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Providing
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 Here are the rest of the last week's comments....... Hold on to your Hats, rates will be going up..... October 3 Greenspan worries about "exotic" mortgage instruments..... September 26 Higher Mortgage Rates on China Decision..... September 23 Which has more force, Mother Nature or the Fed?..... September 22 |
The Week in Review - The buzzword is Inflation.... October 9 8:03 AM EST This week produced the 4th losing week in a row on the bond market as bonds closed the week at 4.34%, slightly higher than last week's close of 4.33%. That is higher bond yields and higher mortgage rates ever since Katrina roared ashore. The main reason for this continued increase from week to week is the fear of inflation and that is the subject of the week. Although this was an improvement after yesterday's close of 4.39%, this continuing trend of higher and higher bond yields and mortgage rates is now nearing the high end of the trading range we have so comfortably been entrenched in during the last two years. Of course, speculation will once again arise as those investors that have been predicting the 5% bond yield and 30 year fixed rate mortgages at 7% will once again start to appear on the forefront. I guess if you predict something enough times, sooner or later you will be right. Unfortunately for the consumer, these higher energy prices just may be the impetus to put us over the edge this time and continue the climb. I will try to give a simple explanation of why this is the case. Inflation is not widespread (yet) and this week's ISM report on manufacturing supported that. In fact, there was overwhelming news in the ISM showing that prices have not yet risen considerably in any area but transportation costs. There was even a separate section of the ISM stating that manufacturing in Hurricane affected areas only makes up 1.85% of the US manufacturing capacity. However, most of the manufaturer managers in the survey noted that transportation costs had risen so dramatically that these prices would have to be passed on to the consumer in the form of higher prices on products or else the manufacturers would either start losing money or have to lay off workers. Most likely, the result will be the higher prices. And this is what the governors of the Fed foresee as they raise interest rates again and again. The initial jump in gas prices that we as consumers see retreated before the second storm hit, but now looks as though those higher prices are here to stay. I bring this up first not only because it is the first thing that we as consumers notice when it comes to rising prices, but will also be the largest contributing factor to seeing inflation across the board in the coming months. Perhaps more important in this ISM report was the indication that there is consistent growth across the board, in all sectors of the economy and this will lead to rising mortgage rates as the Fed turns it's head to controlling inflation. With the recovery of these sectors of the economy, the building industry will suffer and mortgage rates will go up, no ifs, and or buts about that. The Building Industry has been the Backbone of the Recovery Real estate and the building industry have held this economy together and kept us out of a deep recession over the past 3 years. The low, low interest rates on mortgages have kept people buying homes and really has been the one portion of the economy that has prospered during the last 5 years. The Fed has been flat out afraid to mess with the building industry until the rest of the economy started to pick up since it was the one part of the economy that was having any success at all. Although home prices were rising (in some plces out of control) the Fed really couldn't afford to slow down home building with every other sector of the economy shrinking. Now that the economy is starting to pickup, the Fed can raise interest rates and allow the home building sector to slow down. If you have been a reader for some time, you know that I have consistently supported the theory that rrates will not rise very far because the Fed needs people to keep buying houses. Well, that time is coming to a close and so are the mortgage rates below 6%. No Repeat of the late 70's and 80's If there is anything that the Fed wants to make sure of it will be to avoid a repeat of what we saw 25 years ago with mortgage rates hitting 20%. Looking back at that time, we also had a "energy crisis" and the Fed did not raise rates very quickly. That time around, the Fed tried to make it easier on consumers and businesses with lower rates so that the loss of income due to the higher energy costs would be offset with easier borrowing. Stagflation was the buzzword back then. "We have inflation, but no growth!" The Fed kept rates low in order to stimulate growth. Instead of growth, they got higher inflation. Unfortunately, the higher energy costs led to higher prices, higher wages, higher borrowing and when the Fed tried to react to slow down the inflation, they were too late. Do not expect the Fed to make the same mistake twice. In fact, if anything, you can probably expect the Fed to raise rates too far this time to make sure that we do not see double digit interest rates. 8 percent mortgage rates sound awful right now, but in the big picture that sure is better than double that rate. The Good Old Days 5 years from now, we will look back at this time as the good ole days when mortgage rates were so low, so take advatage of what you can while they are still low. Know that this is a fantastic chance to put your finacncial obligations in a good position for the next few years and take a fixed rate instead of an ARM because these rates are NOT going back down to 5%. Have a great day.......... Updated Forecasts This continuing trend of higher and higher rates has caused me to change the rate lock advisory to lock for all four stages. In addition, I have updated my forecast to show rising rates for the second half of 2005. This is a combination of what we have seen in both the market and the economic reports over the last 3 months and the continued tendencies of the market to shoot higher of very little good news. Now, on the bright side, the global economy is still going nowhere. We have quite a quandary where if the market does not rise in response to continued increases by the Fed we could see an inverted rate curve due to the global pressures. This is still a very good possibility and should we see anything close to an inversion, rates could drop quickly. The very high number of mortgages that are ARM's vs Fixed rates would switch in a heartbeat if you can get a 30 year fixed at a lower rate than a 5 year ARM!! If this fine line were to get crossed, you can throw all the forecasts of higher rates right out the window. Where are rates headed in the next 3 months? It looks like the trend will be heading steady or higher with new projections out and the higher oil prices and Fed rate increases driving rates over the next 3 months The September Fed Meeting You can read the Fed's statement on the Board of Governor's Federal Reserve website for yourself. For the 11th straight time, the Fed has increased the Federal funds rate, citing inflationary pressures from energy prices as the reasoning in raising rates one more time. The Fed did make a point of stating that in the long term, inflation was under control. Where are rates going this year? The entire first part of the year, I have been sticking with the experts position that for the year of 2005, we can expect to see mortgage rates to level out in the 6.5% to 6.75% range for a 30 year fixed rate mortgage by the end of the year. Although this forecast has been the same for the last 3 years and has yet to materialize, this long term forecast must be still taken into account. My personal expectations are that 30 year rates will be rising for the second half of 2005 barring any more terrorist attacks. If I were financing/refinancing a home . . . . I would Lock if my closing was within 10 days I would Lock if my closing was 11- 30 days away I would Lock if my closing was 31 - 45 days away I would Lock if my closing was more than 45 days away *As always, this commentary is only my personal opinion if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of any/all other borrowers.
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