Mortgage Commentary

[Adam in CO]

Mortgage Market News for the week ending January 25, 2008

Events This Week:

Short Term Rates Lower
Jobless Claims Improved
Existing Sales Down

Events Next Week:

Mon 1/28
New Home Sales

Tues 1/29
Durable Orders

Wed 1/30
GDP
FOMC Meeting

Thur 1/31
Chicago PMI

Fri 2/1
Employment
ISM Index

Mortgage Rates Hit Lows but End Higher

Returning from a long weekend, investors were greeted on Tuesday with the surprising news that the Fed had lowered the Fed Funds rate by a huge three quarters of a point. What followed was two days of extreme swings in financial markets as investors tried to figure out how to interpret the Fed's move. Fed Chief Bernanke cited increased risks of slower economic growth as the reason for the rate cut. Fearing a recession, investors sold stocks and bought bonds on Tuesday, temporarily pushing mortgage rates to the lowest levels since the summer of 2003. The trend looked to continue on Wednesday, but sentiment reversed midday. The Dow Jones stock index rose from a 300 point loss to a 300 point gain, while mortgage rates unwound all of Tuesday's declines. Mortgage rates ended the volatile week a little higher.

Two related forces were at work in moving stock prices and mortgage rates so dramatically. First, slower economic growth is bad for stocks, but it generally means less inflation, which was good for mortgage rates. Investors were also reacting to a second influence. Major financial institutions have been disclosing enormous losses from the credit crunch, prompting some investors to worry about a major shock to the entire financial system. During periods of uncertainty, investors typically shift funds out of stocks and into the relative safety of bonds. This flight to quality on Tuesday and its unwinding on Wednesday exaggerated the movements in stock prices and mortgage rates.

In an effort to stimulate the economy, politicians proposed legislation which would give consumers and businesses approximately $150 billion. The bulk of the funds would reach consumers as a tax rebate expected in May. Another provision would temporarily raise the dollar cap on mortgages that can be bought or guaranteed by Fannie Mae and Freddie Mac from the current limit of $417,000 to as high as $730,000. The limit will vary based on an area's median home price. The National Association of Realtors (NAR) estimated that lifting the loan limit would lower interest payments for consumers who get new loans meeting these criteria, reduce the supply of homes on the market, strengthen home prices, and increase economic activity.

Also Notable:

• The Fed cut rates between meetings for the first time since just after the 9/11 attacks in 2001
• Refinance applications have increased 92% since November, according to the Mortgage Bankers Assoc.
• December Existing Home Sales fell slightly more than expected, but inventories of unsold homes declined
• Wednesday's 600 point turnaround in the Dow stock index was the largest since July 2002

Average 30 yr fixed rate:
Last week:-0.13%
This week:+0.08%

Stocks (weekly):
Dow:12,362+254
NASDAQ:2,360+18

Week Ahead

Next week will be packed with major economic news. The biggest story will be Wednesday's FOMC meeting. Investors now price in a near certainty of an additional half point rate cut. For economic reports, the main event will be Friday's Employment report. As usual, this data on the number of new jobs created, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month, since the health of the labor market is perhaps the single biggest factor in the performance of the economy. Early estimates are for 50,000 net new jobs added in January.

The pace of economic growth is a major concern right now, and many other primary indicators are also on next week's schedule. The two National Manufacturing indexes, the Chicago PMI and the ISM, will come out on Thursday and Friday. Durable Orders, another important measure of economic activity, will be released on Tuesday. New Home Sales on Monday, GDP on Wednesday, and Personal Income on Thursday will also be closely watched.

admin@corefinancegroup.com