March 4, 2008

What Were The Markets Thinking?

It must be pretty bad if we start referring to the "markets" as breathing, living organisms. But often we wonder whether the markets have a thought process or if they are like reptiles, reacting to their environment. Last Tuesday the markets witnessed oil prices hitting another record. Producer prices surged as inflation again reared its ugly head. Consumer confidence fell to its lowest level in over five years. And December home prices plunged to cap off the worst year on record. Sounds like a disaster, right?

Well, the stock market went up that day. How could the stock market go up with all that bad news? Did the markets know something that we did not? Is recovery around the corner? Well, Federal Reserve Chairman Bernanke's testimony before Congress did not give any indication that the market reaction was on target. Though he did cite the threat of inflation, he also indicated that we are a long-way from being inflicted with 1970's-style stagflation. According to the Fed Chief, the primary risk is a slow economy. Bernanke also indicated that the Fed is ready to take additional action. By the end of the week, the markets must have listened, because the stock market tanked and rates came down significantly. Now the markets are pretty sure March 18th we will see another decrease in rates from the Fed.

The Markets. Rates rose sharply the past week, however, these numbers were reported before the market rally brought rates down significantly towards the end of the week after Bernanke's testimony before Congress. Freddie Mac announced that for the week ending February 28, 30-year fixed rates averaged 6.24% up from 6.04% the week before. The average for 15-year fixed rose to 5.72%. The average for one-year adjustables increased to 5.11% and five-year adjustables rose to 5.43%. A year ago 30-year fixed rates were at 6.18%. "Long-term fixed rates trended up for a third week, bringing rates on 30-year and 15-year fixed-rate mortgages back to their levels of last November," said Frank Nothaft, Freddie Mac vice president and chief economist. "Refinancing activities, which had surged to a 12-month high in January, according to Freddie Mac's monthly refi share report, are likely to ebb following this recent rise in rates."

Current Indices For Adjustable Rate Mortgages
Updated February 29, 2008

During the housing boom, updating a kitchen with high end materials like cherry wood cabinets and a Viking stove was a sure bet to boost a home's value. Homeowners often recovered about 80% of the cost when the house was later sold. But with so much more inventory on the market for buyers to choose from, they just aren't as impressed with the bells and whistles. Now most upscale renovations are returning less than 70% of their cost, according to a recent survey from the National Association of Realtors (NAR). "Pay-back for high-end projects has declined over the past few years," said Kermit Baker, chief economist for the American Institute of Architects (AIA). "People planning to sell shouldn't over-improve," he said. "They won't get the money out if they sell in the next two or three years." NAR's survey revealed that returns on investment for a wide range of high-end interior redecorations dropped in 2007. An upscale bathroom renovation cost an average of $50,590, nationally, but only added $34,588 to house value - a 68.4% return. In 2006, a high-end bath renovation returned 77.4% of its cost. Adding a brand new bath didn't pay off as well either, earning just a 69% return in 2007, compared with 72.8% in 2006. High-end kitchen remodels held up better, adding value equal to 74.1% of the cost, compared with 75.9% in 2006. Source: CNN/Money

The National Association of Realtors testified Thursday in Congress that the Veterans Home Loan Guaranty Program should continue to be a valuable asset in helping the nation's veterans achieve homeownership in a way that is safe, fair, and affordable. NAR cited a 2004 study that found 82 percent of first-time homebuyers through the VA program could not qualify for a conventional loan. The report also found that 61 percent of those borrowers could not meet the downpayment or debt-to-income ratios required to qualify for an FHA loan. NAR urged the House Subcommittee on Veterans Affairs to reform the Veterans Home Loan Guaranty Program so it can better serve many more veterans. NAR asked the subcommittee to make various program enhancements to give military families the opportunity to become home owners. These enhancements include increasing the VA loan limits in high cost areas to 150 percent of conforming loan limits, easing the refinancing requirements and restrictions for veterans, especially those that have fallen victim to risky subprime loans and offering permanent authorization for the guarantee of adjustable-rate mortgages and hybrid ARMs. Source: National Association of Realtors