Dennis' Mortgage Blog

Question of the week:  You have always said inflation makes for higher rates, why with oil going up, which should cause other prices to go up, are rates going down?

Answer:  This is a good question.  We know how dependent our economy, and any economy not based on the barter system, is on oil. Transportation, heating and cooling, electricity, most consumer products, use oil in some refined variation.  Oil is the single most important commodity in almost every economy.  Ergo the price of oil goes up the price of everything else should go up. 

The Federal Reserve is in its second round of Quantitative Easing meant to push, or keep, interest rates down with the intention of creating inflation in our economy.  The basic concept of the Quantitative Easing is to put more money into the economy, in addition to the additional money pouring into the economy from a federal government that has spent several years with trillion dollar plus deficits.

With all the pressure on prices to rise, from the Fed, from federal debt, from rising oil prices, the conventional wisdom is that investors will be fleeing bonds and pouring money into stocks.  So far they have done the latter; stocks have been soaring since September using cheap money from the Fed.

Now with the riots and revolutions and uprisings in North Africa and the Middle East that have seen crude oil prices spike we have seen a slight decline in stock prices and sharp increases in bond prices. Bond prices go up, rates go down.

Why are rates going down when oil prices are climbing?  A few reasons.  First and foremost, the most basic tenet of investing is in times of trouble investors undergo a “flight to quality.”  The take their money out of riskier, more volatile investments, like stocks, and put their money in safer investments, like cash.  Or bonds.  When there is geopolitical turmoil investor flee to quality and bond prices increase and rates drop.  A statement by the guy that still controls the tanks, guns and planes of the country with the biggest oil reserves in North Africa says he will blow up his nation’s reserves and destroy oil fields and production causes a flight to quality.

Secondly, the sudden spike in oil prices can cause other prices to go up.  Higher oil prices can also cause consumers to stay home, stop spending, driving and consuming, hampering any economic recovery.  The riots, uprisings and revolutions in the Middle East are endangering the supply of crude oil to struggling Western economies.  Depending on how high oil prices go, and how long they stay high, will determine the impact on whether our economy will continue its staggering and slow growth, or will sink back into recession.  Whether or not the events in Yemen, Egypt, Bahrain, Algeria, Libya, Lebanon, Iran, Syria, Morocco, Kuwait, and the UAE to name a few will put the brakes on our economy, or throw it into reverse, is the primary focus of those whose decisions impact mortgage rates.  This past week those decision makers feel those events will impact our economy and as a result they have been buying bonds and mortgages—and rates have dropped as a result.

Have a question for me?  Ask me!

Some interesting real estate news this week as the National Association of Realtors released their reports for January’s activity.  After a 12.5% increase in existing home sales in December sales of existing homes increased 2.7% in January despite the horrible weather in much of the country.  Of the January sales 37% were reported as distressed properties, i.e. foreclosures, short sales or borrowers delinquent on their mortgages. 

For home sales in 2010 NAR reports 4.9 million sales of existing homes, the lowest annual total since 1997.  With home sales at thirteen year lows, and foreclosures increasing in 2010 that means there is a lot of inventory either on the market or on bank balance sheets. 

Supply affect prices and prices dropped according to the NAR report.  The national median home price for January 2011 was $158,800, the lowest median price since April 2002 in the early stages of the housing bubble.  The January median price was down 3.7% from January 2010 and down a whopping 5.9% from December’s median price of $168,800.  Economic recovery is not spreading to the housing markets across the country.

Speaking of economic recovery, and growth Gross Domestic Product numbers for the 4^th Quarter (Q4) of 2010 were released by the Commerce Department.  The initial estimate from the government for Q4 GDP growth released last month was 3.2%, and estimates for the final number were 3.2-3.3% actual growth.  Um, not so much.  In the 4^th Quarter of 2010 the GDP grew by 2.8%, lower than originally estimated and lower than expected.

The slower than expected growth helped interest rates as along with the GDP data was the release of the Fed’s preferred meter of inflation, the Personal Consumption Expenditure index which measures the costs of goods and services for consumers.  Stripping out energy and food products PCE grew at an annualized rate of 0.5%, much lower than the Fed’s 2.0% target for inflation. 

Combined with the oil prices and other international factors, the reports on home prices, GDP and consumer prices, mortgage and other interest rates have been hot commodities.  We have plenty of economic news next week that can be market movers so be cautious if you are floating your interest rate.

Rates for Friday February 25, 2011 Rates improve overall from last week, biggest gains on high-balance conforming and FHA rates.  High-balance FHA rate is the same but the pricing is such that there is a big spread between the next lower rate and the current rate—call for pricing and probable credits toward closing.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional                             4.875%             No change

30 year high-balance conforming           5.125%             No change

30 year FHA                                         4.75%               No change

30 year FHA jumbo                              4.75%**           No change

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

*Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

**The FHA pricing is skewed, to go below the 4.75% would cost more than 1 point, at the rate listed points considerably less, call for quote.

I am available if you need me this weekend to run numbers or pre-approvals, between slumber parties for our girls home and away.  Ah the joys of parenthood and sleep overs!

Have a great week,

Dennis