Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – December 3, 2009

We Twittered On November 30, to Lock

Employment Looking Better

Unemployment Claims came in at 457,000 as opposed to the 480,000 that was expected.  This is the lowest reading in 14 months!  We really need to see new claims below 400,000 before we get excited about the labor market even coming close to correcting itself.  Keep in mind, that with the Tax Credit Extension, unemployment benefits were extended, as well, for those who had previously lost their ability to continue their claims. So, expect this number to be difficult to reach the below 400,000 level for some time.

Ben Bernanke Up for Re-Election

President Obama recommended Ben Bernanke for another four year term, as our Fed President, back in August.  He’ll probably get voted back in, however, what will really be interesting is if the government wants to take over the Federal Reserve.

Obama’s Job Forum

The White house is hosting a job forum of CEO’s, economists, and other leaders to determine what can be done to help the job market.  And Speaking of Jobs, the White House Commented that they think that tomorrow’s Jobs Report and Unemployment Numbers will see a slight increase.  Economists are expected a loss of 125,000 jobs.  I think it might come in a little better than that, and as far as the unemployment rate goes…even if it’s worse, I don’t think we’ll see the interest rate lows that we’ve enjoyed this past month.  I think we take advantage of what’s available and lock in before tomorrow’s Jobs Numbers.

Related Must Reads

House Passes Tax Extension
Jobless Claims…Obama Signs Unemployment Benefits Extension
Dubai’s False Troubles Was Still A Signal To Lock

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Why Buy Now…Why Rate Outweighs Price

Where’s The Bottom?

A lot of buyers seem to be, “waiting for the bottom” of real estate prices to hit before they purchase a home.  Waiting for the right deal is crucial, however, waiting too long, could hit your pocket book more than one might think.  An understanding of how interest rates effect payments, compared to how prices effect payments, could be that final “push” that a buyer needs to see, to get off the fence and buy that home, at the most opportune time.

Think Payment, Not Price

We have many borrowers who are approved and ready to buy.  They’re in the trenches, writing offers, but some get emotionally drained when they get outbid in their offers.  They have budgeted their maximum monthly payment and, perhaps, lowball every offer, when it’s easier to just consider a higher offer, with a lower interest rate.  Let’s look at an FHA purchase…

Do You REALLY Save?

A borrower desires their maximum monthly payment to be right around $1,500 per month.  This affords them a home at approximately $210,000 when rates are at 4.875% (with only 3.5% down).  So, they’ve sat on the fence, hoping that values would continue to come down.  If they wait a year, and speculate values to fall 10%, they could wait and hope to buy that home for $189,000.   A savings of $21,000.00.

Does It Make “Cents?”

What’s important to understand about the above mentioned strategy is that with the Government Mortgage-Backed Security Purchase Program’s funds drying up, and bond values starting to trade at higher yields, interest rates are inevitably moving up.  One year from today, it is expected that long term interest rates will be about 6.5%.    So, even if that home lost 10% in value, when you plug in the anticipated interest rate, your monthly payment increases.  So, where’s the “cents” in that?

Other Reasons To Buy Now

With the First Time Homebuyer Tax Credit drying up, as well, you have about five months left to get into escrow.  So, you could be throwing away an $8,000 gift from the Federal Government.   There’s 3.8% of that $210,000 home you could buy, today.  If you move now you have the tax benefits of interest and property taxes written off the income tax you’ll pay now, as opposed to a year from now.  And do not forget, long term rates are going up, even though short term rates may stay low.

Table Comparison:

	$210,000 Purchase	10% Drop In Price ($189,000 Purchase)
Interest Rate	4.875%	6.5%
Monthly Payment-P & I	$1,127.54	$1,215.54
Taxes	$218.75	$196.87
Insurance	$80.00	$75.00
Mortgage Insurance	$96.25	$86.63
Total Monthly Pmt	$1,522.54	$1,574.04

Over the life of a loan, the difference is $18,540.00.  Not to mention the $8,000 Tax Credit and the tax write-offs for a year.  Now is Definitely the time to Buy!

Related Must Reads

Understanding FHA. Why It’s King
Reasons for Higher Rates
House Passes Tax Credit Extension

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4.875%  APR = 5.838% including 1.75% Mortgage Insurance Premium

6.5%  APR=7.508% including 1.75% Mortgage Insurance Premium

Chico, CA Interest Rates Market Report – Economic Influences – November 4, 2009

FOMC Statement Today

Market participants will likely spend this morning holding their breath as they await the release of the Federal Open Market Committee’s (FOMC) post-meeting statement scheduled for 11:15 a.m. PST today.  The FOMC members convened the second of a two-day monetary policy strategy session earlier this morning.  Mortgage investors will be keenly interested to see what, if anything has changed in the Fed’s thinking about the economy, government economic stimulus tactics and the appropriate level of short-term interest rates.  In each of their post-meeting statements since March, the Fed has said it plans to keep interest rates “exceptionally low” for an “extended period.”   

There is a small chance the Fed may choose to do a little mixing-up of the verbiage of their post-meeting statement this time around — by dropping the phrase “exceptionally low” and/or “extended period” — to clearly set the stage for a change in monetary policy in coming months.  If this event were to occur — holding out hope for notably lower mortgage interest rates could be quite a costly mistake, for you and or your clients.

Advice On Wild Swings

Often times, interest rates will move reactively toward The Fed’s comments, not really having an opportunity to absorb the information appropriately.  So, we’ll see interest rates move in one direction, in somewhat of a kneejerk fashion, and then, after the market has time to truly consider and weigh the Fed’s comments, will move in the opposite direction.  Knowing what the Fed says and studying the information accutely can save clients thousands of dollars, over the course of a thirty-year fixed rate loan. 

 Another Record Week For Treasuries

Treasury Auctions, this the coming week, will reach another record amount.  $40 Billion in 3-Year Notes, $25 Billion in 10-Year Notes, and $16  Billion in 30-Year Notes.  This should prove quite interesting, as longer term notes are harder to gain investors’ interest and these Treasuries compete for Mortgage-Backed Securities.  I don’t like the odds, as I think foreign appetite might be tight and The Fed’s running out of money, soon.  So, expect this to put pressure on interest rates. 

Tax Credit Extension

The House approved the extension and expansion of the First-Time Homebuyer Tax Credit.  It will be interesting to see the House version, compared to the Senate version, and what ultimately, President Obama should sign by week’s end.  Included in this Tax Credit Bill is a proposal to extend unemployment benefits an additional twenty weeks.  This will, most certainly, effect the weekly Jobless Claims numbers and unemployment rate, so expect significant increases in these numbers, if this portion of the bill is passed, which could help interest rates stay a little stable, even in the eye of the week Treasury Auctions.

Related Must Reads

2008 Article On Kneejerk Reactions
Why Be Leery? Why Long Term Treasuries Are Harder To Auction
Tax Credit Facts

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