Home Loan Rates Caught in Tug-O-War

As you know, I like to keep you posted on the mortgage market via news from the desk of Monica Jones- Certified Mortgage Planner with RPM Mortgage.  In my opinion, she’s one of the best in the business and this is what she has to say this week:

From the first time home buyer to the savvy investor – from the seller with equity to the seller underwater and needing options – I am here for you.








“Fear comes from uncertainty,” wrote the poet William Congreve. Last week, however, the markets were moved by fear and by uncertainty that were unrelated. On the one hand, unrest in the Middle East drove up Oil prices and pushed investors into the safety of Bonds – while on the other hand, fear of inflation limited the gains that Bonds experienced. To see how those elements impacted home loan rates, let’s take a deeper look at each.

First, the global unrest in the Middle East continues to impact the markets. The protests that started a few weeks ago in Tunisia and Egypt have now spread to Bahrain, Yemen and Libya. Libya is of particular concern to the markets, since it is the largest holder of oil reserves in Africa.

With the thought of Oil fields at risk and with no foreseeable resolution in the near term, Oil spiked as much as $12 a barrel higher last week – climbing over the mark of $100 per barrel. Remember, high oil prices aren’t good for anything; they’re tough on the economic recovery, and they’re inflationary. And in terms of your wallet, the recent spike in oil has only just begun to translate to pumps across the country, so you can expect to see higher prices in the coming weeks.

In addition to higher Oil prices, the unrest is creating fear and doubt in Traders’ minds about what might happen. And when Traders are uncertain, they tend to move money into the relative safety of Bonds, which offer lower returns but also lower risks. This flood of money into Bonds – including Mortgage Bonds – helps prices and home loan rates improve. And sure enough, last week Mortgage Bonds traded higher, as protests and uncertainty permeated throughout the Middle East.

On the other hand, those gains in Bonds have been limited by fears of inflation down the road. That’s because investors demand a higher yield now to offset their concerns that future inflation will eat into their returns. That was evidenced by the tepid buying demand in last week’s Treasury auctions. And as the economy continues to slowly expand and inflation fears grow, rates will gradually move higher over time.

The bottom line is that global unrest has been a driving force behind improvement in the Bond market… and that it may continue to do so in the coming weeks. But at the same time, it’s important to remember that those gains are fleeting and have even been limited by inflation fears – so the positive picture for Mortgage Bonds and home loan rates won’t last long.

Now’s the time to look at your unique situation and take action. It only takes a few moments to sit down and see how the national and international news may help you benefit from a refinance or the purchase of a new home. Call or email today to get started. Or forward this newsletter on to someone you know who may benefit from today’s historically low rates.

Forecast for the Week

In addition to monitoring the unrest in the Middle East, we have a big week of economic reports on our hands – with the big news coming on Friday! Here’s a highlight of what to watch:

  • The week starts off Monday morning with reports on Personal Spending and Personal Income, as well as Pending Home Sales. The Pending Home Sales report comes after last week’s Existing Home Sales release, which came in better than anticipated… but the National Association of Realtors who reports all these numbers is under fire for possible overestimation in the past few years.
  • On Monday, we’ll also see the Personal Consumption Expenditures (PCE) Index, which is the Fed’s favorite gauge of inflation. Remember, inflation fears have grown and have been limiting the gains that Bonds experience. In fact, the inflation reading in last week’s GDP release was hotter than previously reported – and that coincides with the recent Consumer Price Index trend, which saw a hot 0.4% month-over-month gain during each of the past two months. So the markets and the Fed will definitely be keeping a close eye out for the PCE report this week!
  • Manufacturing reports will also hit the newswires this week. On Monday, we’ll see the Chicago PMI, which reports on manufacturing in Chicago and is a good indicator of overall economic activity. Then on Tuesday, we’ll see the ISM Index, which is the king of all manufacturing indices and is considered the single best snapshot of the factory sector.
  • The big topic of the week will be employment. First up is the ADP National Employment Report on Wednesday, which measures non-farm private employment, followed by another round of Initial Jobless Claims on Thursday. In last week’s report, Initial Jobless Claims were reported lower than the expectations. Normally, this would have applied pressure on the Bond market, but again the unrest in the Middle East is trumping this data.
  • Finally, the busy week culminates with the highly anticipated monthly Jobs Report on Friday. This report features new data regarding job growth and the unemployment rate – needless to say, this report can be a big market mover!

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.

The important thing to notice in the chart below is the direction on the right side of the chart. As you can see, Bond prices moved upward, which is good news for home loan rates. One of the major reasons for this movement was the ongoing unrest and uncertainty in the Middle East, which prompted Traders to move money into the relative safety of Bonds.

As a result, now is an ideal time to take advantage of the historically low home loan rates. If you or someone you know is looking to refinance or purchase a home, call or email to find out how you can benefit.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday Feb 25, 2011)
Japanese Candlestick Chart


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