Archive for March, 2007

Watch What I Do, Not What I Say I’ll Do

David Kosmecki | March 30, 2007 in Uncategorized | Comments (0)

The University of Michigan Consumer Sentiment Survey slipped to 88.4 in March, down from February’s 91.3 and its lowest level in six months.

Why should you care about the UofM survey? In a nutshell, you shouldn’t. But, you sort of have to.

Here’s why: Consumer confidence is considered important by markets because hundreds of “real people” are telling the surveyors how they feel about the economy.

Because the surveyed people are the “word on the street”, economists can get a better glimpse into how the economy is likely to perform in the near-term.

For example, if people are feeling good about their personal finances, they are more likely to spend more and propel the economy forward. The reverse is also true. If they feel uneasy about their personal finances, they will curtail spending and pull the economy back.

But, confidence surveys can be worthless because what people say and what they do are often two very different things.

On the heels of today’s UofM survey, the Commerce Department released the Personal Spending report.

We would expect that the falling University of Michigan confidence numbers would translate into lower levels of Personal Spending. On the contrary! Personal Spending was up by whopping 0.6%. People are less confident about the economy, but are still choosing to spend more.

Mortgage markets are mixed on today’s data and mortgage rates are relatively unchanged.

Bernanke Says Inflation Is “Somewhat Elevated”

David Kosmecki | March 29, 2007 in Uncategorized | Comments (0)

Ben Bernanke testifies before congress

Ben Bernanke delivered a prepared speech to the congressional Joint Economic Committee Wednesday in which he stated that inflation is “somewhat elevated”, but that it’s no reason to expect a Fed Funds Rate hike anytime soon.

Some of Chairman Bernanke’s more salient points:

  1. Economic growth has slowed because of a “substantial correction” in the housing market
  2. Sub-prime industry problems are self-contained (so far)
  3. Business spending will pick up this year
  4. Consumer spending will propel the economy forward
  5. Inflation is down largely because of energy costs are down

In other words, there are multiple reasons why inflation is higher than desired and even Bernanke admitted that there are upside and downside risks to each of these points. As a result, markets had a hard time digesting the text.

Immediately following his speech, mortgage rates improved, but by the end of the day, rates had swung back to unchanged.

What Last Night’s Oil Price Spike Reveals About Market Nerves

David Kosmecki | March 28, 2007 in Uncategorized | Comments (0)

Oil prices are down since last year overall, mostly because the political risk has been removed from pricing.

Last night, though, a rumored Iranian attack on a U.S. ship in the Persian Gulf showed how quickly markets can flip if oil supply is threatened.

Immediately, the political risk of tightened oil supply found its way into the price of oil.

Within minutes of the rumor, oil prices jumped more than $5 per barrel to cross the $68 level. Only after the U.S. military refuted the story did prices retreat.

Higher oil prices create higher costs for Americans in many facets of life including gasoline bills, heating and cooling costs, and energy bills.

Higher oil prices increase costs on business and consumers and that is considered to be inflationary, which generally leads to higher mortgage interest rates.

Would You Have Answered The Mortgage Type Quiz Correctly?

David Kosmecki | March 27, 2007 in Uncategorized | Comments (0)

The pie chart at right comes from a survey, sampling 1,000 adults about their current housing situation.

The question asked: What type of mortgage do you currently have?

While the 34% “Don’t Know” figure is troubling, even more frightening is the 6% “ARM” figure.

The sample size was small, but far more than 6% of homeowners carry adjustable rate mortgages. Some of the survey responders may have mistaken their “5-year fixed rate mortgage” for a true fixed rate mortgage — even though they are aware that the rate can change after 60 months.

According to the Federal Reserve, ARM holders tend to be unaware of how often their home loan can adjust, the maximum interest rate to which it can adjust, or even the rules by which the new, adjusted interest rate is calculated. That all can lead to financial stress in a household.

If you own a home, you need to understand the basic structure of your own mortgage the same way that you need to balance your checkbook each month. Even if you have a fixed rate mortgage — you may be mistaken, after all.

It’s never too late to look over your mortgage statement or reviewing your closing documents. If you don’t know how to interpret what you’re reading, get help from a professional.

The Week In Review (March 26, 2007) : What To Watch For

David Kosmecki | March 26, 2007 in Uncategorized | Comments (0)

The Fed held the Fed Funds Rate at 5.250% last week and included verbiage in its Press Release that the FFR may have to come down before it goes up again. This gave investors reason to cheer and the stock market rallied to its best week in four years.

Mortgage rates did not fare as well, however, weighed down by competing fears about inflation and sub-prime lending.

This week could be a wild one for mortgage rate shoppers — there are six major data points, culminating in Friday’s Personal Consumption Expenditures (PCE). If PCE measures higher than expected, mortgage rates will spike Friday.

PCE matters because it is a lot like the “Cost of Living” index. The main difference is that it specifically subtracts out sales made to business and governments. Therefore, PCE paints a more accurate picture of consumer spending because it isolates cost pressures on individuals.

One more reason why PCE can move markets so quickly: the Fed tells us that PCE is their preferred inflation measurement. So, because the Fed watches it, we should watch it, too.

The Headlines On Housing Aren’t Telling The Whole Story

David Kosmecki | March 23, 2007 in Uncategorized | Comments (0)

As a consumer, it’s very easy to be misled by newspaper headlines. Today provides a great example.

“Sales of Existing Homes Up 3.9% For The Biggest Monthly Gains In Three Years”

What was not mentioned in the headline was that total inventory rose by 5.9%, adding more supply than for which there is demand.

More supply usually pushes prices down and last month was no exception. The median sale price was down 1.3% from February 2006.

This is the second time this week that real estate headlines were misleading.

Monday, you probably saw this headline in your preferred news source: “9% Jump in New Home Construction“. The headline was followed by an article highlighting strength in the housing sector because more homes are being built.

Missing from the articles, though, was that the Housing Starts survey’s Margin of Error was 10.2%.

Without getting into the math behind it, if Margin of Error exceeds the measurement, the data measured is worthless. The headline could have read “1.2% Drop In New Home Construction” and that would have been “true”, too.

(Author’s Note: If you want to know more about how Margin of Error works, check Google and find an answer that suits you. Or, just trust me on it.)

Housing may be strong or housing may be weak. But, most likely, housing is both of these things. It all depends on your particular street because all real estate is local. Either way, look deeper than the headlines — there’s always more to the story.

The Fed Gets Ambiguous; Mortgage Rates Fall

David Kosmecki | March 22, 2007 in Uncategorized | Comments (0)

The Federal Reserve held the Fed Funds Rate at 5.25%

Ben Bernanke and the Federal Open Market Committee spoke with ambiguity yesterday in electing to keep the Fed Funds Rate at 5.250%.

So far, mortgage rates have benefited.

A major goal of the Fed is to manage the expectations of markets. Therefore, what the Fed does is sometimes not as important as what it says.

In yesterday’s announcement, the Fed expressed concern that inflation is not slowing as expected, but also added verbiage that its next move may be to drop the FFR. Previously, the Fed discussed the need for “additional firming” of policy (read: rate hike); that language was removed entirely.

A lower Fed Funds Rate means that money is “cheaper” which tends to be good for consumers and business. Mortgage rates moved lower on the possibility.

The Fed Sets The Fed Funds Rate Sets Prime Rate

David Kosmecki | March 21, 2007 in Uncategorized | Comments (0)

This afternoon, the Fed adjourns after a two-day meeting and it is widely expected that they will leave the Fed Funds Rate unchanged at 5.250%.

So, what is the Fed Funds Rate and why does it matter to everyday people?

The Fed Funds Rate matters to you and me because it is used to calculate Prime Rate, a popular consumer interest rate used for credit cards and home equity lines of credit.

And why is it called “Prime Rate”?

That’s because banks are smart.

Banks know that if Prime Rate was called something like “Consumer Loan Interest Rate”, we would all have our guard up. Instead, it’s named “Prime Rate” and that makes us feel warm and fuzzy. “Prime” is a strong word with a positive connotation.

It’s important understand, though, that when the Fed makes changes to the FFR, it directly impacts Prime Rate; the two move in lock-step.

Prime Rate is always 3.000% higher than the Fed Funds Rate.

For example, in June 2004, the FFR was 1.000% and Prime Rate was 4.000%. Since that date, however, the two have increased to today’s levels of 5.250% and 8.250%, respectively.

Because of the increase, credit card balance-carrying Americans have faced a 4.00% APR increase and homeowners with home equity lines of credit have watched their HELOCs more than double in payment.

The Fed is widely expected to leave the Fed Funds Rate unchanged today, but may provide clues about the future path of the benchmark rate. Any hints that the FFR will be lowered should provide a boost to the housing market.

Of course, the opposite is true, too. If the Fed cites economic strength and that FFR may have to be increased, it should have a detrimental effect on housing.

Look Beyond Short-Term Movement Towards Longer-Term Trends In Housing

David Kosmecki | March 20, 2007 in Uncategorized | Comments (0)

Mortgage rates are somewhat restrained today as the Fed begins its two-day meeting.

As reported by the Census Bureau, Housing Starts — defined as the number of units for which construction began — surprised to the high-side, despite a cold February.

The 9% increase over January showed relative strength, but when compared to February 2006, the number of starts is down 28.5% year-over-year.

This data points to an overall slowing in the housing market.

Supporting the slowdown, Building Permits are also down. That data point registered a 2.5% decline versus last month, and a 28.5% decline versus February 2006.

Market mentality is that the FOMC will look at today’s housing data as indicative of a general housing slowdown, and that is generally good for mortgage rates.

Traders will stop short of placing heavy bets, though, so until tomorrow afternoon’s FOMC press release, expect general malaise and flatness in mortgage rates.

The Week In Review (March 19, 2007) : What To Watch For

David Kosmecki | March 19, 2007 in Uncategorized | Comments (0)

Sub-prime mortgage news dominated the headlines this past week as the Chicken Littles were out in full force. Perhaps the fears of a credit crunch are overblown, but then again, perhaps there’s reason to worry.

Like everything else in the world of economics, it all comes down to expectations.

Markets makes predictions about the future health of the economy and then they place bets to reinforce their predictions. This week, there will be several “expectation setters” to keep an eye on.

The major expectation setter will be Wednesday as Ben Bernanke and the Federal Open Market Committee meet to discuss U.S. monetary policy. After their meeting, the FOMC will issue a press release that will be heavily scrutinized by global investors.

Traders will be reading between the lines to see if the Fed believes our economy is expanding or contracting.

Any whiff of contraction and mortgage rates will plummet because the prevailing expectation is that the Fed is comfortable with the current expansion levels.

The other expectation setter comes in two parts: Monday’s Housing Starts data and Friday’s Existing Home Sales data.

Markets will be looking at both of these figures to see if sub-prime mortgage defaults spilled over into builders’ development plans and the general housing market, respectively.

This could be a volatile week for mortgage rates with so much uncertainty ahead.