. Meanwhile, demographic trends favor housing, and the rise in households is outpacing the rise in permits. "All of this adds up to good structural demand for housing if the credit markets and lending institutions can ease the credit flow," the Conference Board said. Indeed, U.S. Sen. Pete Domenici (R-N.M.), after a private meeting with Federal Reserve Chairman Ben Bernanke, said the central bank chief anticipates signs of a rebound in the housing market by the end of 2008. Sources: Investor's Business Daily and National Mortgage News