April 22, 2008
Happy Tuesday everyone! Hope your week is getting off to a good start.If you’re the kind of thrill seeker that likes to look for the fastest, most exhilarating, most teeth rattling, kidney jarring rides at the amusement park, then recent market conditions should be right up your alley. Last week the NASDAQ got a nice little boost due to gains primarily in the Technology and Energy sectors. No surprise on the later given oil just topped $117 per Barrel!! What might be surprising is that the financial sector was up 5.2% at the end of last week on the release of earnings reports from Merrill Lynch, Citigroup, JPMorgan Chase, and others that showed a significant decrease from the same period last year. But since they were not as bad as expected, many investors were looking to buy the stock while it was "on sale" with expectations that at some point the credit problems will correct.
In my humble opinion, however, I don’t think it’s wise to assume the gain last week in the financial sector should make us think we’re out of the credit crunch or even close to it. The NAR (National Association of Realtors) announced this morning that existing home sales in March reached 4.93 million homes, down from 6.11 million homes sold the same period last year—a Drop of 19.3%. Additionally, average home prices came in at $200,700 down from $217,400 a year ago. And this morning on CNN, it was reported that 18% of ALL homes currently listed for sale in the United States are in a "negative equity" position, meaning the homes have larger mortgage balances than what they are listed for. But wait, there’s MORE!! The NY post also reported that in many parts of the country, it now costs more to build a new home than the home would be worth due to higher prices for materials and costs of production. With that in mind, we can expect Friday’s NAR release of NEW home sales to be significantly lower than last year, and that the credit/housing markets will continue to claw their way out of last year’s debacle.
So with Stock Market swings, negative news on home sales, and continued fear in the credit markets, what does this mean for Mortgage Rates? Simply put, we’ll stay on this roller coaster indefinitely, so buckle your seatbelt and hang on! Remember that Mortgage Backed Securities—the driving force behind the interest rates we can offer our clients—trade on Wall Street just a few doors down from the NYSE. And what’s going on with the stock market has a pretty big influence on what mortgage rates will do. Simply put, the traders of MBS on Wall Street need to keep investor interest in their product to keep mortgage dollars available for me to lend to you. So when the stock market has a rally, and investor interest turns to the stock market, the MBS market gives out a collective yell and says "Wait!! Don’t put your money over there in the stock market!! Keep investing your dollars here, and we’ll DROP the price of the Coupon!!"
Which effectively means that the investor looking to put dollars in the stock market can buy for example, a 5.5% coupon for less. The result is that the interest rates I can offer YOU will go UP. And when the stock market is doing poorly, investors will rush to the safety of MBS, so the traders get to lean back in their chairs with a smug smile on their face and RAISE the price of the coupons, which drives interest rates for you and me DOWN. Remember, a MBS is a Debt Security, so the price of the commodity on wall street is inversely proportional to the interest rate movement for lenders like me and borrowers like you.
Take last week for example. Positive gains in Energy, Technology, and Financial sectors pushed the NASDAQ higher, and mortgage rates increased the last half of the week. Today, stocks are down, and mortgage rates have dropped across the board.
Additionally, things like the CPI (Consumer Price Index) the PCE (Personal Consumption Expenditure) and Fed Rates that indicate/control inflation also have an impact on mortgage rates. As does every piece of significant news released like the NAR reports, Earnings reports for the megabanks, etcetera.
What does all this mean for the homeowner, or potential home buyer? My hunch is that we’ll see mortgage rates continue to fluctuate dramatically from week to week, or even from day to day, without seeing huge increases or decreases one way or the other. It’s a PHENOMENAL time for first time homebuyers to enter the ranks of homeowners because interest rates are still low and inventory is high, and the savvy investor could capitalize BIG on Bank Auction/Foreclosure sales. That being said, it’s also incredibly crucial you’re working with a lender who keeps tabs on the market and can capitalize on market swings!
Have a productive and fun filled week, and as always, if you or anyone you know is looking to buy or refinance a home, I’m happy to help!
Carl Salvo
Mid Oregon Lending
497 SW Century Drive · Suite 104
Bend, Oregon · 97702
Ph. 541-728-0390 · Fx. 541-728-0395
Oregon License ML-4707 · NMLS # 277334
