It’s no longer just about the jobs report

Until recently, all attention about the direction of the economy focused soley on the jobs report. Analysts made predictions and then analyzed where they got things wrong. Then there is the quarterly growth data (GDP). Together with the jobs report, the markets reacted until the next set of numbers were released.

Now we have another focus, and it involves inflation.

Now analysts are obsessing over the inflation numbers. The Consumer (CPI) and Producer (PPI) price reports are “where it is at” with the regard to influencing the stock and bond markets today. We are even reacting to inflation reports from Europe, because the entire world seems to be in a similar situation.

For example, last week, it was announced that the CPI increased by 7.7% annually, with the core number increasing by 6.3% annually. The core excludes the volatile components of food and energy. Overall, these numbers were seen as better than expected and the stocks and bond markets reacted very positively. Though this is only one month of data, it is hoped that this report represents the beginnings of the improvement we have been waiting for (and the reason for my post last month about the Federal Reserve moving too fast/perhaps need to slow down on rate hikes)

Today, market movement is all about inflation and the wide range of data gives analysts and the Fed plenty to chew upon.

Federal Reserve Moving Too Fast?

The Federal Reserve said they’d take inflation seriously. After being a late to react, the Fed declared war and backed up their words with a historic pace of rate increases. While no one wants a recession, the Fed implied they are aware their actions may cause a recession and they are okay with this course of action to get the job done.

Just as the Fed was a little late when they began raising rates, they could be now raising rates too fast. A growing number of analysts are worried that the Fed is moving too far at too fast of a pace. The reasoning for these concerns is that rate increases take time to trickle down to the economy. Some say it takes a few months, others say it takes even longer. Thus far this year the Fed has raised short-term rates by over 3.0%.

Should the Fed slow down? Perhaps they will in December. The inflation numbers leveled off over the summer and dropped in the reports from September. It will be interesting to see the inflation numbers for October and November.

Getting inflation under control is important, but perhaps not having a dramatic rate increase in December could be appropriate. Maybe take a little bit of a breath to see if the over 3.0% of rate increases this year is getting the job done. I’m certainly glad I do not have the job of trying to balance out inflation figures while hoping to not cause a recession.

If the October and November stats show inflationary figures continuing to cool, perhaps take it easy in December and let’s see how things unfold. The Fed can always go back to a big rate increase in late January 2023.

Tapering begins again

Part of the stimulus plan by the Federal Reserve during the Covid caused Recession was purchasing bonds. This was a repeat effort by the Feds just like they did during the Great Recession. Just as they stopped this effort several years ago, they started the process of ending bond buying again.

The process began in November 2021. The Fed was purchasing $120 Billion monthly in bonds ($80 Billion in Treasuries and $40 Billion in mortgage backed securities). It was reduced to $105 Billion (a $70 & $35 breakdown) in November and down to $90 Billion ($60 & $30) in December. This trend will continue until the Fed is completely out of the bond buying business.

What can we expect from Tapering? The main impact for readers of this blog – mortgage rates will rise. Rates were predicted to end 2021 in the low 3s for a 30 year fixed rate loan (they did) and move into the upper 3s by the end of 2022.

How will this impact home loans?

• expect a sharp drop in the number of refinances in 2022
• we may see a cooling of the housing market in terms of purchase volume, but not necessarily a cooling in housing prices

What will keep prices steady for home sales? For one, sellers who do not need to move may simply take their home off of the market if they cannot get a high price for their home. The bigger story here is the sheer number buyers still looking to purchase a home. Many would-be buyers stopped looking in 2021. With many still wanting to purchase a home, along with Millennials in their prime home-buying years, and an improving economy, signs remain positive for the housing market itself.

While we may be in a new year (hello 2022!), this year should still be another’s seller’s market (although possibly not as severe as 2021).

It is still a competitive market. With the numbers of homes expected to be sold this winter higher than normal, now is a good time to get ready to purchase a home. If you are buying in the state of Georgia, contact me today. In a few minutes, I can have you prequalified and working toward getting your loan pre-underwritten approved.

Mortgage rates continue to improve

The federal reserve completed their fourth rate hike of the Federal Funds Rate this week. Guess that means mortgage rates are up? Nope! They are not. Mortgage rates have improved.

In fact, mortgage rates improved by over a half a point better coming off their 2018 highs in early November. Why? This blog covers the topic often, but not often enough as a lot of people believe mortgage rates flow with the actions of the Federal Reserve.

While mortgage rates may get worse when the Federal Reserve raises the Federal Funds Rate, mortgage rates themselves are actually determined by the value of mortgage backed security bonds. As these bond prices go up, mortgage rates go down (and vice versa). The Federal Funds rate impacts rates on car loans, credit cards, and home equity lines (second mortgages). We’ve seen those rates get higher this year as the Fed raised rates a full point in 2018.

What is causing mortgage rates to improve? It’s the usual suspects:

• When mortgage rates were at their yearly high, stocks were at an all time high. Since the Dow his 26,800, it has lost 4,000 points (15% of its value) as of this blog post. Money is coming out of stocks and going into bonds. As bond prices go up, mortgage rates go down. It’s no coincidence rates were at their highest point of 2018 when the Dow was just like rates are now improving as the Dow pulls back.
• Stocks are slowing their historic run due to bad economic news. There are signs the economy is potentially headed toward a recession (some believe it will happen in 2019). Bad economic news sends investors from higher risk/higher reward stocks into the safer investment/less reward bond market.
• The Federal Funds Rate itself – as it moves higher, inflation is slowed. Mortgage rates hate inflation, and combating inflation is a way to help mortgage rates improve.

What to do with this rate improvement? If buying a home, rates are still low and headed back near their levels at the start of 2018. Purchasing a home with these improved rates gives the buyer a 6% increase on their purchase price. Now is a great time to start looking. The spring market for buyers/buying power is already upon us. If you’ve considered doing a refinance to pay off an equity line whose rate is going up and up this year, now is a much better time to consider making this move.

Owning or buying a home in Georgia? Ready for that mortgage conversation? Contact me today, and we’ll get started!

Feds raising rates again?

This week the Federal Reserve meets again with the prospects of another hike in the Federal Funds Rate. While there seems to be positive sentiment for an increase, the excitement for an increase is lower than it was a few weeks ago. There are concerns in the markets with events overseas, increased prices in oil, and a sluggish first quarter of economic growth in the US.

If the Fed raises rates, it would be the seventh increase within the past 30 months. That said, rates would still be well below where they were at the start of the recession. Whether they raise rates or not, analysts will be watching carefully for the Fed’s statement which will be released on Wednesday along with the rate decision. This statement may give us a clue of what the Fed is thinking about rate increases for the rest of the year and perhaps even into next year. A major question to answer will be at what level will they consider rates “normalized.”

In terms of mortgage rates, the last several times the Feds have raised the Federal Funds Rate, mortgage rates have either improved or at least stayed the same. Why? The higher the Federal Funds Rate, the more inflation is kept in check. Since mortgage rates hate inflation, this can help push mortgage rates down. Considering mortgage rates have increased by 0.750% this year, any relief would be welcomed. So don’t worry about hearing the Feds are raising rates because that may actually help mortgage rates improve.

Looking to get prequalified to buy a home in Georgia? Contact me today today and I can help you toward owing your new home!

The Feds are halfway there

One of the Federal Reserve presidents recently said the Fed was halfway home to raising rates. Currently, the rate sits at 1.25%, and the statement implies the target is 2.5%. The San Francisco Fed President feels a rate of 2.5% is the normal target rate for the US economy.

If true, what does that mean for rates, economy, etc.?

One interesting aspect would be the ability of the Fed to help when the economy experiences another downturn – and it will. The economy rises and falls, and it will slow down again at some point. Before 2008, the Federal Funds rate sat at 5.25%. The Fed lowered the rate to virtually zero to help the economy. What happens the next time there is a down turn, and the rate sits at 2.5%? There wouldn’t be as much room to lower the rate to stimulate the economy. Of course, no one expects another down turn like 2008 to happen.

What about mortgage rates? Since the Feds began raising the Federal Funds rate, mortgage rates have improved every time. The only reason rates haven’t set new historic lows is due to the rapid rise of mortgage rates after the 2016 election. In fact, was the dropping of the Federal Funds rate that helped pushed mortgages rate lower. Over the past 5 months, mortgage rates have been flat. As they are near historic lows, there really isn’t that much more room for improvement. That said, more rate hikes could help push them lower as an increasing Federal Funds rate can help mortgage rates improve.

In the end, it will probably be more of the same when it comes to rates… staying low. That has been the Fed’s goal since the 2008 market crash. They’ve achieved this goal by buying bonds and then several rounds of quantitative easing. Now that the economy has improved, the Fed’s attention turns to keeping inflation in check. They do this by increasing the Federal Funds rate, which helps mortgage rates improve (mortgage rates hate inflation). The Fed continues their goal to keep mortgage rates low. When will rates go up? Honestly, at this point, I don’t think anyone knows. I’ll believe it when I see it!

Potential Shake Up at the Federal Reserve

Janet Yellen’s days may be numbered. She is the current head of the Federal Reserve, and her role is up for renewal by President Trump. While he has been coy in the past about his plans to (or not to) replace her, signs are pointing to the fact he might indeed do so.

Trump has made no secret about his desire for low interest rates. This tends to fuel stock values/growth (something President Trump enjoys), but it could cause problems down the road. It also marks a significant shift in the philosophies of our major political parties:

• Democrats traditionally want lower rates to encourage job and wage growth.
• Republicans tend to want the Federal Funds rate to be higher to fight off inflation.

There is another angle to consider: Ammunition for the Federal Reserve when there is another economic down turn. Lowering the Federal Funds rate is a classic monetary policy employed by the Federal Reserve to help stimulate the economy in times of slow growth/recession. We saw the Federal Reserve lower the funds rate after the “.com” bubble burst, and then raise it as the economy recovered. This repeated after the housing collapse, and the Feds are now raising the rate again to have this as a fallback position for next time (there will be a next time). If rates are kept low, the Feds won’t have this as an option. Japan have kept their “federal funds” equivalent at zero for many, many years with little impact. They recently started a “negative” rate policy that has also shown little results in getting their economy back on track.

It is a delicate balance, and will be interesting to see how it plays out.

The question that most people reading this blog want to know is how will this impact mortgage rates. Mortgage rates tend to work in opposite fashion to the Federal Funds rate.

• the Federal Funds rate directly impacts rates on second mortgages, car loans, credit cards.
• mortgage rates are determined by the value of mortgage backed security bonds. These bonds (and all bonds) hate inflation. As inflation rises, bond values drop. As bond values go down, mortgage rates go up.

It stands to reason that mortgage rates could improve as the Federal Reserve raises the Federal Funding Rate. That is exactly what has happened as the Fed raised rates. Mortgage rates improved after the Federal Reserve raised rates in December 2015. Mortgage rates skyrocketed after the election (when stock prices went up dramatically). Mortgage rates have improved since the Fed began raising the Federal Funds rate again at the end of 2016 and into 2017 (while stock values have been mostly flat/slightly higher).

It will be fascinating to watch how this unfolds as traditional party philosophies, the economy, monetary policy, and mortgage rates all stand to be impacted by the decision.

How Could Fed Rate Increase Affect Mortgage Rates?

For the first time in a year, the United States Federal Reserve raised the federal funds rate by 0.25%.  How will that impact mortgage interest rates?

Here’s a history lesson:  The last time the FED raised the federal funds rate was in December 2015.  By the end of January 2016, mortgage interest rates actually improved by about a half point.  Mortgage rates then stayed flat (for the most part) until June and July, when they continued to improve.  Mortgage rates stayed at this very low level until election day.  From election day through December 15, 2016,  mortgage interest rates increased about 0.75%.

When trying to analyze mortgage interest rates, it makes sense to look at a mortgage loan as an investment.  Here’s why…Fannie Mae and Freddie Mac purchase most of the conforming mortgages originated in the USA.  They “pool” these mortgages into mortgage-backed securities (“MBS”) which are bought and sold on Wall Street just like other investments.  MBS provide investors with regular, predictable income (from the interest payments on the mortgages), so they are considered less “risky” than stocks and mutual funds.

But ultimately, MBS must compete with all other investments for investors’ dollars.  In the recent, post-election period, stock values have increased making equity investments more attractive.  To compete, lenders had to raise mortgage interest rates to provide a greater return and compete with the high-flying equities.

 

In addition, China has been selling large amounts of its US government debt holdings.  As China sells, that creates pressure to raise interest rates on US government debt.  Again, government debt competes with MBS for investor dollars.  As interest rates on government debt increase, mortgage rates may have to rise to remain attractive to investors.

So what is a home buyer to do?  If you plan to buy soon, you can relax knowing that, once you get a home under contract, your lender can lock your interest rate through your closing date.  This means that if market interest rates rise between the time you lock your rate until closing, you still pay the lower rate specified in your lock.  You are protected against rate increases.

In addition, Dunwoody Mortgage offers a free interest rate float down on some mortgage products.  This means that, if market mortgage rates drop after you lock your rate, we might be able to lower your rate before closing.  With the free float down, after you lock your rate, you are protected should interest rates increase, and you may still be allowed to benefit if market rates decrease.

Ultimately, we at Dunwoody Mortgage are working in the best interest of our borrowers.  If you are looking to buy a house anywhere in Georgia, and mortgage interest rate changes make you nervous, contact me.  We can set you up with a loan program that can help protect you against the ups and downs of mortgage interest rate changes.

Feds may not raise rates at all this year

Well over a year ago, the Federal Reserve indicated they would begin raising the Federal Funding Rate. This started in December 2015 when the rate increased by 0.250% for the first time in almost a decade. While we didn’t expect a 0.250% increase each time the Feds met this year, surely there would be another increase at some point. Right?

The year is almost over, and the Feds have stood their ground. The comments from the most recent Fed meeting made it sound as if it is doubtful there would be an increase this year, but could be in 2017 as the economy continues to reach employment goals.

Does that mean potential buyers should panic as rates may go up in 2017? No, it doesn’t.

• The Federal Funding rate does not impact mortgage rates. When the Federal Funding rate increases, rates go up on second mortgages, credit cards, car loans, etc.
• Mortgage Rates go up and down along with the value of Mortgage Backed Security Bonds. To see plenty of previous posts on this topic, do a search for “MBS” in the “search this site” box in the upper right corner of the page.
• The last time the Feds raised the Federal Funding Rate, Mortgage Rates improved. Rates are roughly 0.500% lower now than they were in December 2015.

So what to make of this? Don’t make home buying plans on what the Feds may or may not do. Don’t buy a home out of fear of rates going up. The best strategy is to get prequalified to buy a home, and purchase a home when the time is right for you… and not what the Feds or media dictates.

Looking to buy a home in Georgia? Contact me today. I’ll get you prequalified and get you ready for your home buying experience.

 

The Fed holds, but rates went up?!?

The Federal Reserve announced last week that it would not raise the Federal Funding Rate (again), which keeps the rate near 0% as it has been for years now. Guess that means mortgage rates won’t rise.

Well, a funny thing happened since the Fed’s announcement. Mortgage rates have gotten worse. Say what?!? If the Feds didn’t increase rates, why are mortgage rates going higher?

The answer is this – the Federal Funding Rate does not determine mortgage rates. Mortgage rates are determined on the value of mortgage-backed securities. These are a type of bond that trade every day like stocks. Their values can go up (and lower mortgage rates), or their values can go down (and increase mortgage rates). If mortgage-backed security bonds have a dramatic shift during the day, just like the Dow can, then we may see mortgage rates change more than once a day.

This means mortgage rates, like stocks, are driven by the market and not by the Federal Funding Rate. Remember the Quantitative Easing (QE) program from a year or so ago? This was the Federal Reserve purchasing mortgage-backed security bonds to increase their value, and lower mortgage rates. The Fed attempted to influence the rate market, and it couldn’t do that by simply lowering the Federal Funding Rate.

So what does the Federal Funding Rate actually impact? Great question! The Federal Funding Rate impacts car loans, home equity lines, credit cards, etc…. not mortgage rates.

Remember, next time you hear a news article about “rates going up,” it may not have anything to do with mortgage rates. Those can increase at any time depending on the market. More questions? Contact me today and I can answer them for you. If you live in the state of Georgia, I can also help you purchase your new home!