SLOW AND STEADY?

Housing Starts and Building Permits, which are leading indicators of the new home construction market, both came in below expectations that were already low. If you consider the significant amount of foreclosures and inventory overhang weighing on the market, it is no surprise to see a weak indicator on new home construction. Broadly speaking, foreclosures and short sales are expected to continue weighing on new home construction for the next couple of quarters... but as we all know, real estate is very local - so your particular market may be quicker or slower to improve.

Manufacturing reports were also disappointing last week. For example, Industrial Production, Capacity Utilization, and the Philadelphia Fed Manufacturing Index all came in below expectations - which helped Bonds last week.

So why didn't Bonds and home loan rates improve?

The recent rally in Bonds and home loan rates was partly sparked on the notion that US economic growth will slow - which the economic reports last week seemed to indicate. And when you also factor that the only two ways the government can lower the budget deficit is either by cutting spending or raising taxes - or some mix of both - the austerity measures could indeed slow the economy.

Normally, such soft economic data would help Bonds and home loan rates. But last week, Bonds had trouble making gains because - despite the negative economic headlines - some of the reports included data that was unfriendly to Bonds.

Here's an example...

Last week, the Empire State Manufacturing Index was reported a lot weaker than expected. But, when you look beyond the headline number, you see that the "Prices Paid" component of that report - which measures wholesale inflation - showed the highest rate of inflation in three years... and the second highest reading ever! Remember, inflation is the archenemy of Bonds and home loan rates.

Additionally, the employment index of the Empire State Index was positive, which suggests hiring. And, in a separate report released last week, the Labor Department's Initial Jobless Claims number also showed the lowest level of unemployment claims in a month. Not only was that a good number from the standpoint of beating expectations, but it also indicated that April's surge in unemployment claims was more likely due to temporary factors rather than a worsening labor market.

In the end, the positive employment news combined with the concerns over inflation offset some of the negative economic news last week and held Bonds and home loan rates in check. Both Mortgage Backed Securities and Treasuries traded dead on a ceiling of resistance last week. And unless Bonds can break above this ceiling, prices can't improve further. I'll be watching the markets closely this week to see if Bonds break above that ceiling this week.

Is the glass half empty... or half full?

That question is one many people are debating when it comes to our economy - yes, the economy is still sluggish... but the slow recovery has helped home loan rates improve. So what developed last week...and what was the impact on home loan rates? Let’s take a deeper look.
First, on the inflation front: 6.8%...that's the current year-over-year rate of Producer or Wholesale inflation. And that is hot - very hot! And while Producer or Wholesale inflation doesn't always get passed onto the consumer as evidenced by the relatively benign Consumer Price Index (CPI) inflation readings, at some point one of two things must happen.

• Businesses who are burdened with increased costs must pass the increase to the consumer by raising prices, thus boosting consumer inflation.
• If businesses aren’t in a position to raise prices because of weak consumer demand, they must absorb the increased costs...thereby lowering earnings and the ability to expand, thus furthering the present slow economic growth.

The takeaway here: One of the Fed's goals for their second round of Quantitative Easing (QE2) was to create inflation and avoid deflation in the hopes of strengthening our economic recovery. It appears that they have been somewhat successful in this goal, as the risks for deflation have somewhat abated. But remember, inflation is the arch enemy of Bonds and home loan rates. If inflation continues to heat up, this could hinder further improvement in home loan rates.

It’s also important to note that inflation in China is also on the rise, and inflation abroad becomes inflation here in the US as we import so many items from China. China's buying of our debt has helped keep our home loan rates relatively low for a long time. Home loan rates would likely move higher if China not only slows buying, but were to start selling some of their near $900 Billion worth of U.S. government debt holdings.
 
And speaking of our debt, Republicans in the U.S. House of Representatives are increasingly dismissive of Treasury Secretary Tim Geithner's warnings that Congress must raise the debt limit prior to August 2nd or risk economic "catastrophe." This will be an important development to watch in the weeks to come.

The bottom line is that, on the glass half full side of things, home loan rates still remain near some of the best levels we’ve seen this year. If you have been thinking about purchasing or refinancing a home, call or email me to learn more about why now is a great time to benefit from today’s historically low rates

Find out the story behind the latest employment numbers - and what they mean to home loan rates.

"LIFE IS A MIXED BLESSING, WHICH WE VAINLY TRY TO UNMIX" - author and journalist Mignon McLaughlin. The labor market and the economy saw their own mixed blessings last week, when three different employment reports were released. Unlike Mignon McLaughlin’s quote above about life, these mixed job reports can actually be untangled. So let’s break down what we learned about employment last week...and, just as importantly, what’s going on with home loan rates.

After two disappointing employment reports earlier last week - in the form of the ADP National Employment Report and the Initial Jobless Claims Report - the labor market finally received some good news on Friday when the Labor Department released their official Jobs Report that showed 244,000 jobs were created in April. That was far above all expectations... and it was the biggest private job increase since 2006!

But where did this number come from... and is it accurate?

This headline number comes from the Current Population Survey, which uses the birth/death model to guesstimate the amount of jobs lost or gained in different industries - based on how many businesses were "born" or "died." And it isn't until we get revisions to the previous month's reports that we get a more accurate and final number.

Furthermore, history has shown that the birth/death model used to estimate is lagging - and at the start of an improving labor market, like we are seeing, the future revisions will likely show more jobs created than previously reported. This dynamic was evident in this month's Jobs Report, as revisions to March showed that an additional 46,000 jobs were created.

Despite the better-than-expected number of jobs created, the Unemployment Rate ticked up to 9% from 8.8%. The data for the Unemployment Rate comes from an entirely different survey - which is called the Household Survey - and is a bit contradictory to the headline news. This shows that the jobs being created simply aren't enough to have yet made a significant dent in the number of jobless Americans.

Also in the Jobs Report, Average Hourly Earnings were reported up by 0.1% to $22.95 per hour. Hourly earnings have increased by 1.9% year over year, just not enough to create "wage-based inflation," which is where employers have to pump up the prices of their goods and services to cover increased wages. So this was somewhat Bond-friendly news.

Although the Jobs Report was mixed, the overall positive tone does validate that the labor market is gradually improving. As the labor market improves, so will the economy and housing - and with that, interest rates will gradually rise as well. In the short run, the recent rise in Bonds is encouraging. However, after such a strong run higher, it would not be surprising to see more downside follow through in Bonds - which could mean higher home loan rates. The good news is that home loan rates recently reached some of the best levels so far in 2011 - and rumors on Friday that Greece may leave the European Union helped Bonds, as traders sought a safe haven.

That means a window has opened up... but there’s one important point you should understand.

It’s important to note that the last time rates hit this level, they jumped significantly higher from here. What’s more, signs of inflation are beginning to creep into our economy, which never bodes well for home loan rates. And if the rumors of Greece leaving the European Union turn out to be untrue (as Greece has stated), the safe haven bounce we saw last Friday could quickly be erased. That’s why it’s important to take action now.

It doesn’t cost anything to check out your situation, and the choice of moving forward or not will be up to you. Don’t miss this window of opportunity to save significantly on your monthly budget.

This week will be jam-packed with economic reports that can have a big impact on the markets and home loan rates:

• We’ll see more housing news this week with the New Home Sales report right away Monday morning, followed by the Pending Home Sales report on Thursday.
• Consumers are also in the news this week. First, we’ll see the Consumer Confidence report on Tuesday, followed by the Consumer Sentiment Index on Friday. Both those reports give us some insight into how confident consumers are in the economy. Second, we’ll get a look at Personal Spending and Personal Income on Friday - which provide insight into the financial picture of consumers.
• The Federal Reserve holds its FOMC meeting this Tuesday and Wednesday, with the release of its Policy Statement coming Wednesday afternoon. As always, what the Fed says could impact home loan rates.
• Speaking of the Fed, we’ll see the Fed’s favorite gauge of inflation this Friday in the Personal Consumption Expenditures report.
• We’ll also get a read on the economic recovery with Wednesday’s Durable Good Orders, which gives us an update on consumer and business buying behavior on big-ticket items that are designed to last for an extended period of time, like furniture, televisions, appliances, vehicles, copy machines, and so on.
• On Thursday, the markets will see the latest report on Gross Domestic Product (GDP) - which is the broadest measure of economic activity - as well as Friday's Chicago PMI, which is a good indicator of overall economic activity.
• The Jobless Claims report also comes out Thursday. In the latest week’s report, Initial Jobless Claims fell but still remained above that pesky 400,000 level as the job market continues to be a thorn in the side of the economy. Until we can see a pattern of unemployment claims well below 400,000, we will not see a significant fall in the Unemployment Rate.
• Finally, on Friday the Employment Cost Index (ECI) will be released. The ECI is one way to evaluate wage trends and the risk of wage inflation, as well as possible price pressures. This is important to the housing industry because if wage inflation threatens, it is possible home loan rates will rise through Bond prices dropping.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.
As you can see in the parallel black lines on the right side of the chart below, Bonds hovered in a tight range and were unable to improve much last week due to rising Stocks and inflation concerns.
Those two elements only add to the headwinds for Bonds and indicate that now may be the ideal time to take advantage of low home loan rates. Call or email to see how you can benefit by acting now.

How is the housing industry holding up? And what does the labor market look like? We’ll see this week.

In the early days of this week, the news will shift to the health of the housing industry, and then end with more labor and manufacturing news. Here are some of the reports to watch:

• We’ll start out Tuesday morning with new reports on Housing Starts and Building Permits in March.
• Those reports will be followed on Wednesday by a report on Existing Home Sales in March. So by mid-week, we’ll have a good look at the health of the housing industry. Feel free to call or email me to discuss how these reports came in and what impact they may have.
• Thursday we’ll see the weekly Initial Jobless Claims Report. In the report released last week, Initial Jobless Claims climbed higher to 412,000, and above the psychologically significant 400,000 mark for the first time since March 5th. Funny how those round numbers work with our brains - it's the same logic as why something at the store costs $7.99, instead of $8.00. Overall, the report indicated that employment growth continues to muddle along.
• Also on Thursday, we’ll see more manufacturing news - this time in the form of the Philadelphia Fed Index, which is considered an important indicator of the manufacturing industry and, therefore, has the potential to move the markets depending on how it comes in.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.
As you can see in the chart below, Bonds climbed at the end of last week, due in large part to the report that inflation remained contained for now.
Remember, inflation is the archenemy of Bonds and home loan rates. So the news of contained inflation was good for Bonds and home loan rates - making this a good time to purchase or refinance a home. Call today to get started.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday Apr 15, 2011)

The Jobs Report for March was released on April 1, and that’s no joke. But did the numbers give us something to smile about?

People say that "life is full of surprises." And last week’s Jobs Report offered a few surprises of its own. But were those surprises positive, and what do they mean for home loan rates overall? Read on for details.

The headline Jobs Report number showed that 216,000 jobs were created in March, which was a positive surprise as this was above expectations. In addition, 230,000 jobs were created in the private sector, which was also better than expectations and offset a decline in government jobs. A small 2,000 upwards revision to February's prior release added some more jobs as well.

In addition, the Unemployment Rate surprisingly dropped to 8.8%, which is the lowest unemployment rate since March of 2009. Remember, the Unemployment Rate is derived from the Household Survey (exactly as it sounds, from calls made to households), and is considered to be more accurate than the Current Employment Statistics or Business Survey (again as it sounds, from calls made to businesses), which is used to determine the headline jobs number.

The one negative within the report is Hourly Earnings coming in at 0.0%. This is the second month in a row where earnings growth is 0.0%. Why is this significant? If earnings don't grow, people have less to spend and as a forward looking indicator on job growth, it shows that businesses are presently not under any pressure to raise wages. This means they may not have to hire new people as quickly because they may have room to raise wages for present workers down the road.
Overall, the Jobs Report was a good report and reminds us that the trend in the labor market is improving. But keep in mind, while lowering unemployment is good for our economy overall – as are the other two goals (creating inflation and boosting Stock prices) of the Fed’s current Quantitative Easing (QE2) program – these goals can also lead to higher home loan rates over time.
In fact, inflation continues to be a growing concern both around the world and here in the U.S., as several members of the Fed, including St. Louis Fed President James Bullard, have expressed concern that if the Fed waits "too long (to remove accommodative monetary policy) we will get a lot of inflation in the United States and around the world."
What does this mean in the long run? Like the Treasury Department, at some point the Fed will start selling some of its massive holdings and unwind their QE1 and QE2 purchases. And when it does, not only will the Bond market lose a buyer in the Fed, but they will gain a seller and this will make it hard for Mortgage Backed Securities and home loan rates, which are tied to these types of Bonds, to meaningfully improve.
If you have been thinking about purchasing or refinancing a home, call or email me to learn more about how you can benefit. Or forward this newsletter on to someone you know who may benefit from today’s historically low rates.

"It’s not a matter of IF, but WHEN!"

That old adage proved true last week as the fiscal problems in Europe came back to roost as predicted - even after being overshadowed recently by news from Japan and the Middle East .

Despite all the focus on government debt in Europe , it’s important to note that the problems are more than just financial; there is also a ton of political capital at risk. The stronger and more fiscally conservative Euro member countries like Germany and France do not want to pick up the tab for poor performing countries like Ireland , Greece , Portugal and many others standing in line behind them. And as news flows out of Europe - either good or bad - Mortgage Bonds and home loan rates here in the US will move in sympathy.

One news item that pressured Bonds lower last week was word that inflation in the United Kingdom (UK) jumped to the highest level in two years in February. Remember, inflation is the archenemy of Bonds, and inflation around the globe seeps into the US .

In fact, we’re already seeing it as Producer Prices (which look at wholesale inflation) are running at very hot levels... with prices up 3.3% in just the last three months. If pricing pressures don't recede for producers of goods and services, companies will have one of two choices:

Either: Absorb the higher cost of goods - and, thereby, hurt earnings growth

Or: Pass those increased costs onto consumers - thereby, creating consumer inflation

Both of those scenarios would be bad for Stocks and Bonds. And since home loan rates are tied to Mortgage Backed Securities - which are a type of Bond - those scenarios would also be bad for home loan rates.

Speaking of Mortgage Backed Securities, last week the Treasury Department announced it is going to begin selling some of its massive Mortgage Backed Securities holdings. This is important to anyone looking to purchase or refinance a home. That’s because this announcement immediately pushed Bond prices significantly lower, as Traders tried to get their own positions sold. Think of it as a financial game of musical chairs... in which no one wants to be the last one standing with a mitt full of Mortgage Backed Securities. This isn’t the last we’ll hear about this - and since home loan rates are tied to Mortgage Backed Securities, this creates the potential for home loan rates to rise in the near future.

Fortunately, home loan rates are still at very attractive levels for now, despite the Bond market taking a hit for most of last week. So if you’ve been thinking about purchasing or refinancing a home, this is the time to see how you can benefit before rates possibly move higher. Because as bad as it was to lose some Bond pricing in the last few days, prices could move significantly worse depending on how they hold on to technical support.

For more information on what this means and how it may impact you or someone you know, call or email today. I’ll be happy to explain the situation and offer advice based on your unique situation.