Posts Tagged Federal Reserve


A Look Into the Mortgage Market

0 Comments By Mark Logue on March 15th, 2011
Tags: , , , ,      Categories: Buying, Mortgage

A Look Back
At the end of 2007, as we were falling into one of the worst economic periods in the history of the United States, economists were predicting that it would be 2011 – 2012 before we would start to see signs of growth in the economy again. Well, here we are almost at the end of the first quarter in 2011 and we are starting to see signs of growth again.

Over the last four years, the unemployment rate was as high as 10% while the under-employment rate (people who worked part time, less hours, or who took themselves out of the employment market altogether) was as high as 18.5%. As of Friday, March 4th, 2011, the unemployment rate is now at 8.9% which represents the best rate in over two years. Additionally, this is the third straight month of positive news in the employment sector.

On a very simplistic level, there are three major areas to look at to forecast inflation; cost of goods and services, consumer spending, and The Federal Reserve.

Cost of Goods
We are going to continue to see an increase in the cost of gasoline prices due the fear in the market over what is going on in the Middle East. Even though supply has not been affected, the perception is that it could be, and as a result the price of gasoline could reach $4 per gallon by the summer of 2011. As a result of climbing gas prices, there will be upward pressure on food costs and we have already seen a significant rise in the cost of many commodities. Beer, coffee, tires and breakfast cereals, to name a few, have already seen increases of 20% – 100%.

Consumer Spending
The American Consumer will continue to keep a tight hold on their wallets as there is still a major concern over job stability. The American consumer will need to see a longer period of job growth before they start to spend more freely.

The Federal Reserve
Ben Bernanke, the Chaiman of the Federal Reserve, has indicated that inflation will remain low through 2013. Mr. Bernanke clearly stated that the Fed will not pare back their QE2 stimulus package until there is a “sustained period of stronger job creation”. With the benchmark federal funds rate staying near zero, look for the prime rate to remain at 3.25% through 2011. The existing stimulus package in tandem with the Fed’s ongoing purchases of long-term Treasuries, I would be surprised to see the 10-year Treasury note climb above 3.8% in 2011.

A Look Ahead
So what does this mean for interest rates? We should see the interest rate environment for 30 year fixed money; vacillate between 4.875% and 5.375% in 2011. The one note of caution is the cost of oil; this could have a negative impact on long term rates if oil climbs to higher than expected price levels.

For anyone considering buying a home, 2011 is the time to buy, as the cost of money will be significantly higher in 2012. Why will this happen? Well, growth leads to inflation and inflation is the nemesis of the bond market so rates will climb as a result.

Mortgage Rates on the Move

0 Comments By Mark Logue on April 14th, 2010
Tags: , , ,      Categories: Buying, Credit, Mortgage, Selling

As we all know, interest rates have plummeted to historical lows in recent months. Average long-term interest rates remained below 5% throughout March 2010. That is well below the 6% average that we were seeing in 2008, not to mention the lowest rates seen in decades. All good things must come to an end (clearly not said by anyone from the optimistic Emerald Isle) and we have already seen rates climb over 5% to an 8 month high of 5.25%.

So what does the future hold for interest rates? As I am NOT clairvoyant with a crystal ball I can only look to the past to try and get an indication of what the future holds. History shows that periods of significantly low interest rates are generally followed by sky-high rates.  Case in point: From 1970 to 1972, 30 year fixed mortgage rates hovered around 7.25% before leaping to 10% by the end of 1973. Murphy’s law applies here (Murphy was a well known pessimist in Ireland ), when rates move downwards, it is typically a slow creep to the downside.  However, when rates rise, it is typically violently quick to the upside.

So why are rates rising?

  • Good economic news is one reason that rates are rising: Government debt, a safe bet during the recession is losing its appeal as stocks and corporate bonds are becoming the investments of choice by investors.
  • The Federal Reserve has ended its program of buying Mortgage Backed Securities. When the Fed was buying, rates were in the mid 4% range for most of last year. Today, according to the Mortgage Bankers Association, the national average for a 30-year fixed rate mortgage is 5.31%.

For people putting their home on the market this spring, rising rates may actually be a good thing. Buyers are racing to complete their transaction for two main reasons

  • Buyers want to lock in their interest rate before they go higher.
  • Buyers want to have a signed Purchase Agreement in place before April 30th in order to qualify for the (up to) $8,000 Tax Credit offered by the U.S. Government.

I am expecting a frenzied last two weeks in April as there will be a near panic (in some cases) to meet the April 30th deadline. As a seller, price your home right as you will not have time to “test the waters”. As a buyer, get pre-approved and lock in your interest rate before it is too late.