Monday, September 8, 2014

Calm Before the Storm..

Calm Before the Storm
Summer isn't officially over, but once Labor Day passes, for all practical purposes it is for most of us.
Now that we are back to work with no sight of a respite in the immediate future, we expect market activity to pick up. It's worth noting mortgage market activity (buying and selling of mortgage-backed securities) has picked up, and rates have become a bit bouncy over the past couple days.
Trader activity has surely picked up. To wit: Stocks rallied and bonds sold off on speculation that Russia and Ukraine might hash out a ceasefire. The headline was pure manna from heaven for bond and stock traders, who were given a reason to buy stocks and sell bonds.
But once the euphoria passed, stocks sold off and bond yields rallied.
The fact is that we remain in a fundamentally low-inflation environment, which is why interest rates in general, and mortgage rates in particular, continue to trade at 2014 lows. At the same time, and somewhat paradoxically, the economy appears to be growing at a brisk pace – one that has been creating 200,000-or-more new jobs per month for most of the year. We say “paradoxically” because when economic growth and job growth take flight, so, too, do interest rates. But not this time around.
That said, we expect interest-rate volatility to pick up. We say that because the languid days of summer are over, and that means more people are watching the market and offering their opinion – either through spoken or written words or direct buying and selling.
Nevertheless, we don't think we'll see a trend toward higher interest rates to materialize this year. Mortgage rates might be more volatile, but they'll likely be more volatile within this low range.
Going forward, the Federal Reserve will remain key. We expect rates won't ratchet higher with any fortitude until the Fed decides to raise the influential federal funds rate – the rate banks lend short-term to each other. When that occurs, rates will likely begin to take flight.
But we prognosticate with one caveat: Don't discount the ability of a strong jobs report or unexpectedly stout gross domestic product numbers to get mortgage rates moving higher. What has worked in the past may not be working at the present, but that doesn't mean it won't work again in the future.


Date and Time
Consumer Credit
Mon., Sept. 8,
3:00 pm, ET
$15 Billion (Increase)
Moderately important. Credit expansion remains brisk and is an indicator of firming consumer confidence.
Mortgage Applications
Wed., Sept. 10,
7:00 am, ET
Important. Purchase activity has again eased. Buyers remain stubbornly inured to today's low-rate opportunities.
Retail Sales
Fri., Sept. 12,
8:30 am, ET
0.2% (Increase)
Moderately Important. Sales growth has moderated in recent months, but the longer-term trend remains up.
Import Prices
Fri., Sept. 12,8:30 am, ET
0.2% (Decrease)
Moderately Important. Falling import prices will help keep domestic inflation under control.


The Cost of Financing Is Lower (And Higher) Than You Might Think
When pundits discuss mortgage financing, they frequently tout the money saved in interest when paying cash. But is that worth touting?
Let's say we have two home buyers: each has $100,000 and each buys a $100,000 home. One pays cash; the other puts $10,000 down and finances the remaining $90,000 with a 30-year fixed-rate mortgage at 4.25%. Both stay put, and 30 years later the 30-year mortgage is paid in full. Over the 30 years, the cash buyer obviously incurred no interest charges. The financed buyer, on the other hand, pays over $69,300 in interest over the life of the loan.
It appears the cash buyer comes out ahead, but does he?
Keep in mind that the cash buyer did not have use of the $90,000 like the financed buyer did. Let's say the financed buyer took his $90,000 and bought 5,000 shares – $18 a share – of a real estate investment trust (REIT) that pays $0.125 in dividends each month. We'll assume there is no dividend increases (which would be unlikely in the real world).
Each month, the REIT pays the financed buyer $625 in dividends. In a year, the REIT owner collects $7,500 in dividend income. Over 30 years, the REIT owner will collect $225,000 in dividend income.
In other words, opportunity costs must be factored into the equation. By financing his home with a low-rate loan, the intelligent investor/home buyer was able to use his money to buy a cash-generating investment that far exceeded his interest payments.
This example shows that opportunities and opportunity costs must always be factored into a financial equation. When this occurs, the cheaper option can frequently be shown to be the less financially profitable option.

Article courtesy of Patti Wilson, American Momentum Bank.

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