Hello Friends
We are two weeks away from the next Federal Open Market Committee meeting, chaired by Ben Bernanke, to determine economic policy. At this meeting, they must decide whether it makes sense to lower the Discount Rate (the rate the Feds lend to banks over-night), the Federal Funds Rate (the rate that banks lend to each other and the rate that the Prime Rate adjusts to), or both. Remember that these key indexes are short term rates and while they may make your home equity loans and credit card interest fall, they are NOT directly connected to mortgage interest rates. In fact, when the Feds surprised most, including me, by dropping both indexes by ½ point on September 18th, mortgage rates actually climbed in the week following.
Why is that? Immediately after the Feds made their decision, the dollar accelerated its decline against the Euro. This is inflationary as products imported into the US become more expensive as the dollar becomes worth less. A related concern is the cost of crude oil. If the dollar is worth less, crude oil will cost more. At this writing, crude oil closed at $89.47/barrel and the dollar closed at a value of $1.4294 per Euro...both records. When there are inflation concerns, investors sell mortgage backed securities moving mortgage rates up.
But market participants are looking for confirmation that the economy is cooling and inflation is contained presently. The dollar value and crude oil price could become more of an issue in the future if trends continue, but this week, both the Producer Price Index and the Consumer Price Index readings indicated that both costs and prices were within the comfort level of Ben Bernanke and the Federal Reserve Board. Inflation for now seems to be under control. Traders seem to be growing more convinced the US (and possibly Asia and Europe) economy is heading for a slowdown.
Both Secretary of Treasury Henry Paulson and Ben Bernanke stated this week that the housing slowdown has affected the economy more than they had thought and were concerned about growth in the months ahead. Initial claims for state unemployment insurance totaled 337,000 in the week ending October 13th, much larger than the 314,000 predicted by economists. Bank Of America's quarterly profit fell a much larger-than-expected 32 percent, hurt by mounting credit losses and poor trading results in its investment banking unit. Washington Mutual said third-quarter profit fell by 72 percent due to mounting losses and write-downs related to mortgages.
There is enough data to see clearly that we are not out of the credit crisis. The decision on the 31st is a very difficult decision indeed. There are arguments for the Fed to pause and as many to continue what they started on August 17th and again on September 18th. Remember, I have said that the only way for this Real Estate market to get on track is for long term mortgage rates to come down thereby bringing buyers on the sideline into the market. The Feds must make the right move or long term mortgage rates could actually climb as the short term rates decline. If the Feds were meeting tomorrow, I believe they would cut the Federal Funds Rate ¼ point. Any more than that could lead to the mortgage backed security sell-off we saw after September 18th causing Mortgage rates to climb.
But there are still two weeks before that decision is made. Watch the stock market...what we want is a flight to the safety of the bonds. The DOW has finished down four of the last five trading days during which interest rates have been ticking lower. Data released over the next two weeks could make a difference but it does seem that evidence of a slowing economy with inflation in check will leave the path open to another cut.
By the way, rates on loans over $417,000 (jumbo loans) have been much higher than those $417,000 and below. This is due to the over-reaction of investors that stopped buying mortgage assets that were not insured by Freddie Mac or Fannie Mae. The good news is that it is now possible to lock into jumbo 30 year fixed loans under 7% now. The dust seems to be settling so if you have a buyer frustrated by the high jumbo rates, call me to get details.
As always I hope you find value in these updates. Until next time, I wish you good times and good business.
Rick
Rick Bernstein
Senior Vice President
16655 West Bluemound Road Suite 330
Brookfield, WI 53005
Office 262-784-6600 Ex 232 Cell 414-350-5834
Fax 414-376-4760
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