This week's market update 8-28-2009

Hello Everyone, Once again, the markets have survived a week of huge borrowing from the Treasury. Over $107 billion in capital was sucked from the markets with little or no negative impact on rates. Many analysts (me included) are amazed at how the markets have shrugged off the never ending demand for capital by our Federal Government. In fact, I’ve got an interesting video clip that really puts the US debt picture in great perspective. Drop me an e-mail or give me a call if you’d like to see the clip. We also got GREAT news on new home sales for July this week. Sales were up 9.6% last month when a 1.5% increase had been expected. It was the fourth monthly increase in a row and proof positive that the tax credit incentives are working to move inventory! In fact, new home inventories are at 16 year lows! The only dark cloud in this report was that the median price of a new home is down 11.5% from a year ago. But fear not, prices will recover, once we get through the inventory glut! In other news this week, we have a 4.9% jump in durable goods orders in July. This was the best month to month increase for this index in two years and better than the 3.2% expected increase. We even learned this week that the recession was “less bad” than had been expected. The 2nd quarter drop in GDP was revised to down 1.0%, which in fact wasn’t a revision at all since the original report was a drop of 1.0%. However, “they” (whoever “they” is) were expecting the revised number to show a drop of 1.4% for the 2nd quarter. In summary, the news for the week was pretty positive for the economy but could have been negative for interest rates. The real “killer” for mortgage rates hit on Thursday of this week. On Thursday, the President of the Richmond Federal Reserve Bank commented that he felt the Fed might not need to buy the full $1.25 trillion in mortgage backed securities they have committed to purchase by year end. Quick sidebar…the Fed has already spent $792 billion of the $1.25 trillion so far. There’s no question that mortgage rates are as low as they are in large part because of the $20+ billion in mortgage backed securities the Treasury buys each week. If this program gets cut off early and/or unexpectedly, it could easily lead to interest rates skyrocketing higher. So let’s review, The Treasury took down $107 billion, the economic news was all supportive of a recovering economy and we had a Fed official suggest we “pull the plug” on intervention in the mortgage markets. With all this, you’d expect interest rates to be substantially higher wouldn’t you? I know I would. But to my surprise, the market was able to shake off the bad news all week (though it did rock the markets early) and we end the week basically unchanged from last week. While that may sound disappointing to those holding out for lower rates, it is quite remarkable and makes today’s low rates an even better deal than they were a week ago! So here we remain, flirting with 4.875% on a 30 year fixed rate mortgage! I’m truly nervous about how much longer rates will be able to remain this low. While I don’t expect them to go up very far as we still have a long way to go towards economic recovery, we shouldn’t be flirting with all time lows again either! Don’t forget the tax credit runs out by November 30th and with the holiday, you’d better be closing before the 25th if you ask me! I’m hopeful that Senator Isakson and his supporters will be able to get an extension and/or improvement to the tax credit for home buying as it is doing a great job at helping our market to recover. It’s a great time to buy! Have a successful weekend and please call on me if I may be of service. Blaine R. Bailey Sr. Mortgage Consultant Prestige Mortgage 678-990-9229 (fax) 404-402-7184 (mobile) baileybr@bellsouth.net