Mortgage Market Review - 12/14/09

Good morning. I often get asked about my opinion regarding “floating” or “locking” an interest rate. As we all know, mortgage interest rates change on a daily and intra-day basis. With so much volatility, it is often difficult to make the right decision regarding floating or locking. What is important to remember is the fact that there is a difference between gambling and taking a calculated risk when making mortgage interest rate decisions. Floating into an economic release such as the employment report is usually a gamble, as was evident with the rate spike the beginning of this month. In addition, floating over a span of more than a few days is also a gamble. Unforeseen events can cause instability in the financial markets which results in mortgage interest rate volatility. On the contrary, floating on a day of positive market movement with no economic data the following day, while such action is still vulnerable to market movements, can be considered a calculated risk. It is possible for interest rates to push lower due to the uncertain future of the economy. Unfortunately the recent focus has been towards rate increases, which generally don’t bode well for lower mortgage interest rates. Taking advantage of rates at the current levels guarantees a historically favorable interest rate and protects against uncertainty surrounding future interest rate developments.

There’s a full week in the markets coming up, so stay tuned. Please let me know if you have any questions and thanks for taking the time to read this. I hope you find it useful and informative. Have a great week.

Fred

This Morning…Monday, December 14, 2009:
Treasuries and mortgages opened a little better this morning. Today there isn't any economic data to think about. At 9:30 the DJIA opened +30.

Last Week:
Mortgage bond prices were near unchanged last week holding mortgage rates steady. Trade was extremely volatile with swings throughout the week. The Treasury auctions were not as well received by foreign accounts as traders were hoping. The US relies on foreign central banks such as China to fund our deficit spending. If China were to decrease or cease purchasing US bonds and notes, rates would rise.

This Week:
It will be a busy pre-Christmas week for economic news. For one, the Fed meeting on Wednesday is expected to have no change for rates but, as usual, investors will be closely watching the language. The Producer Price Index (PPI) comes out tomorrow, as does Industrial Production and Capacity Utilization, and the Empire State Manufacturing Index. This is followed by the Consumer Price Index (CPI) and New Residential Construction on Wednesday. Housing Starts comes out Wednesday. Jobless Claims, Leading Economic Indicators, and the Philly Fed are on Thursday.

EconomicIndicator
Producer Price Index
Tuesday, Dec. 15,8:30 am, et
Up 0.9%,Core up 0.2%
Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates.
Industrial Production
Tuesday, Dec. 15,9:15 am, et
Up 0.6%
Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
Capacity Utilization
Tuesday, Dec. 15,9:15 am, et
71.1%
Important. A figure above 85% is viewed as inflationary. A decrease may lead to lower mortgage interest rates.
Housing Starts
Wednesday, Dec. 16,8:30 am, et
Up 8.6%
Important. A measure of housing sector strength. Weakness may lead to lower rates.
Consumer Price Index
Wednesday, Dec. 16,8:30 am, et
Up 0.7%,Core up 0.1%
Important. A measure of inflation at the consumer level. Lower than expected increases may lead to lower rates.
Fed Meeting Adjourns
Wednesday, Dec. 16,2:15 pm, et
No rate change
Important. Few expect the Fed to raise rates, but some volatility may surround the adjournment of this meeting.
Leading Economic Indicators
Thursday, Dec. 17,10:00 am, et
Up 0.7%
Important. An indication of future economic activity. A smaller increase may lead to lower rates.
Philadelphia Fed Survey
Thursday, Dec. 17,10:00 am, et
16.5
Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.


Market Forecast:
Funds are essentially done for the year. Trade in markets is thinning daily, leading to the potential of continuing volatility on any surprises. We expect interest rate markets will continue to hang in a narrow range with not much change from where they trade today. This week the FOMC statement on Wednesday will likely cement rates into a tight range after the statement is chewed and a consensus forms as to what the Fed wants markets to accept. With economic improvement slowly but surely improving, markets will be keyed on what if anything it means to the Fed. Bernanke and most Fed officials have been stalwart on letting short term rates remain at zero for most of 2010, or at least until there is complete conviction job markets are stabilizing and some evidence jobs are being created. Although the Fed wants to be sure tightening rates won't lead to a double dip recession, there are a few regional Fed Presidents that are sounding more hawkish on rates. The concern is reacting too late may imbed inflation, and once ignited it becomes more difficult to control. This is the last week of the year where trading will have a modicum of volume

Some Humor:
Bob had finally made it to the last round of the $5,000,000 Question. The night before the big question, he told the M.C. that he desired a question on American History.
The big night had arrived. Bob made his way on stage in front of the studio and TV audience. He had become the talk of the week. He was the best guest this show had ever seen. The M.C. stepped up to the microphone.
"Bob, you have chosen American History as your final question. You know that if you correctly answer this question, you will walk away $5,000,000 dollars richer. Are you ready?"
Bob nodded with a cocky confidence-the crowd went nuts - he hadn't missed a question all week.
"Bob, your question on American History is a two-part question. As you know, you may answer either part first. As a rule, the second half of the question is always easier. Which part would you like to take a stab at first?"
Bob was now becoming more noticeably nervous. He couldn't believe it, but he was drawing a blank. American History was his easiest subject, but he played it safe. "I'll try the easier part first."
The M.C. nodded approvingly. "Here we go Bob. I will ask you the second half first, then the first half."
The audience silenced with gross anticipation . . .
"Bob, here is your question: And in what year did it happen??"


The material contained in this newsletter is provided by a compilation of third parties to real estate, financial services and other professionals for their use and the use of their clients. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, we do not make any representations as to its accuracy or completeness and as a result, there is no guarantee it is not without errors.