The Federal Open Market Committee adjourns from its two-day meeting this afternoon and is widely expected to lower the Fed Funds Rate.  This does not mean that mortgage rates are being lowered, too. 

The definition of Fed Funds Rate from the Federal Reserve:

The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day. The target federal funds rate is set by the Federal Open Market Committee (FOMC).

Notice that the words “consumer” and “mortgage” are nowhere to be found.  That’s because the Fed has nothing to do with them. 

The Fed does not control mortgage rates.

The Federal Reserve’s policy changes impact banks, which then impacts consumers in the form of “looser” or “tighter” credit standards.

In lowering the Fed Funds Rate, the Federal Reserve stimulates the economy.  In raising the Fed Funds Rate, it slows the economy.  The big risk, therefore, is lowering too much (which promotes inflation) or raising too much (which retards growth).  It’s a difficult dance.

The FOMC will release its policy statement at 2:15 P.M. ET.

Source
FRB: FAQs: Monetary Policy

http://www.federalreserve.gov/generalinfo/faq/faqmpo.htm#3

When a loan officer locks a mortgage rate for you, that rate is tied to an expiration date. 

The expiration may be 30 days, or 75 days, or 90 days, or more into the future, but so long as the rate is “locked”, the bank is committed to delivering that rate to you at your closing.

What most people don’t know is that the longer the rate lock, in general, the higher the interest rate and/or fees and that’s because banks can’t predict the future. 

The more time that passes between today and your rate lock expiration, the more likely it is that market conditions will have changed from where they are today, and the bank will be “below market” on your individual loan. 

Therefore, banks compensate for this “time risk” by increasing their rate of return (i.e. your mortgage rate), and/or charging “extended lock fees” to borrowers. 

To lenders, rate locks represents a huge risk — what if its prediction of the future is wrong?

Rate locks vary from lender to lender, but in general, they move in 15-day increments — 15-day, 30-day, 45-day, et cetera.  After 90-days, rate locks tend to move in 30-day increments.  The shorter the time, generally, the lower the rate and/or fees.

So, when you’re negotiating a new contract on a home, it makes more sense set a closing date 30 days in the future as opposed to 40 days; 45 days as opposed to 46.  By keeping your rate lock commitment days as low as possible, you’ll help save money long-term. 

There’s no sense in paying for extra rate lock days if you don’t need them.

Strong earnings from Apple, American Express, Microsoft and Boeing helped to keep markets in balance last week after reports of weak business spending and poor housing data (again). 

The available data doesn’t seem to match corporate earnings reports and that is giving investors fits.

Mortgage rates bounced around last week on the lack of conviction from the markets. 

The uncertainty may be resolved this week, though, after several major events make their ways through trading circles.

The first major event is the Federal Open Market Committee’s two-day meeting, beginning October 30-31. 

The FOMC meets eight times annually and, at its last meeting, the FOMC voted to lower the Fed Funds Rate by 0.500% to 4.750%.  When this happened, mortgage rates briefly dipped, and then soared. 

As of today, markets are predicting another decrease, but are unsure of how large the decrease will be.  If you are currently floating your mortgage rate, or shopping for a mortgage, you’ll likely have much different pricing prior to the Fed’s meeting than after it so be aware.

Then, on Thursday, the next major event hits: the Personal Consumption Expenditures.  This is the Fed’s preferred inflationary gauge and PCE is expected to show a 1.7% increase.  If the number comes in hotter than expected, though, the dollar should weaken on inflation concerns, thereby causing mortgage rates to rise.

And, lastly, on Friday we’ll get October’s employment report. 

It’s expected that the economy added 90,000 jobs in October and that the unemployment rate held flat at 4.7%.  Each month, this data point is a huge market mover because more working Americans means that more Americans can afford to consume goods.  More consumption pushes the economy forward so as we head into the Holiday Shopping season, the employment data should impact Retail Sales for October, November and December.

It’s a busy week, everyone, and mortgage rates could be very different from day-to-day.  If your rate looks good today, perhaps you should consider locking it.

The Federal Open Market Committee is widely expected to lower the Fed Funds Rate next week. 

For holders of credit cards and home equity lines of credit, this is good news. 

Both of these financial products feature interest rates tied to Prime Rate. Prime Rate is tied to the Fed Funds Rate. 

When the Fed Funds Rate comes down, therefore, so does the rate of borrowing for credit cards and HELOCs.

For mortgage rate shoppers, a drop in the FFR could be bad news.

When the Fed lowers the Fed Funds Rate, it signals that the U.S. economy is weakening and that tends to weaken the U.S. dollar.  When the dollar weakens, the value of dollar-denominated securities weaken, too.

Mortgage bonds are denominated in dollars, of course, so when the dollar loses value, mortgage bonds lose value as well.  This causes mortgage rates to move higher.

After the Fed’s last meeting, it lowered the Fed Funds Rate by 0.500% and, predictably, mortgage rates headed higher in response.

According to Bloomberg, as of this morning, market players are predicting with 90 percent certainty that the Fed will lower the Fed Funds Rate by at least a quarter.  That means that the currently low level for mortgage rates may not last much longer.

The Wall Street Journal used a lot of ink this morning on September’s Existing Home Sales data, including the chart below.  It’s frightening to the lay person who may not know how to interpret data like this.

Remember: real estate is local. 

Yes, on a national level the number of homes for sale in increasing and the housing market is showing weakness, but on a local level, the story is always different. 

And, despite chunking the national data into 28 “Major Markets”, the figures below still can’t be considered “local”.  The Miami-Fort Lauderdale market, for example, is a 31.6 mile tract of land.

Real estate markets vary by neighborhood and even by street.  It’s why one zip code may be hot, and a neighboring zip code may be flat.  It’s also why we should ignore national real estate price patterns and focus on the local trend instead.

(Image courtesy: Wall Street Journal Online)

The number of home valuation Web sites continues to grow. 

A simple Google search for “How much is my home worth?” shows 119,000 results and seems to get larger month-over-month.

For home sellers, these programs can give a false sense of security (or insecurity!) about at what price a home should be listed for sale.

Computer programs can never replace the role of licensed home appraisers and that’s because valuing a home is not as simple as providing some inputs (traits) in order to get some output (value).  There is a “fuzzy logic” that computer programs just can’t produce in the same way that appraisers and real estate agents can.

Even with tax records, recent sales data, and a full description of a property, valuing a home is as much “art” as “science”. 

There are “human” considerations that include neighborhood quality and curb appeal that a computer can’t measure.  Nor can a program take into account how a kitchen may require $20,000 worth of work to bring it “up-to-date” or inline with neighbors’ homes.

Besides, the real value of a home is what somebody is willing to pay for it.  Therefore, you can never truly know what a home is worth until it has sold.

So, while automated valuation tools are a good start to finding a home’s value, they’re not equipped to finish the job. 

(Image courtesy: Kirchoff Appraisals)

As we talked about yesterday, the stock market appears to be directing traffic for the bond market. 

Monday was a flat day for stocks, and it was a flat day for bonds, too.  Mortgage rates idled.

Tuesday, with no economic data hitting the wires, market participants will be looking for direction elsewhere. 

Some likely candidates include:

1. The price of oil. If oil prices continue to rise, it will place inflationary pressure on businesses and consumers.  That is bad for mortgage rates.
2. The value of the dollar.  A recent rally in the dollar should attract foreign investors to the U.S. markets.  That is good for mortgage rates.
3. Corporate earnings statements.  Apple and American Express both showed well in Q3.  A rally in the broader stock market will pull money from the bond markets.  This is bad for mortgage rates.

Mostly, markets are taking very few risks in advance of the Federal Open Market Committee meeting next week.  Momentum rules.

Rising oil prices, weak housing data, and ongoing credit concerns pushed mortgage rates lower last week as investors sought safety for their dollars.  Stock markets took losses and bond markets — including mortgage bonds — booked gains.  Remember, when mortgage bonds go up in price, mortgage rates come down.

To understand why mortgage rates tend to drop when stock markets have a sell-off, we should look at the situation from an investor’s perspective. 

When lots of investors are selling stock positions, stock markets fall.  The investors get cash in return for their sold securities.  But cash doesn’t offer much of a return on investment.  So, investors look for “better” places to invest their cash. 

The bond market usually fits the bill.

As more dollars enter the bond market, the relative demand for each type of bonds increases.  With the higher demand, bond prices move higher, thereby pushing yields down.  And mortgage bonds are just one type of bond that benefits like this — there are municipal bonds, corporate bonds, and treasury bonds/notes, too.

This week, the biggest news will be Wednesday’s release of the Existing Home Sales report, and Thursday’s New Home Sales.  Both are expected to show relative weakness from August’s figures but because the weakness is expected, the news shouldn’t move mortgage rates.

The biggest threat to mortgage markets this week will be changing expectations about the Federal Open Market Committee’s meeting next Tuesday and Wednesday.  If markets believe that the Fed will try to spur economic growth, expect money to flow back into stocks (at the expense of bonds) which will pull mortgage rates higher.

(Image courtesy: Google Finance)

According to the Wall Street Journal, the number of Americans taking loans against their 401(k) plans is increasing because most plans allow participants to borrow funds to purchase a home or to avoid foreclosure.

But just because the avenue is there, though, doesn’t mean that borrowing from a 401(k) is a good idea. 

Here’s why: When you put money into a 401(k) plan, you use pre-tax dollars but when you repay a 401(k) loan, you use post-tax dollars. 

Therefore, if your tax rate is 28%, it takes $1,388 of income to repay each $1,000 increment of your loan.  Then, when you withdraw the funds at retirement, the money is taxed again.

Double-taxation is costly, but the other less-well-known impact of a 401(k) loan is that you can lose the long-term power of compounded interest on your entire portfolio. 

This isn’t to say that a 401(k) loan is bad, it just may not be right for you. So, if you’re planning to withdraw from your 401(k), be sure to talk with a qualified financial professional first.

If you’d like a referral to a trusted professional, call or email me anytime.

Once again, the headlines may be misleading you.  It’s a good thing that Housing Starts dropped last month — despite what the papers say.

A “housing start” is a new residence on which construction has started.  Yesterday, the government released September 2007’s Housing Starts data for the country. 

1. There was a 10.2% drop in Housing Starts versus August 2007
2. There was a 30.8% drop in Housing Starts versus September 2006

The headlines are trying to tell us that this is bad news for the U.S. economy.  On the contrary — this is excellent news!

Determining a home’s value is mostly based on Supply and Demand for that particular home.  In its own neighborhood, an over-supply of like homes can be a significant drag on the value of all homes in the neighborhood  This is a concept many people understand.

So, when builders stop adding new supply to the housing market — on a neighborhood-by-neighborhood basis — the existing demand for homes can “catch up” with the existing supply of homes.  This can rebalance the Supply and Demand equation and place upward pressure on home values. 

Many homeowners (and future homeowners) can agree that rising home values is a good thing.  Rising home values creates wealth and opportunity.

So, just because the headlines read that the news is bad, that doesn’t mean that it really is bad.  Housing Starts are down and that is a good thing.

(Image courtesy: The Wall Street Journal Online)