Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – Oct 14th, 2008

Unchartered Territory…Again

Last week I indicated that… “some experts think that the Fed might have a surprise lowering of our (overnight) rate by 50 basis points before the October 29th meeting.”  Also, I indicated that generally, that would be inflationary, however, with a coordinated effort of banks all over the world, lowering their benchmark rates too, “the value of the dollar would not be affected and rates might benefit from this.”  Well…rates haven’t benefited.  I did say also that, “we’re in unchartered territory.”  So, that’s my out!

So, the European Central Bank, Canada, the United Kingdom, Switzerland, and Sweden all lowered their Benchmark Overnight Rate.  This should have kept rates lower and should have not had an inflationary reaction since the value of the dollar would be in check.  Also, since the value of the dollar was increasing, and oil is traded in dollars, the price of oil came down…this should have helped interest rates too.  So I was right about the actions of the banks, just wrong about what the affect of those actions would be.  Unfortunately…there was no lowering of interest rates.

A Catch-22 for Interest Rates

The next day, Central Banks in Asia, followed suit.  What ended up happening here was a flight of investors, back into the stock market, which was at the expense of bonds, mortgage-backed securities, and therefore, interest rates.  We’re stuck in somewhat of a catch-22 scenario and interest rates are bearing the brunt.

The four-week average of Initial Jobless Claims moved to a seven year high.  But, as mentioned before, here’s some good news…oil is trading at about $82 per barrel.  Remember when I was writing about $100 dollars, then $147 in July?  So…at least we’re spending less at the pump!  Other good news was that two weeks ago I reported on the sharpest decline in the Dow Jones History…well…this last week we had the highest gain in the Dow Jones History…a 936 point increase.  That’s cool, but this volatility can be frightening.  We’ll just have to buckle down and try to be optimistic about the future.

Follow The Right Index

Once again we were experiencing opposite directions regarding the 10-Year Treasury and the yield on mortgage-backed securities.  I have spoken more often of this in the past year than any other year in history.  It’s important to note that many of my colleagues use the 10-Year Treasury Yield to follow interest rates and that is a dangerous path to follow.  For example, last week Treasuries were getting pummeled as people took money out of them and put them into the stock market.  However, Mortgage Bonds (or mortgage-backed securities) started to look a little more favorable to investors, as they tried to gain some momentum on the recent declining values of these bonds.  So again, some in the industry may have locked in an interest rate on the wrong day, by following the wrong index.

So, $250 Billion of the $700 Billion rescue plan (or whatever the final number ended up being) went to invest directly in our banking system.  So, the government will start buying stock in the biggest American Banks.  This will stabilize the marketplace, and it’s truly needed right now, but will be interesting to see how the government will get out of this habit in the future.  Banks just had too many loans compared to what capital they held.  The only way to offset this is to sell the loans at a discount or raise capital.  Hard to raise capital when nobody’s interested…so the government will step in.  There are incredible buying opportunities out there…get out and work with your favorite real estate agent and mortgage professional to see the safe haven real estate holds for the future.  It’s an excellent time to buy.  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – August 5th, 2008

Big Changes On The Horizon

This week I’m going to be extremely brief with my comments on the economic reports and educate you a little about major changes in the real estate lending market.  So, let’s rock and roll!

First, the government lifeline extended to FannieMae and FreddieMac was signed into law by President Bush.  I’ll be addressing that in forthcoming issues.  Second, 2nd Quarter GDP come in at 1.9% while expecting 2.3%.  Previous quarters’ numbers were also revised lower.  Third, initial jobless claims shot up to 448,000.  This is a huge number, however, is somewhat misleading, as the government has laid out a new federal benefits program that will manipulate this number for about a month…interesting…Fourth, a better than expected jobs report showed we only lost 51,000 jobs.  WooHoo!  Unemployment moved to 5.7% so the better than expected jobs numbers, that’s right a loss of 51,000 is better than expected!  Fifth, I told you I’d report on the Fed’s favorite inflation gauge, the Personal Consumption Expenditure Index.  Core PCE moved to 2.3%.  This is outside the governments comfort zone of 1.0 – 2.0%.  Last, the Fed left the overnight rate unchanged at 2.0%.  They did indicate that they felt like inflation pressures should start easing toward the end of this year, however.

BIG Changes in Mortgage Insurance

The changes that have occurred, as of August 1 of this year, is in regard to mortgage insurance.  Years ago, you couldn’t buy a home unless you had twenty percent down.  Mortgage Insurance (MI) companies got involved and said if you let someone put five or ten percent down, they would insure a percentage of the loan amount.  This enabled more people to buy homes because they didn’t have to wait longer to save twenty percent.  This past week four of the seven major mortgage insurance companies changed their guidelines.  Basically, if you do not have a credit risk score of 620 or higher, you’re not getting a FannieMae or FreddieMac loan unless you put twenty percent down and avoid mortgage insurance all together.

FHA Will Return As “King Of The Loans”

Only one MI company left enables you to put five percent down.  All others are requiring ten percent down.  So, if you know of people that only have five percent down, make sure they continue to call other lenders if their lender is telling them that they HAVE to put ten percent down.  And there are a lot of major banks that are not approved or not contracted with this one, MI Company!   Refinances on investment properties will have to have twenty percent equity in the subject property.  Also, if more than 55% of your income is going toward all of your monthly obligations, than you can not qualify for a loan with mortgage insurance.

Monthly Guideline Changes

Now, these changes are changes to July’s changes.  We are seeing guideline changes on at least a monthly basis, sometime weekly.  Make sure you’re working with an expert in the field that follows these changes closely.  Also, make sure you have an option to work with an FHA expert!  FHA has new guidelines taking effect on January 1, whereby the buyer would have to put 3.5% down as opposed to the current 3%, but they have more flexibility regarding their qualifications than MI companies.  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – July 15th, 2008

Higher Inflation Causing Higher Rates

Mortgage backed securities are about 71 basis points higher than last week.
That means that their yields went down and therefore interest rates.  So, last weeks advice to float was right on target.  You’d better have an itchy trigger finger on that lock button though…as this market is completely unpredictable and volatile. 

Iran shot off missiles this week capable of reaching Israel. 

This, not only is quite alarming and concerning, but creates a lot of uncertainty and instability to the market as well.  We’ll continue to watch this story closely and see how it affects oil prices, the market, and human beings in general. 

Right after I wrote this article, last week, mortgage backed securities moved upwardly above the 25-Day moving average.  Once it broke through that tough layer of resistance, the 25-Day trend line became a nice layer of support.  Then the very next day we broke through the 50-Day moving average.  Good news for rates.  The very next day, however, Initial Jobless Claims moved down by 58,000 to 346,000.  This is the lowest number since April and bonds reacted negatively with this labor market surprise. 

For the very first time in history, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke spoke to the House Financial Services Committee regarding ways to amend the current financial regulatory system to avoid future crises.  Mortgage Backed Securities moved up to the 200-Day moving average, but quickly bounced off of it.  This is an extremely stubborn level of resistance and locking at that high level was the best opportunity to lock this past week.  It was only back in September that we were able to move above this line very briefly.  

Government Take-Over of Fannie Mae & Freddie Mac?

Two big deals happened this past week that need mentioning.  First, FannieMae and FreddieMac have been threatened with a government controlled take over.  So, their stock prices tumbled 40%.  Second, IndyMac Bank was taken over by the FDIC and closed their doors.  Their customers got wind of a senators comments that they might need to be rescued and they flocked to the bank, withdrawing over $100 Million a day until FDIC had to rescue their depositors.  IndyMac Bank was a bank that specialized in “lite doc,” “no doc” loans and they, obviously, were hit hard by the credit crises.  We’ll keep a close eye on the Fannie/Freddie issue in the coming weeks.  This caused rates to increase. 

The next Monday, Treasury Secretary Paulson asked Congress for the ability to buy unlimited stakes in FannieMae and FreddieMac.  The Federal Reserve indicated that it would lend directly from the Central Bank to Fannie/Freddie to alleviate a collapse in confidence.  The Fed is asking Congress to increase the $2.25 Billion line of credit that these companies currently have.  This caused bond yields to increase again and play with the 200-Day and 100-Day moving averages.   

Investors Getting Concerned?

Tuesday saw investors somewhat weary of the Treasury’s plan and stock prices started to falter.  Generally, you’d see money go into bonds and mortgage backed securities, however, with the Producer Price Index showing wholesale inflation at 1.8% and the year-over-year PPI ending at 9.2% rates started to deteriorate. 

Next week we’ll inspect the FOMC minutes from their latest meeting.  It’s a crazy market out there.  You should be working with a serious professional watching your interest, with interest!  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – July 2nd, 2007

Businesses Are NOT purchasing…a sign???

Last week had very little economic information until after the News & Review went to print…then things got pretty cool.  Wednesday’s weaker than expected Durable Goods Orders Report fell by 2.8% in May.  This was the lowest level since January and shows us that businesses are not making as many purchases for machinery, equipment, and particularly airplanes. 

May showed 313,000 Initial Jobless Claims, which was right where experts expected the number to be and continued to show that we’re in a labor market that remains tight. 

Inflation Levels Looking Good

Finally, we hit below 2% on some inflation levels.  Friday’s highly anticipated Core Personal Consumption Expenditure Report came in at a cool 1.9% for the year-over-year rate.  Remember that the Fed’s desire has been to have the Core consumer inflation rate between 1% and 2%.  This really helped mortgage backed securities move upwardly (remember, when bonds move up, their yields -and interest rates- move down).  Unfortunately though, we still hit a very hard line of resistance.  This trend line has been falling downwardly for quite some time.  Since early May, actually.  So while we had had good news for interest rates lately, we still have not had enough information to help us break through this tough line…and it keeps falling. 

Fed Comments:  Very Cautious

Coupled with a very cautious statement from the Fed meeting, where the Federal Reserve Open Market Committee left the Fed Funds Rate untouched, at 5.25%  They did indicate that inflation is moderating somewhat, but that they are not convinced that it is completely under control.  Again, using fun phrases like this help to keep the Fed out of trouble.  Regardless as to how the market reacts to their comments…they are somewhat ambiguous, and therefore…never wrong…I guess.  Makes my statements a little more easy to write, too.  The Fed also mentioned that they expect an increase in economic activity, which would probably mean that they don’t expect to decrease the overnight rate any time in the near future.   So, the Core PCE Report was a truly welcome sight to see the very next morning after the Fed’s statement.  Apparently, the Fed is now watching the Headline Inflation Numbers.  These include food and energy…so you may be reading more about this in the near future. 

Bonds continue to trade in a tight area with that Falling Resistance Line at $98.79 and a level of support at $98.28.  With the Fourth of July Holiday coming and with Friday’s Jobs Report, we could see some volatility before next week’s issue.  Generally and holiday creates low trading volumes and leads to more volatility in the marketplace.    Monday’s close left bonds just above that $98.79 level.  Whether or not we’ll be able to stay above it will be fun to wait and see.  Bonds are trying to move higher…let’s hope that the sparks fly, the rockets glare, and the fireworks thrill with Friday’s Job Report and Independence week.  Happy Fourth everyone!  Until next week…