Archive for April, 2008

Making English Out Of Fed-Speak (April 2008 Edition)

David Kosmecki | April 30, 2008 in Uncategorized | Comments (0)

The Fed lowered the Fed Funds Rate by a quarter-percent to 2.000% this afternoon.

Because it is tied to the Fed Funds Rate, Prime Rate also fell by a quarter-percent. Prime Rate is now 5.000%.

Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month’s statements.

Mortgage rate shoppers are also benefitting.

Each time the Federal Reserve cuts the Fed Funds Rate, it’s meant to stimulate the economy in growth. Too much stimulation can create too much growth and that often leads to inflation (which causes mortgage rates to rise).

This is one reason why mortgage rates had not fallen over the past few months. Each Fed Funds Rate cut made it more likely that the economy would overheat in the second half of 2008.

So, because the Federal Reserve signaled that a rate-cutting “pause” may be ahead, investors are reducing expectations for a Fed-induced inflation cycle for later this year, pushing rates lower.

The FOMC’s next scheduled get-together is a two-day meeting June 24-25, 2008.

Parsing the Fed Statement
The Wall Street Journal Online
April 30, 2008

Why It Doesn’t Matter What The Federal Reserve Does Today

David Kosmecki | in Uncategorized | Comments (0)

But, it's not what the Fed does that matters to economy right now.  It's what the Fed says.The Federal Open Market Committee adjourns from its two-day meeting at 2:15 P.M. ET today.

Markets expect the Fed to lower the Fed Funds Rate by 0.250 percent in its press release but it’s not what the Fed does that matters to economy right now.

It’s what the Fed says.

If the Fed states that future rate cuts are needed to stabilize the economy, mortgage rates should rise because rate cuts tend to create inflation. Inflation is the enemy of mortgage rates.

By contrast, if the Fed states that it will “pause” before making additional rate cuts (or hikes), mortgage rates should fall.

We’ll dissect the message in full late this afternoon but the most important message to remember is this:

The Federal Reserve does not directly control mortgage rates.

The Fed only controls the Fed Funds Rate, the interest rate on a very specific type of loan made from one bank to another. The Fed Funds Rate, however, is directly related to a consumer-focused interest rate called Prime Rate.

Prime Rate is the basis of interest rates on credit cards and home equity lines of credit.

If the Federal Open Market Committee votes to lower the Fed Funds Rate by a quarter-percent, it means that the interest rate on Americans’ collective credit card and home equity line debt will fall by a quarter-percent, too.

Market Update – April 29, 2008

David Kosmecki | April 29, 2008 in Uncategorized | Comments (0)

Risks favor: Carefully Floating

with finger on the lock trigger

Current Price of FNMA 5.5% Bond: $100.25, +9bp

After two days of nice gains, Mortgage Bonds are taking a little breather as prices test a ceiling of resistance at the 50 and 100-day Moving Averages. Stocks are under some selling pressure on news that Germany’s largest Bank, Deutsche Bank, reported its first quarterly loss in five years after writing down 2.7 Billion Euros ($4.2 Billion) in sub-prime related losses.

Today kicks off the two day Fed Meeting and tomorrow the monetary policy decision and statement will be announced. We expect the Fed to lower the Fed Funds Rate by .25%, to 2.00% and this is also what the Fed Funds Futures are presently pricing in.

At 10:00am ET, Consumer Confidence will be reported. Unless the report wildly misses expectations, we don’t expect the market to react too dramatically in advance of the Fed tomorrow. We will float, but very carefully as prices test a dual layer of resistance at the 50-day and 100-day Moving Averages. As mentioned in yesterday’s update, a signal from the Fed tomorrow that the rate cutting cycle is over should help Bonds. But because they are testing resistance, this a very delicate situation. We will float and give the Bond a chance to improve, but be ready to lock should things change in this volatile market.

The 80/20 Rule Applies To Foreclosures

David Kosmecki | in Uncategorized | Comments (0)

80 percent of foreclosures come from 20 percent of the statesRealtyTrac released Q1 2008 foreclosure statistics and the data follows an interesting statistical phenomenon most commonly known as the “80/20 Rule”.

The 80/20 Rule states that 80 percent of the effects come from 20 percent of the causes.

In this case, 80 percent of bank repossessions in the first three months of 2008 came from 20 percent of the states in the union.

Accounting for 156,463 repossessed homes nationwide:

  1. California (40,023 homes)
  2. Texas (14,935 homes)
  3. Michigan (12,016 homes)
  4. Ohio (10,299 homes)
  5. Florida (10,185 homes)
  6. Georgia (8,265 homes)
  7. Arizona (7,956 homes)
  8. Colorado (7,022 homes)
  9. Tennessee (4,533 homes)
  10. Indiana (4,446 homes)
  11. Illinois (4,216 homes)

Overall, 0.55 percent of homes were repossessed by banks in the first quarter.

Market Update – April 28, 2008

David Kosmecki | April 28, 2008 in Uncategorized | Comments (0)

Risks favor: Carefully Floating

Current Price of FNMA 5.5% Bond: $99.88, +6bp

With no economic news on the calendar today, action is slow as Traders gear up for what is expected to be a week filled with some of the biggest economic events of the month.

On Wednesday, the Fed will release their Policy Statement and interest rate decision. At the moment, the Fed Fund Futures are pricing a 75% probability of a .25% cut to the Fed Funds Rate. We also see a .25% cut, but of far more importance will be the Fed’s Policy Statement. As you know, Bond prices have reacted very poorly after Fed Rate cuts, due to the expectation that the cut will spur on inflation. But if the wording of the Policy Statement leads Traders to believe this may be the final cut, it might just have the opposite effect, helping Bonds actually move higher with the reduced prospect of the Fed spurring future inflation.

Right on the heels of the Fed decision and statement, Thursday will bring the Fed’s most favored gauge of consumer inflation, the Core Personal Consumption Expenditure Index (PCE). Especially since it will come after Fed day, it will be interesting to see the inflation read in light of the Fed’s decision. And as if this weren’t excitement enough for the week, Friday will bring the important Jobs Report, where early estimates are for a loss of 80,000 jobs.

With Bonds currently trading between overhead resistance at the 50-day Moving Average and support at the 200-day Moving Average, Bonds will likely take their cues from action in the Stock market today.

Looking Back And Looking Ahead : April 28, 2008

David Kosmecki | in Uncategorized | Comments (0)

Mortgage markets lost ground last week on inflation concerns and a general feeling that “the worst may be over” on Wall Street.

As investors moved money into the stock market, mortgage rates ticked higher for the second straight week.

The biggest story from last week was the rising cost of gasoline.

Rising energy costs combined with rising food prices are creating worries about the American consumer’s ability to spur the economy forward.

That sets up the biggest story of this week — the Federal Open Market Committee meeting.

The FOMC starts a 2-day meeting Tuesday and is widely expected to lower the Fed Funds Rate by 0.250 percent at its adjournment.

Cuts to the Fed Funds Rate are meant to promote growth in the economy by decreasing borrowing costs for businesses and consumers. For example, credit card rates are tied to the Fed Funds Rate so when the Fed Funds Rate falls, American households pay less interest and (theoretically) have more money to spend on “things”.

But the FOMC meeting is not the only big news to watch for.

On Thursday, the Personal Consumption Expenditures data is released. PCE is the Federal Reserve’s favorite inflation gauge because it’s a smarter version of the “Cost of Living” index. If PCE rises more than expected, it’s an indication of inflation and inflation tends to make mortgage rates rise.

Then, on Friday, it’s the jobs report. The economy is expected to post the fourth consecutive month of negative job growth. Markets have been highly sensitive to the jobs data lately so expect wild swings in mortgage rates in its wake.

And lastly, sprinkled throughout the week, more than 100 influential members of the S&P 500 will report their earnings. If earnings and outtlooks are strong, mortgage rates should rise. If earnings are weak, mortgage rates should fall.

Market Update – April 25, 2008

David Kosmecki | April 25, 2008 in Uncategorized | Comments (0)

Risks favor: Carefully Floating

Current Price of FNMA 5.5% Bond: $99.78, -22bp

It’s another wild ride so far this morning, but these days, we’d be surprised if it wasn’t. Bonds have been extraordinarily volatile, which can be a bit stressful. However, remember to use this to your advantage, as your competitors without this information are left scratching their heads…while you are able to help your clients and referral sources through these crazy times.

Mortgage Bonds opened a whopping 56bp lower than yesterday’s close, but cut their losses in half as they attempt to stabilize. The reason for the negative open was inflation concerns from around the globe – it’s becoming a smaller world, that seems to be more interconnected every day. Oil prices remain stubbornly high, while food prices have increased at an alarming rate. These inflationary pressures are creating some stiff headwinds for Bonds.

The University of Michigan Consumer Sentiment for March was reported at 62.6, which was just slightly below expectations of 63.2. The market did not react much to the news.

After this week’s relatively slow economic news calendar, things really heat up next week with many potential market moving reports, including the Fed’s favored gauge of consumer inflation, the Core Personal Consumption Expenditure Index (PCE) on Thursday, and Friday’s important Jobs Report, where early estimates are for a loss of 80,000 jobs. Plus, on Wednesday the Fed will announce their interest rate decision. At the moment, the Fed Fund Futures are pricing a 75% probability of a .25% cut to the Fed Funds rate.

Much like yesterday, this morning we woke up and saw considerably worse pricing right out of the gate. The Bond is now trading between the 50 and 200-day Moving Averages and will likely take their direction from Stocks.

New Home Sales : How The Newspaper Headlines Mislead You

David Kosmecki | in Uncategorized | Comments (0)

Newspaper headlines rarely tell the full story and today's papers provide a terrific exampleNewspaper headlines rarely tell the full story and today’s papers provide a terrific example.

From the Baltimore Sun (and others):

New-home sales lowest since 1991
8.5% March decline exceeds forecasts; prices also tumble

As always, there’s more to the story than the headline.

The Census Bureau reported a 8.5 percent decline in New Home Sales last month, but in the “fine print” of the report, the Census Bureau cites a margin of error of 16.1 percent.

By including a margin of error, the Census Bureau is acknowledging that the “headline number” is not precise and that the actual change in New Home Sales data lies somewhere between the values -24.6% and +7.6%.

Notice that the range of possible reading includes positive numbers.

This means that New Home Sales could have just as easily shown growth in March — if only the Census Bureau had interviewed a different set of home builders.

The Census Bureau acknowledges this possibility, adding that it “does not have sufficient statistical evidence to conclude that the actual change is different from zero.” The data, therefore, is worthless.

The housing market may be strong or the housing market may be weak. Most likely, it is both of these things. It all depends on your street in your neighborhood because all of real estate is local.

Either way, look deeper than the headlines. They’re a good source of information, but the real analysis requires a deeper look.

New Residential Sales In March 2008
April 24, 2008

How To Determine When You’ll Get Your Tax Rebate

David Kosmecki | April 24, 2008 in Uncategorized | Comments (0)

More than 130 million Americans will receive tax rebates this year as part of Congress' $168 billion economic stimulus package.More than 130 million Americans will receive tax rebates this year as part of Congress’ $168 billion economic stimulus package.

Payments begin in about two weeks and range from $600 for individuals to $1,200 for couples, plus an additional $300 per child.

Not everyone is eligible for a full rebate, however.

For single filers earning more than $75,000 and joint filers earning more than $150,000, the tax rebate is reduced by $50 for each $1,000 of income beyond the limits.

An individual with no children, therefore, will not receive a tax rebate if income exceeds $87,000 annually. The IRS provides a tax rebate calculator that can help make sense of the math.

For tax filers using direct deposit, the rebates will be paid based on the last two digits of the social security number:

  • SSN ending in 00-20 will arrive May 2
  • SSN ending in 21-75 will arrive May 9
  • SSN ending in 76-99 will arrive May 16

For tax filers using paper checks instead of direct deposit, payouts begin a little bit later on May 16 and extend through mid-July. The IRS makes the exact dates known on its Web site.

For late income tax filers, the IRS send rebate checks about two weeks after the returns are processed, but not before the regularly scheduled date.

It Doesn’t Matter That The Median Home Sale Price Rose In March 2008

David Kosmecki | April 23, 2008 in Uncategorized | Comments (0)

The National Association of REALTORS released its Existing Home Sales report for March 2008. An “existing home” is one that is not considered new construction.

A sub-headline in the report showed that the median sales price of all homes sold in March increased by 2.5 percent to $200,700.

But don’t assume that the housing market is improving because of a statistic like that because in the field of Statistics, median is just the “middle” in a group of numbers.

With respect to the Existing Home Sales, the median sales price is the price point at which half of all homes sold went for more, and half went for less.

If more homes sell in high-priced San Jose, CA than in low-priced Youngstown, OH, for example, the median will be skewed to the high-side. The reverse is true, too.

Median sales price make for good headlines, but it does nothing to talk about the local market and that’s where real estate is bought and sold.