Hello to all my colleagues
I know that I am beginning to sound like a broken record when I use the word volatility. Unfortunately, there just is no better way to describe it. Let's get all the bad news out of the way. Last month I told you that my sources indicated there would be a nationwide increase in the conforming loan limit from $417,000 to at least $625,000. This certainly would have had a huge impact on Real Estate that required a "Jumbo" loan to purchase their new home. After battling between the House and Senate, they compromised (doesn't sound like much of a compromise to me) by raising the conforming limit to 125% of the median area home price.
The Median Home Price in Milwaukee County last year was $241,501. Multiply that by 1.25 and you get $301,876. The conforming limit remains $417,000. The good news is that the same formula appears to apply to FHA loan limits. The exact Median home prices will be determined by HUD and the amount above is NOT the amount that will be used but it should be close. The new limits are good through December 31st, 2008. With FHA loan limits rising, that buyer with challenged credit or little to put down will be back in the market.
In my opinion, Congress made a big mistake in not making the increase effective throughout the country. The only areas that will truly benefit from the new limits will be high cost areas, which represent a small percentage of counties in the United States.
On January 22nd, after the Feds jumped in with a ¾ point rate cut, the Fannie Mae 30 year 5.5% bond price topped out at 102.28. At that point, mortgage rates were at historical lows. After the scheduled January 30th Fed meeting, where another ½ point was cut, bond prices were steady until February 4th, when Philadelphia Federal Reserve President Charles Plosser made no secret about his concern that core inflation will elevate. Bonds sold off more as concerns about Bond Insurers ability to remain solvent swept the market. Recently, investors have not looked to mortgage bonds as the safe option. Yesterday, the price fell to 98.53 as mortgage rates hit the highest level in over 6 months. WHY?
Right after the first emergency cut in August, there was little confidence in the quality of bonds and yet they became a safe haven whenever stocks had a bad day soon after. Yesterday, Standard And Poor reaffirmed the AAA rating for bond insurers MBIA Inc. and Ambac Financial Group Inc. The result was a rally on Wall Street with the Dow Jones Industrial Average closing up 189 points on the news. This caused bonds to sell off, moving mortgage rates up further.
Why may the news today be very good for rates? With the reaffirmation announced today, bonds once again have become a safe option. There is more bad news to come on Wall Street and when that next shoe drops, money should flow back to bonds, moving rates down. In January, we had bad news after bad news announced creating the "perfect storm" that caused investors to move money from stocks to bonds consistently. There is no reason to believe that won't happen again.
On March 18th, Bernanke and Company meet to decide on policy. Most expect them to ease again, most probably by ½ point. This becomes a much more difficult decision as inflation becomes more of a concern. Many feel that we are already in a technical recession and the Feds have decided that it is more important to keep the economy growing than to combat inflation that may likely accelerate as a result of the aggressive rate cuts. Today, Federal Reserve Vice Chairman Donald Kohn said turmoil in credit markets and the possibility of even slower economic growth pose a ``greater threat'' than inflation. (He made this statement after the Producer Price Index was announced at 1% which was over double the number expected.) As a result, both stocks and bonds rallied which illustrates not only how volatile the market is but how important for Mortgage rates it is that investors are convinced that growth remain the priority for the Fed.
Folks, the Fed is doing everything within its power to stimulate growth. Those of you that have followed this column remember that it has been my view that valuable time was wasted in denial of the fact that Real Estate crisis would bring this economy to a halt.
I believe that as the Feds cut short term rates which will put more money in all of our pockets, Real Estate will begin the comeback that will result in an economy that will grow once again. Clearly, one can not happen without the other. If the Fed Funds Rate drops to 2.5% next month, the Prime Rate will fall to 5.5%. (The Prime Rate is the index that determines interest charged for credit cards, adjustable home equity loans and other variable rate loans, and many business loans.)
When will this happen? Statistics show that when the Feds cut rates, the full effect is not felt for 6-8 months. The first Fed Funds cut was made on September 18th of last year. (The August 16th emergency cut was to the Discount Rate only) The January 21st /January 30th cuts that totaled 1.25 points won't have full effect until sometime between July and September of this year, using that formula. The Feds will continue to ease until there is a sign that there is improvement to the Gross National Product, assuming inflation is not out of control. Mortgage rates should fall again as problems surface on Wall Street. Prices are continuing to fall on Real Estate as buyers remain on the sideline. Low rates and low prices will once again make Real Estate a solid investment at some point.
HANG IN THERE! The time to really worry was when the Fed was doing nothing and believing that the Real Estate crisis was NOT related to the strength of our economy. Now, they know what you and I have known all along. Yeah...they were late...real late...but as they say..."better late than never"!
Until next time, I wish you good times and good business. Rick
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