Everyone is constantly asking me…”What are interest rates doing?” or “How’s the housing market?” So I decided to go straight to an expert and ask him to be a guest blogger and help us all learn about interest rates.
Brian Davidson, President of Benchmark Mortgage in Shreveport, LA is today’s guest blogger. 
“By far the biggest economic news last week was the better-than-expected rate on core inflation. The Labor Department reported that the Consumer Price Index increased 0.6% in March, but the core rate, which excludes food and energy, increased only 0.061%. That’s the smallest increase since November and well below the 0.2% expected by economists.
The subdued inflation report gives new hope to the idea that the Federal Reserve may cut interest rates soon. While the Fed likes to separate food and energy from the overall inflation statistics, the European Central Bank doesn’t. As a result, while the U.S. Fed appears to be dovish, the ECB is much more hawkish, which should help to explain why the dollar has been so weak and the euro so strong. I should add that the Fed prefers the Personal Consumption Expenditure index, which is running at a slower pace than the CPI, since it’s not as affected by higher housing costs.
One reason why the Fed may want to cut rates sooner rather than later is that the housing market’s woes are worsening. Foreclosures rose 47% in March. Half of the March filings were in just five states; California, Florida, Texas, Michigan and Ohio, which is partially a reflection of local property markets and varying state laws on foreclosure.
One in every 389 households in California is currently in foreclosure. Of the 10 cities with the highest foreclosure rates, six are in California (Stockton, Vallejo, Modesto, Sacramento, Riverside and Bakersfield). Nevada, scored the highest foreclosure rate at one in every 183 households, with almost all the foreclosures in Las Vegas. The states with the highest foreclosure rates were Nevada, Colorado, California, Georgia, Arizona, Michigan, Florida, Ohio, Indiana and Illinois.
It will be interesting to see how fast home prices fall. Ironically, this should help the CPI to settle down a bit since approximately 42% of the CPI is attributable to housing costs. Complicating matters is the more than eight months of unsold homes in inventory, which will continue to climb due to rising housing starts, which unexpectedly increased 0.8% in March to 1.518 million.
Since the Federal Reserve ultimately regulates the banking industry, it’s watching the sub-prime crisis carefully. Seven of the top 10 sub-prime lenders are based in California, so the surge in the state’s foreclosures is likely starting to worry the Fed, especially if it starts to impact selected California banks. Between the unfolding sub-prime crisis, dramatically rising foreclosures and housing’s overall drag on the economy, I believe that the Fed may cut interest rates soon.
The initial report on first-quarter GDP growth, due this Friday, isn’t shaping up to be very strong. A GDP report under 2% will likely cause the dollar to weaken further and place more pressure on the Fed. The housing market will likely subtract 1.2% or more from first-quarter GDP growth. The economy is still growing thanks to rising exports and strong consumer spending, but looks increasingly fragile. I expect that the Fed will come to the rescue and cut interest rates in the upcoming months.”
I hope you enjoyed our guest blogger!
Darryl Glade ~ RE/MAX 100% Club ~ www.DarrylGlade.com
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