20070922 - Big News! Fed Lowers Rates and Mortgage Rates Rise ????????

Snapshot: Average Rates
30 yr - 6.34% w/ 0.5% in fees. UP from 6.31%. 1 yr ago - 6.40%
15 yr – 5.98% w/ 0.5% in fees. UP from 5.97%. 1 yr ago – 6.06%
5/1 ARM – 6.21% w/ 0.5% in fees. UP from 6.17%. 1 yr ago – 6.08%
1 yr ARM - 5.65% w/ 0.6% in fees. DOWN fom 5.66%. 1 yr ago – 5.54%
(Average mortgage rates according to Freddie Mac’s Primary Mortgage Market Survey®, as of 09-20-07)

Note: These rates should be used for trend line analysis only, NOT for comparison shopping. Your rate will vary depending on multiple factors. In general, this simply helps demonstrate which direction mortgage rates have moved from week to week.

Summary: The obvious big news this past week was The Fed lowering rates. Not mortgage rates, but the Fed Funds Rate. As you can see and as we often repeat here, mortgage rates are not influenced by The Fed, or more properly known as the Federal Reserve Open Market Committee (FOMC). What impacts rates more often is what they say, not what they do. This is evidenced by the fact that rates have actually gone up! Ever so slightly, but up. If The Fed controlled rates, one would conclude that a ½ percent drop by The Fed would equal a ½ percent drop in rates. Look above. Not true. On the surface and with all the media attention on mortgage rates, I know it may not make any sense to many, but it really does. To learn more, send me an email and I will send you a special report “What Makes Mortgage Rates Move”.

The Fed: How can mortgage rates possible rise after a Fed cut? A Fed cut is supposed to spur economic growth. The Fed didn’t cut rates to lower mortgage rates…they did it to save the bacon of a few banks that are getting squished. Remember, The Fed’s role is not to pump up stocks, sell homes or keep employment high, or even keep inflation in check. That’s what they pretend to do, but in all reality, the sole purpose of The Federal Reserve Banking System is to make certain that the nation’s banks remain liquid, viable and profitable….that’s it. All the other stuff is window dressing. If the Fed were really concerned about inflation, they would NOT have lowered rates. Look what happened to gold and oil after The Fed cut….to the moon baby! Anyway, off my soapbox.

Stronger economic growth has a history of raising inflation. Fears of inflation concern bond holders and they require a higher yield to purchase more bonds. Mortgages are packaged on Wall Street in the form of bonds. Anything that impacts bonds, impacts mortgage rates. The Fed lowering rates to spur on economic growth could lead to higher inflation, thus bond prices went down and yields, and mortgage rates, went up.

More Fed: Economic growth has slowed in recent months and inflation has been slowly cooling for a while, helping to keep mortgage rates steady for most of 2007. By lowering rates, The Fed made money cheaper for certain borrowers, notably banks. (See how this goes back to what The Fed’s real role is…think banks, banks, banks.) If the Fed's actions have the desired effect, economic growth should increase, which would likely create some form of inflation. The markets adjusted for this potential inflation and mortgage rates adjusted as well, again upward.

Market players should always be careful. You don’t always get what you want, but usually get what you deserve.
The markets have been whining about lower rates…gosh I want to smack people sometimes…look how low rates are these days. Come on...look! They’re lower than they were one year ago. The one main thing this move will do is help people that have ARM’s. Their rates won’t change as high as they were going to prior to The Fed cut. How many people will this help? Not as many as people tend to think. More people have fixed rate loans as compared to ARMs. Makes for some big headlines though!

New Construction: The National Association of Homebuilders survey reveals bleak outlooks from builders. Their index of member sentiment fell to a level of 20, the lowest September value in the history of the survey. Troubled credit markets in August simply added to the poor outlook. August housing starts fell by 2.6% to an annualized rate of 1.331m units and Building Permits fell 5.9% to a 1.307m annualized rate.

Inflation - PPI: The Producer Price Index for August fell 1.4% overall, but actually increased by 0.2% with energy and other volatile costs removed from the equation, the “core” rate. With energy prices rising, this number is very likely to reverse itself and head north. For the PPI, "headline" inflation is up 2.1% over the last 12 months, while "core" PPI is up 2.2% over the past 12 months. This was good news for The Fed and helped them in making their decisions as inflation appears to be 'in-check' when looking at some of these numbers.

Inflation - CPI: Headline Consumer Price Index fell 0.1% during August, while the "core" CPI rose 0.2% higher. CPI is up 1.9% over the last 12 months and the "core" CPI is down 2.1% over the last 12 months. This numbers have provided a glimmer of reasonableness for the Fed to lower rates. They can say, “see, inflation is in check”. Buy groceries or fill up your gas tank lately?

Consumer Confidence: The weekly ABC News/Washington Post poll showed a -15 reading during the week of Sept. 16, the highest level since the credit market disruption of mid-August.

Outlook: Next week will be full of reports. Measures of consumer attitudes, several local and national manufacturing reports, construction spending, home sales and the last look at Q2’07 GDP numbers are due next week.

Another implosion: Decision One, a subprime lender, closed its doors this past week. Overall, odds are good that rates will tick north a bit next week as everyone gets over the "big news" of The Fed. I know it’s hard for many people in today’s economy. I wish them well and good luck with future endeavors.

Thought of the Week: "You can't always control the wind, but you can control your sails."
- Toni Robbins