20080301 - Way to Go, Ben

30 yr – 6.24% w/ 0.5% in fees. UP from 6.04%. 1 yr ago - 6.18%
15 yr – 5.72% w/ 0.5% in fees. UP from 5.64%. 1 yr ago – 5.92%
5/1 ARM – 5.43% w/ 0.4% in fees. UP from 5.37%. 1 yr ago – 5.93%
1 yr ARM – 5.11% w/ 0.7% in fees. UP from 4.98%. 1 yr ago – 5.49%
(Average mortgage rates according to Freddie Mac’s Primary Mortgage Market Survey®, as of 2-28-08)

Note: These rates should be used for trend line analysis only and NEVER 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: Rates went up across the board as news of higher inflation ripped across the wires this week. The big banger this week was Fed Chairman, Ben Bernanke, in his testimony to Congress flat out saying that The Fed will continue to lower rates even if the dollar devalues as a result. Kaboom! Commodity prices went to the moon and sure enough, the dollar went down in value against almost all other currencies and mortgage rates went up as well. No surprise here. Own any gold? You should. I know it sounds like I think I have all the answer…obviously I don’t. I’m just trying to share some info and be a little, repeat, little entertaining.

OK. OK. Chill out Jim. Sorry, no can do. But you’re a dork! Be quiet and let me get back to writing. (That’s weird, an internal dialogue from inside Jim’s head showing up here. Hmmm?). Anyway, long-term rates are higher than a year ago while short-term rates are lower. What’s the significance? Nothing more than what I have been trying to pound into everyone’s head for the last several years. The Federal Reserve does not control mortgage rates!!!!!!!!! I must have received two dozen comments/questions over the last week…“Does it make sense to wait to refinance? I heard The Fed is lowering rates.” Ahhhhhhhh!!!!

Seriously though, I cannot stress this enough -- The Fed does NOT control long-term mortgage rates any more than I do. IF ANYTHING, The Fed might have some small impact on short-term rates like 1-year adjustable-rate mortgages. That is evidenced by the fact that the current average 1-yr ARM is lower than it was last year, while the average 15 and 30 yr fixed (i.e. long term) rate mortgage is higher than a year ago. The difference? The Fed has lowered the Fed Funds Rate, the shortest of short-term rates…literally an overnight loan..over the last year and mortgage rates are all higher except the 1-yr ARM. See, no impact on long-term rates. In fact, just the opposite. But again, this is just a snapshot of rates, not a comprehensive examination of the entire financial world, and it’s just one man’s opinion…mine.

Don’t be surprised to see The Fed continue to lower the rates they try to control…that’s really a story for a whole book, but The Fed controls the Fed Funds Rate, the rate banks charge to one another for overnight lending…the shortest of short-term rates, literally overnight. Didn’t I just say that? Can you see how that compares to long term mortgages that are on the opposite end of the spectrum? The Fed tries to control overnight lending while mortgages are way down on the other side, 30 years out. Big difference and different influencers. As long time readers know, INFLATION has a huge impact on the supply and demand for mortgage backed securities which has a direct impact on mortgage rates. So….

The Fed: As stated earlier, Big Ben, during his chat with Congress told the wise people sitting before him, had the guts to say that the "Fed would continue to cut rates in the face of rising inflation" NO WAY? WAY. That's our fed Chairman, leading us down the road of destruction caused by rising inflation! What does higher inflation mean…..come on everyone, you know the answer…higher mortgage rates. Bingo. You win a prize!

Greenspan Returns: No, not to The Federal Reserve, but in the news. Big Al Greenspan told the Gulf State Nations, you know, the people with all the oil over there, that they should abandon their dollar peg. You see, oil is priced internationally in US dollars. With the dollar falling, they're losing a lot of money. You might think that they could decide to abandon that link at sometime in the future. They’ve rattled that cage before in the past, but you never know when things will change, especially after recent events. What blows about all of this, here we have the former Fed Chairman, who had his hands deep into this mess that started all this, now telling people to abandon the dollar! By doing so, demand for US dollars would certainly fall further. Goofball.

New Home Sales: January New Home Sales were lower by 2.8%. Not much news here but a continuation of a slowdown in housing. New homes sales are lower by 23.4 for the last 12 months.

Existing Home Sales: For January, existing home sales posted an annualized rate of 4.89 million, just above expectations of 4.8m. Still though 23.4% below a year ago levels. This is simply a return to normalcy as the excesses in housing over the last few years are wrung out of the system. Result: a buyer’s market and sellers, including more and more banks, are taking it in the shorts. You see bankers are just that, bankers. They don’t want to own the real estate. Let me give you an example of a series of transactions that just took place down the street from me.

Housing Story: Person A buys house in 1999 for $275k. Person A then sells house to Person B in 2004 for $450k. Person B put 10% down payment on home. Person B runs into trouble and tries to sell the home in 2006, does not sell and gets foreclosed on. Bank tries to sell house in early 2007 for $400k. They keep dropping the price all throughout 2007 and early 2008 until finally Bank sells property to Person C for $285k. The Bank can’t live in the home, doesn’t want to rent it, let alone own it, so they dump it. Moral of the story: if you want some real estate and you think it will be worth more in 10 years than today, how much real estate do you want to own. It’s a huge buyer’s market for qualified buyers. It’s not all bad news for everyone. It’s horrible news for some, neutral for others and glorious news for still others. It’s not what happens to you, it’s how you react. Make lemons out of lemonade, blah, blah, blah.

[Who does this guy think he is this week?]

Wholesale Inflation: Wholesale inflation came in a whopping 1.0% for the MONTH of January, that’s an annualized rate of 12% folks. Expected increases called for 0.4%. Over the last 12 months, wholesale inflation, as measured by this gauge, producer Price Index, is up 7.9%. What happens at the wholesale level eventually finds it way into the retail or consumer level. So, look for higher inflation in consumer numbers in the near future. All bad news for mortgage rates.

Consumer Confidence: As measured by the Conference Board, consumer confidence came in at a 75.0 reading as compared to the expected 82.0, down from January’s 87.3 and down 36 points from last year. People are not feeling too well.

Unemployment: Weekly claims rose slightly to 373,000 new applications from last week’s 354,000. The 4 week moving average is 360,500. Not much impact on rates.

Gross Domestic Product: The largest measure of our economy, GDP, showed preliminary number for Q4’07 rising 0.6%, which was in line with expectations. Over the last 12 months, this measure of economic growth shows a +2.5%. Not that bad, but certainly trending downward in a rapidly decelerating fashion.

The Bottom Line: Exact same as last week. The economy is slowing and The Fed is lowering rates, inflation and mortgage rates are heading North. Next week we’ll get reports on Personal Income, consumer confidence, manufacturing and the often big market moving monthly report, this time for February.

Thought of the Week: "Customers today want the very most and the very best for the very least amount of money, and on the best terms. Only the individuals and companies that provide absolutely excellent products and services at absolutely excellent prices will survive.” - Author, Brian Tracy