Monday, October 14, 2013

Keeping you updated on the market! For the week of October 14th, 2013.

Was This Much Ado About Nothing?
Political wrangling on the federal debt ceiling and the Affordable Care Act (Obamacare) helped to hold mortgage rates in check for another week.'s national survey reports an average rate of 4.39% on the 30-year fixed-rate mortgage. Freddie Mac's survey shows the national average rate at 4.23% on the same loan, which is roughly where it was last week.
Rates have been held at these levels on raised financial market risk. Many market participants are concerned the government slowdown will lead to slower economic growth. The rationale being that furloughed government workers would spend less, and thus the economy would slow.
At the same time, more investors are fearful the government will default on its debt. Most financial institutions and many individuals own U.S. Treasury notes and bonds (either directly or through a mutual fund). These securities are perceived as ultra-safe investments. A default would negate that perception and investors would sell en masse, thus generating huge financial losses.
The fears, quite frankly, are over done. The economy is powered as much by investing and savings as by consumption. To be sure, everything produced is made to consume, but there are vast production stages that generate paychecks and spending that go unnoticed in economic-growth statistics. In short, the furlough workers and the reduced government activity itself isn't having as much of an impact as many believe.
That said, private companies that require government approval to transact business are being hurt – mortgage lenders are one – and that could lead to slower economic growth.
As for defaulting on the natural debt, that's also very unlikely. The federal government brings in roughly $253 billion a month in revenue. Interest on the national debt is around $20 billion, or less than 8% of monthly income. There is plenty of revenue flowing in to pay creditors, as well as to pay people owed money through Social Security and government pensions.
For now, mortgage rates are at levels unseen since mid-June. When the latest political brouhaha began a few weeks ago, we opined that the rate on the 30-year loan would fall within a 4.25%-to-4.50% range. So far, we've been on target.
We seriously doubt rates will go any lower. More likely, they will move higher: Fears of a default have abated and a deal appears imminent on the debt ceiling that will have the government up-and-running in full soon.
In fact, the yield on the 10-year Treasury note is already up over 10-basis points this week. As the 10-year Treasury note goes, so, too, goes the 30-year fixed-rate mortgage.
Yields are moving up despite the high likelihood that the current Federal Reserve Chairman Ben Bernanke will be be replaced by lead candidate Janet Yellen. Ms Yellen supports continuing the quantitative easing and low-rate interest policies currently in place. Nevertheless, rates are still moving higher.
We believe we are at a bottom in interest rates, which means we see little reason to wait to apply for a mortgage. Admittedly, there are delays in dealing with the federal government to verify borrower information, but it's still worthwhile to get the process started nonetheless.


Date and Time
Mortgage Applications
Wed., Oct. 16,
7:00 am, ET
Important. The government slowdown continues to weigh on application activity.
Consumer Price Index
Wed., Oct. 16,
8:30 am, ET
All Goods: 0.2% (Increase)
Core: 0.2% (Increase)
Moderately Important. Inflation remains low and will have little impact on interest rates.
Homebuilders' Index
Wed., Oct. 16,
10:00 am, ET
58 Index
Important. Sentiment points to sustained building activity through 2013.
Housing Starts
Thurs., Oct. 17,
8:30 am, ET
905,000 Units (Annualized)
Important. Starts continue to move higher, but at a slowing rate.


The New Normal
It appears investors have finally had their fill. In many housing markets, sales volume and price appreciation have been driven by investors. Their activity was reflected in a high percentage of all-cash transactions. The number of these transactions has dropped noticeably over the past few months, particularly in popular investment markets like Las Vegas and Phoenix.
We will likely see a continued decline in investor activity going forward. This means price appreciation growth will continue to slow. We've mentioned in recent months that the days of double-digit year-over-year price appreciation are nearly over. Investors were a major contributor to price appreciation; their leaving the market will surely impact prices.
This isn't bad news. Stability is an important variable in a healthy market. When expectations are calibrated to how the housing market has historically operated, more people will be willing to buy and sell a home. The market in total will become more fluid – buying, selling, and financing will become an easier and more predictable process.
So embrace slower price growth, because it ensures a more stable, more profitable market in the long term. More important, it instills less speculation and a higher degree of certainty, which is what we all want when we attempt to accurately gauge the outcome of a major purchase like a home.

Article Courtesy of Patti Wilson, American Momentum Bank.

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