Hello to my colleagues and clients
WOW! After the Feds jumped in and lowered the Federal Funds Rate and Discount rate 3/4 point last Tuesday, I told you that this was the most volatile market I have seen in a very long time. That day we saw the DOW drop 500 points right after the announcement (it seems to take investors time to digest events they don't expect), moving mortgage bond prices way up, which moved mortgage rates down to close to historical lows. That was short lived as money flowed back into stocks and by the end of the day, mortgage rates were 3/8% higher than morning.
We spent the next week with investors speculating as to the probablility of the Feds easing more today. By this morning, there was a 80% probability that they would ease another 1/2 point today and they didn't disappoint. This decision came after the advance Quarter 4 Gross Domestic Product came in at PLUS 0.6%, weaker than the expected 1.2% increase. This number should have resulted in mortgage bonds moving higher (rates moving in the opposite direction), but not ahead of the Fed decision. When the Feds announced their decision, stocks initially moved higher with bonds lower.
Stocks then reversed it's rally and fell for the first time this week on concern that bond insurers guaranteeing $2.4 trillion in securities will lose AAA credit ratings. By the end of the day, the Dow Jones was down 38 points with mortgage bonds also slightly negative.
Consider that after a cut of 1.25%, the Dow Jones gained just 170 points this week when investors should have been thrilled about what the resulting lower Prime Rate would mean to corporate debt and consumer debt (credit card interest and home equity loan interest, etc). Imagine where stocks would have been today had the Fed not chosen this aggressive path!
Tomorrow Personal Income and Outlays will be announced. This will be an indication both of inflation and consumers ability and williness to spend. On Friday, the government employment number are announced. Weak numbers should result in lower mortgage rates. Obviously, the opposite will be true. Today, ADP, a private firm that measure, sometimes inaccurately, estimated that 130,000 new jobs were created in Jaunary. That number is a surprise to the upside...but we'll see what the official numbers show.
Where are we headed? In my opinion, there is only one reason that Bernanke, congress, and Bush are so agressively pursuing every avenue possible to stimulate growth in our economy. There is a common concern from everyone that we could be headed toward the "perfect storm" of consumers losing both their assets and their income should the stock market go into a free fall and unemployment accelerate at the same time. Absent of the positive news of the inpending stimulus package and the fed aggressive moves, we would probably already be in the recession that we may not be able to avoid in any case. In the long term, I believe it will work as the values of under-priced stocks and real estate along with lower cost of debt will jump start our economy similar to the way it did after the 2001 recession. But we have a long road ahead before that happens with opportunities that we must recongnize before we can take advantage of them. Mortgage rates will likely drop over the next few weeks and months close to or below historical lows!
The intense volatilty that will continue through our road back makes it more important than ever that consumers have trusted professionals to advise them when making Real Estate and other investment decisions. Connect with your clients during this stressful time so that they feel confident that you have their back. As an example, I have been having 10 min phone conferences with my clients to help them plan for the right time to lock in to rates at a point that makes sense for them. Since it is clear that when mortgage rates reach the bottom (wherever that is), market volatility will probably not allow them to stay there, planning is essential.
Hang on for the ride, my friends. This will be a year to remember. Until next time, I wish you good times and good business!
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