Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – August 7th, 2007

Rates Down, Then Up

Outlook on Banks:  UGLY!

If you pick up the papers or go on-line and read about what is transpiring with Banks lately, you’ll notice that generally, the news is not good.  When the CEO of one of the nation’s largest lender sells stock in his own company…and a lot of it…it might not make since in investing in that company.  Basically, that’s what is happening with the Banks and Savings and Loans right now.  Investors are weary about buying loans nobody wants.  So, interestingly enough, you may see lower interest rates for conforming loan amounts (loan amounts $417,000 and lower for single family residences).  However, higher interest rates for loans greater than $417,000.  It’s actually quite a phenomenon.  The difference is that loans that are of conforming loan limits can still be purchased in the secondary market by FannieMae and FreddieMac (the two largest purchasers or real estate loans in the world).  So, if there is a market to sell these loans, than they are still available to the public as good rates.  However, if there isn’t a market to sell the loan…than the risk goes up, and therefore the rates as well.  Now that’s in a quick nut-shell explanation, but basically that’s what’s up right now. 

Outlook on Jobs:  UGLY!

Last week, we did break above the 50-day moving average.  This has really helped conforming loans.  Keep in mind that as stocks move higher, money is pulled out of bonds and rates go up.  But when stocks are not doing so well, money gets poured into bonds and interest rates benefit from this.  This last Thursday, Initial Jobless Claims were reported at 307,000 which was basically what was expected.  The great news for interest rates came out with the Jobs Report on Friday.  The Labor Department reported that only 92,000 jobs were created in July, and they expected 135,000.  In addition to this, the unemployment rate dropped to 4.6% from 4.5% too.  This takes the heat off of waged-based inflation, and keep in mind that inflation is bonds’ worst enemy!  

Now, this Tuesday the Fed agreed to keep interest rates UNCHANGED.  So, the overnight rate stayed at 5.25%, which should really showed have helped mortgage backed securities (or bonds).  However, the “tone” of the statement indicated that the Federal Reserve is still concerned that inflation, “will fail to moderate as expected.”

Speculation Moving Rates

There goes that speculation again…causing uncertainty in the market and not helping interest rates (on conforming loan limits, remember).  So, watch the stock market, and when it’s moving up…bond values are probably moving down, causing rates to move up.  And…if the stock market continues to decline, as we saw this last week, bond values would move up…causing some lower rates.  We are in un-chartered water here, and it’s fun to watch and see what will happen on a daily basis.  Just be thinking about the unfortunate results of what’s occurring with these banks and lending institutions.  There are a lot of people losing their jobs, investments, etc. and so we’re with them in though as we move from this market, to hopefully soon, another market…how quickly they can change…until next week…