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2011-10-24 15:15:43
Inflation and mortgage interest rates

Here is some great information that I received in an email from a lender trying to earn my business. Although I am perfectly content with my current lender(s), I was very impressed by this information. As you will read, it is better to purchase a home while rates are lowin an unsteady market, then when rates are high in a steady market due to inflation.





In This Issue: The Fed made headlines, plus inflation is heating up!

Forecast for the Week: Some key reports on housing, plus the Fed’s favorite gauge of inflation and news from Europe could move the markets.

Last Week in Review: When the Fed talks, people listen. And last week, the Fed made headlines when Fed Governor Daniel Tarullo called for the Fed to engage in another round of Mortgage Bond purchases…or in other words, another round of Quantitative Easing (QE3). Read on to find out what this could mean for the housing market and home loan rates.

In order to really have an impact on housing, the Fed would have to announce something significant to get people to buy a home. Why? Because even now, with rates at historically low levels and incredible affordability levels, the sales pace in housing is tepid, due to structural problems in the labor market, which the Fed can't fix. In fact, there is a lot to consider before the Fed starts expanding their balance sheet, and the biggest concern is rising inflation.

Contrary to what the Fed has said about it moderating, year-over-year inflation is on the rise. The headline Producer Price Index (PPI) rose by a whopping 0.8% in the month of September, elevating year-over-year wholesale prices by a hot 6.9%. Meanwhile, the Consumer Price Index (CPI) for September rose by 0.3%, and while this was inline with estimates it pushed the year-over-year number to 3.9%. This is significant because the year-over-year figure was just 1.6% in January. Remember, inflation is the arch enemy of Bonds and home loan rates.


September PPI - Utah Real Estate




The concept is very simple: If inflation rises, investors in Bonds demand a higher yield to offset the lost buying power inflation imposes on a fixed payment. And as home loan rates are tied to Mortgage Bonds, this would mean home loan rates move higher. And let’s not forget the ongoing drama out of Europe. French and German leaders will hold two summits in the span of four days to come up with a resolution to the European debt crisis. Whichever way this news goes could have a real effect on the markets, including Bonds and home loan rates. With all the news to come this week, it’s still important to remember that now remains a great time to purchase or refinance a home, as home loan rates are still near historic lows. 

Forecast for the Week:

Look for some key reports on the housing market, which come after last week’s better-than-expected Housing Starts and the softer numbers from Existing Home Sales. New Home Sales are set to be delivered on Wednesday. That number has been hovering near record lows, so the markets will be anxious to see if there’s any indication of an improvement.

Also this week, Pending Home Sales will be released Thursday. Also on Thursday, Initial Jobless Claims will be released as usual. Plus, the first reading on Gross Domestic Product (GDP) for the 3rd quarter will be released. Overall, the estimates don’t appear as if the economy is hitting on all cylinders yet. The markets will see how the American people are holding up in this economy with Consumer Confidence and Consumer Sentiment on Tuesday and Friday, respectively. Ending the week, Friday’s Core Personal Consumption Expenditure (PCE), the Fed’s favored inflation measure, is sure to garner some attention. In addition to those reports, keep an eye on the news.

One story that could gain some attention is news that the Federal Housing Finance Agency (FHFA) and the Obama administration will submit proposals to Congress to help the housing market for those homeowners who are underwater. 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.

As you can see in the chart below, Bonds and home loan rates stayed in a tight range last week. I’ll be watching closely to see how the markets react to Fed Governor Tarullo’s call for QE3, the news out of Europe, and the economic reports of the week. Chart: Fannie Mae 3.5% Mortgage Bond (Friday Oct 21, 2011).

Mortgage Bonds Trading - Utah Real Estate




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