Guest Post – Shaun Meller’s Weekly Economic Summary

March 22, 2011 by Leave a Comment

Shaun Meller of Bank of America

Last week in review – (March 7 – 11, 2011)

Shaun Meller is a mortgage professional at Bank of America specializing in financing for Manhattan condos, co-ops, and townhomes.

First, let us extend our deepest sympathies to the families affected by last week’s earthquake and tsunami in Japan and our hope for a speedy recovery. The earthquake was a magnitude of 8.9—the strongest in 140 years. The earthquake in Japan and its damage created some counterintuitive market reactions.

Ordinarily, U.S. Treasuries and mortgage bonds would trade higher in the face of devastating natural events that drive money into “safe haven” trades. But in this case, buying of Treasuries and mortgage bonds as a safe haven trade was offset by the Japanese selling some of their own massive holdings of Treasuries and mortgage bonds in order to repatriate money back to their country during this time of emergency. Considering that Japan is the second largest holder of U.S. debt at $877 billion, selling just a small portion of their holdings has an impact on bond prices.

In addition, bond prices traded in very volatile fashion last week after getting jockeyed around on news out of Saudi Arabia that police had opened fire on protesters with rubber bullets. Let’s look at how this influenced the markets in a different way than one might at first imagine.

Oil fell last week, despite the news out of Saudi Arabia. Why? Shouldn’t unrest in Saudi Arabia – the world’s largest oil producer – push prices higher? Yes, but that news was offset by the earthquake in Japan. That’s because Japan is a huge importer of oil, and the market senses that the earthquake and subsequent tsunami may create an economic slowdown and diminish the demand for oil.

Seeing that mortgage bonds are lower – even in the face of weak stocks and enormous uncertain global news – tells us that the gains in bonds are not coming with a lot of conviction, and traders are selling into this strength. This is because a lot of headwinds remain for bonds – like inflation abroad, rising government debt and continued QE2 purchases.

In the news this week (March 14 – 18, 2011)

There are multiple reports this week focusing on the same segments of the economy. We’ll talk about these reports next week and their impact on the bond market: 

  • Federal Reserve report
    • Tuesday – Federal Open Market Committee releases policy statement
  • Housing markets reports
    • Wednesday – Housing Starts and Building Permits
  • Manufacturing reports
    • Tuesday – Empire State Index
    • Thursday – Philadelphia Fed Index
    • Thursday – Capacity Utilization
    • Thursday – Industrial Production
  • Employment reports
    • Thursday – Initial and Continuing Jobless Claims
  • Inflation reports
    • Wednesday – Producer Price Index
    • Thursday – Consumer Price Index

As you can see by the arrows in the chart below, bond prices experienced some up-and-down volatility last week, but ended the week near where they began.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday, March 11, 2011)

Economic calendar for the week of March 14–18, 2011

I’m here to help you through the entire home-financing process – from application through closing – and to match you with a mortgage that’s perfect for your financial situation.  Contact me today and let’s get started on achieving your home financing goals.

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Guest Post – Weekly Economic Summary by Shaun Meller of Bank of America

February 15, 2011 by Leave a Comment

Last week in review – (January 31 – February 4, 2011)

The Labor Department reported that 36,000 jobs were created in January, a much lower

Shaun Meller

number than anticipated. However, there were upward revisions to both November and December, which added another 40,000 jobs than previously reported.

But that’s not the only bit of good news in the report. The unemployment rate fell to 9%, down from 9.4% last month, rather than increasing as had been expected. In addition, the U6 unemployment report, which includes job seekers who haven’t actively looked for a job recently and those who have accepted part-time employment for economic reasons, fell to 16.1%, from the previous month of 16.7% and reflects the lowest level since April 2009.

So what does all of this mean when it comes to home loan rates?

It’s important to remember two things:

  • First, the Fed’s goals for their current Quantitative Easing policy (QE2) where $600 billion is being injected into the economy are to: (1) boost stock prices, (2) create inflation, and (3) lower the unemployment rate.
  • Second, while these goals are designed to stimulate our economy and keep our recovery moving forward, they are also unfriendly to bonds and home loan rates.

In recent weeks, we’ve seen evidence of all three goals: stocks have been improving, the unemployment rate has declined, and we’ve seen an increase in global unrest of late, not just in Egypt, but in other parts of the world as well and much of this centers around runaway inflation in commodities and food.

In the news this week (February 7 – 11, 2011)

This has been a quiet week on the economic report front, though with all the news happening around the world, there’s plenty of action that could impact the markets.

  • Thursday’s weekly Initial and Continuing Jobless Claims Report. Last week, Initial Jobless Claims declined to 415,000, which was below the 425,000 expected, and reversed most of the increase from the previous week. We’ll talk about this week’s report next time and its impact on the bond market.

As you can see in the chart below, bonds and home loan rates worsened due to a mix of positive economic news, a decline in unemployment, and hints of inflation in the air.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday, February 4, 2011)

Fannie Mae Mortge Bonds

Economic calendar for the week of February 7–11, 2011

Weekly Economic Calendar

I’m here to help you through the entire home-financing process – from application through closing – and to match you with a mortgage that’s perfect for your financial situation.  Contact me today and let’s get started on achieving your home financing goals.

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Guest Post – Weekly Economic Summary by Shaun Meller of Bank of America

February 1, 2011 by Leave a Comment

Shaun Meller

Last week in review – (January 17 – 21, 2011)

 

The US dollar is starting 2011 with its value dropping relative to other currencies.

Let’s take a look at why and what this could mean for home loan rates.

  1. Some of the dollar’s drop is attributed to the recent strength in the euro, which has gotten a boost from some recent positive stories, like Spain and Portugal’s ability to sell debt in the bond market without crisis. But have Europe’s problems gone away? No – there will be more problems ahead for the region, and as they emerge, we should see a reversal in the euro’s strength along with improvement in the US dollar.
  2. Another reason for the dollar’s weakness is the Fed’s Quantitative Easing (known as QE2).

At this point, the weakening US dollar hasn’t had a big negative effect on the US bond market, but should the dollar materially weaken, it could make US-denominated assets like US bonds less valuable and desirable amongst global investors and it has been these foreign investors, like China, who have supported the US bond market for years by purchasing our debt. Remember, home loan rates are tied to mortgage backed securities, which are a type of bond. So negative news for bonds would also be bad news for home loan rates.

In housing news last week, existing home sales for December were reported much better than expected. The jump in sales is likely attributed in part to the recent trend of rising home loan rates, which has prompted many homebuyers to take advantage of the still low home loan rates. Building permits – which signal future construction – also came in better than expected last week, surging 17% in December.

The housing industry shows signs of improvement in 2011. There will still be some areas that suffer price declines, and those will be where foreclosure backlogs overhang and where unemployment rates are higher than the national average. But housing looks to have bottomed out in many areas and should see more of a pick up in the second half of 2011. And although home loan rates will likely rise slightly as the year progresses, they are still near all-time lows right now.

In the news this week (January 24 – 28, 2011)

This week includes a full load of economic reports ranging from housing and the economy – but the big event will be the Fed meeting. We’ll discuss impact of these events in next week’s report.

  • The week started with a read on consumer attitudes with the Consumer Confidence report on Tuesday. That report will be followed by the Consumer Sentiment Index on Friday.
  • We also saw additional housing news this week, with a report on New Home Sales in December on Wednesday and the Pending Home Sales report for December on Thursday.
  • The Federal Reserve held its FOMC meeting this Tuesday and Wednesday, with the Fed’s Policy Statement released Wednesday afternoon. There’s no chance for an interest rate hike at this meeting but what the Fed says about the economy, inflation, and its Quantitative Easing program could have an impact on rates.
  • Thursday’s weekly Initial and Continuing Jobless Claims Report is important, as always. Last week, Initial Jobless Claims came in below expectations and the 4-week moving average fell from the previous week. Those readings tell us the trend in the labor market is continuing to improve, albeit at a slower pace than historically seen at this stage within an economic recovery.
  • We also got a read on the economic recovery with Durable Good Orders on Thursday. This report provides an update on consumer and business buying behavior on big-ticket items that are designed to last for an extended period of time, like furniture, televisions, appliances, vehicles, copy machines, and so on. It’s an interesting report, as people tend to hold back on these types of purchases when they are feeling a need to be extra conservative with their finances or feel insecure about their employment.
  • The GDP report will be followed on Friday with reports on Gross Domestic Product (GDP) – which is the broadest measure of economic activity – and the Employment Cost Index (ECI). The ECI is one way to evaluate wage trends and the risk of wage inflation, as well as possible price pressures. This is important to the housing industry because if wage inflation threatens, it is possible home loan rates will rise through bond prices dropping.

As you can see in the chart below, bonds and home loan rates continued their negative trend to end the week worse than where they started.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday, January 21, 2011)

Economic calendar for the week of January 24-28, 2011

I’m here to help you through the entire home-financing process – from application through closing – and to match you with a mortgage that’s perfect for your financial situation. Contact me today and let’s get started on achieving your home financing goals.

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All Things Come to an End (including historically low interest rates)

January 17, 2011 by Leave a Comment
Historical U.S. Prime Rates

Image via Wikipedia

All things come to an end (Chaucer) and so it goes for the historically low mortgage interest rates that we have seen over the preceding eighteen months. The yield on ten year U.S. Treasury bonds has been rising since QE2 began about seven weeks ago. But it’s not just U.S. bonds; European (even German – generally considered the safest), Japanese, and U.K. bonds are moving up as well. To understand why this is significant to us, you need to know that home loan rates are tied to mortgage backed securities which are essentially a type of bond. The equities markets are also rallying (stocks rose to their highest level in two years today). As yields in the sovereign debt market rise (generally considered the lowest risk investments), and the equity markets produce increasing profits for shareholders, investors will insist upon an even higher rate of return in the mortgage backed securities market. Additionally, the recent tax cuts in the U.S., which are in effect another stimulus plan, make investors increasingly wary of holding long-term debt (like mortgages) at low, fixed rates of return. And thus, home interest rates at the consumer level rise in order to offer investors the increased return they demand.

Over time, it is likely that home loan rates will continue to rise. The Fed has suggested that all further stimulus options remain on the table should the economy require it. Existing and future stimulus will result in inflation, as already evidenced by last week’s Producer Price Index and Consumer Price Index. Inflation erodes the value of the fixed rate of return offered by bonds. Anticipation of future inflation will be built in to current bond prices, thus driving up mortgage interest rates even before the inflation occurs. However, current interest rates are still at historic lows (see graph at this link:http://is.gd/jbfGB).

As interest rates rise, there will be downward pressure on home prices. This is because consumer capacity to pay increased monthly debt service will not rise along with interest rates. Let’s look at an example of how this plays out:
• The monthly payment on a loan of $1mil on a 30 year fixed rate note with an APR of 5% is $5,368. If the APR increases to 6%, the monthly payment for the exact same loan increases to $5,995 (a $637 per month increase). If the APR increases to 7% (i.e. 2002 levels), the monthly payment increases to $6,653 (a $1,285 per month increase).

The consumer has three options; 1) make a larger down payment so that they can borrow less and keep their monthly payment the same; or 2) pay more per month on their mortgage payment; or 3) purchase a less expensive property so that they can maintain their down payment amount and monthly debt service. Most purchasers will be unable to do 1) or 2) and reluctant to do 3). This could result in decreased velocity in the markets as potential buyers postpone purchasing decisions. Sellers who need to sell will likely respond with another round of price decreases to encourage buyers into option 3). Of course, the purchaser’s monthly payment will be unlikely to decrease below today’s levels – they will buy the same property at a lower basis but with a loan at a higher rate of interest. The seller will likely suffer the greatest loss in the form of decreasing sales price spawned by the increased cost of capital in the marketplace.

So where does that leave us today? Now may be an ideal time to lock in historically low prices that can be fixed for the next thirty years or as long as you keep your property. Sellers may wish to take advantage of this sentiment among purchasers by listing their property after the New Year rather than hoping for the capital markets to reverse course, which may turn out to be a risky bet.

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