I am hoping to be able to put down my thoughts on my Mortgage Blog later today on President Bush's brokered agreement to freeze subprime interest rates, check in later today or this weekend.

 

KABOOM! That was the sound of our mortgage rates yesterday and the echo today is even louder.  As you are aware rates had been dropping in front of the Fed meeting next week with many anticipating a 0.50% cut in rates--as anticipations go on Wall Street so go expectations and money follows expectations.  There was some sell off yesterday causing a slight bump in rates, nothing we would have made a big deal about but it led into today's markets where jump off replaced sell off. 

 

Recapping one of our economic axioms: the Fed wants to control inflation and recession and keep the economy on as even a keel as possible, it does so with interest rates among other tools.  When it feels stimulation is needed it lowers rates, when it feels like some brakes are needed it raises rates, on the Federal Funds and/or the Federal Discount Rate.  Moves in these rates filter through other sectors and credit markets.

 

Because of the credit and housing scenario playing out since Spring the Fed has been engaged in cutting rates the last several meetings--keeping money flowing and trying to prevent or stave off a shut down of the economy.  In doing so it has run the risk of fueling inflation which would as dangerous to the economy.  As a result there have been many, myself included, who have felt the Fed rates cuts have been excessive and inflationary.  Since I do not have a vote on the Fed Board of Governors my opinion matters not so much in policy making.

 

Wall Street investments, in stock and bonds mostly, are bets.  Investors are betting that a company or sector will do better or worse in the future and bet by buying or selling.  If Wall Street thinks inflation is on the way it will sell out of bonds as higher interest rates are on the way--and by selling they create a lowering of price and increase in rates.  In a way creating their own self-fulfilling prophecy.

 

Today the employment and wage figures came out for November...and they were inflationary.  Almost 100,000 new jobs were added to the economy last month, about 20,000 more than expected.  Further, along with more people getting paid they are getting paid more money with wages increasing 0.5% in November.  Now that may not seem like a big number, zero point five percent, but taken across all the payrolls in America it becomes a lot of money.  Let's say you are Boeing with 20,000 workers and the average hourly rate is $15 per hour and now you have to pay $15.08 per hour--that amounts to $64,000 per week, or $3.3 million per year.  For just 20,000 workers in the economy.  Multiply that by say 147 million workers in the U.S. economy and that little one-half of one-percent becomes a huge number: $2.5 billion per year in additional wages just from that percentage entering our economy on the workers side.  That is inflationary.  (Not to mention the increase in payroll taxes for the government but I will get into that!).

 

So now the markets who have already priced in a cut of 0.50% by the Fed next week are screaming, "No way! Sell! Sell! Fed will only cut 0.25%!" and rates get slammed.  Big readjustment to the anticipations and expections and therefore the bets or investments result in a big jump in rates today.  We should see things calm down next week and by end of the year get back towards, or closer, to 5.5% for conforming, but until then we had a few days of rates of two year lows--at least for conforming.

 

Please feel free to forward this email to your co-workers and clients--or send them to my Mortgage Blog where it is posted weekly.

 

Have a great weekend,

Friday, December 07, 2007

 

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