Market Comment
Mortgage bond prices fell last week pushing rates higher. The Senate approved an additional $350 billion in TARP funding to provide further relief to the current credit crisis. Consumer sentiment came in surprisingly better than expected despite unfavorable news reports of struggling financial firms. Fed Chairman Bernanke indicated the timing of a global economic recovery was “highly uncertain.” For the week, interest rates on government and conventional loans rose by about 3/4 of a discount point.

The housing starts data Thursday will be the most important event this week. The bond market is closed Monday in honor of the Martin Luther King Holiday. The market may be volatile when trading resumes Tuesday.

Housing Starts
Housing starts data is a leading indicator of the state of our economy. The Housing Starts Report, provided by the Census Bureau, takes into account data from both single-family homes and multi-family dwellings. Building permits are also released with the housing starts data. By knowing the number of permits issued monthly, analysts can attempt to estimate for the upcoming months. Normally, starts are 10% higher than permits since all locations are not required to have a building permit.
Housing starts and permits give a warning of future economic activity. In effect, a rise in housing starts can lead to a fall in the bond market and vice versa. Continued declines in housing starts can lead to continued economic slowdown and essentially a deeper recession. On the other hand, increases in housing starts could signal a possible reversal.

Changes in interest rates often affect housing starts. High interest rates can cause a significant decline in home sales, which can lead to a drop in housing starts. With the Fed keeping rates low, we may see an increase in both home sales and housing starts.

Despite the recent Fed efforts to purchase mortgage bonds, further improvements are uncertain. The good news is that mortgage interest rates remain historically low.

In today’s financial climate, everyone’s becoming more informed about our nation’s markets and economic indicators. The following information will help you understand a few key factors that affect the movement of certain elements in the mortgage market.

The Federal Funds Rate is the primary tool used by the Federal Open Market Committee to influence interest rates and the economy.  Changes in the Fed Funds Rate influence the borrowing costs of banks in the overnight lending market, and subsequently the returns offered on bank deposit products such as Certificates of Deposit, Savings Accounts, and Money Market Accounts.

Changes in the Fed Funds Rate and the discount rate also dictate changes in the Wall Street Journal Prime rate.

The Prime rate is the underlying index for most credit cards, home equity loans & lines of credit, auto loans, and personal loans.  Many small business loans are also tied to the Prime rate.

Mortgage Backed Securities (MBS) are used by lenders to price rates on mortgages.  Historically, the 10-year Treasury Bonds moved in the same direction as MBS — but mortgage rates are not tied directly to the 10-Year Treasury or the Prime rate.  They’re tied directly to the FNMA benchmark coupon.

The “Market Data” section of Bloomberg.com provides a great daily indicator of real time market movement — and your PERL advisor is always available to give you up-to-the-minute financial data.

For more information on mortgage-related topics, tune-in to the new PERL Mortgage Podcast at perlmortgage.com.

Click here to download a printable version of the Winter 2009 Newsletter.

© Copyright 2008 PERL Mortgage, Inc.

What can we expect to see in the new year? Will home values rise? Will foreclosure rates drop? Will the cloud over the declining market finally lift?

Looking into the future is complicated, and even the best predictions can be flawed. But by analyzing the past and identifying future challenges, we can take a stab at forecasting what 2009 may bring.

Home Prices
Analysts don’t expect a rise in home prices until the later part of 2009, when buyers will benefit from rock bottom pricing and low interest rates.

Lending Guidelines
Banks will maintain strict lending practices. While putting 20% down for a home purchase used to be the gold standard, it’s now moving to the silver or bronze category. Lenders will continue to offer better rates for loans carrying less than 60% of the value of the property. Good credit used to be definied as “620 and above.” Now it’s closer to 720, with incentives beginning above 740.

Advice for Sellers
Wait it out. The 2010 real estate market should be stronger, with fewer homes clogging the market.

Highlight your home. Sellers face tough competition from fellow homeowners, but even more from banks and builders, who are slashing prices to sell new and foreclosed homes. Make sure your home is move-in ready by showcasing unique features, especially those uncommon in new constructions.

Price below market. Talk to your realtor about the value of your home and recent sales in your area, and then price your house 5% below that amount. In a study completed by a New Jersey appraiser (c/o Money Magazine), lower-priced homes had greater exposure and sold for more than those priced above market.

Advice for Buyers
Look for homes that have been sitting around. Beautiful homes linger in the market for over six months, especially in areas with an abundance of new developments. Check-out properties that have been on the market for over 90 days. Chances are, sellers are willing to negotiate.

Bargain. Offer less money right out of the gate. Offering 13% below the seller’s price may be good place to start.

Improve your credit. Lenders charge fees for clients outside of the 720+ credit tier. A boost of 40 points on your FICO score can reduce your mortgage interest rate by as much as a quarter of a point.

The best way to forecast your own financial future is with the help of your mortgage expert. I can review your individual scenario and help you plan for the new year and I look forward to helping you exceed your 2009 goals!

Click here for a printable version of the Winter 2009 Newsletter.

© Copyright 2008 PERL Mortgage, Inc.

Market Comment
Mortgage bond prices remained volatile last week with trading tied to both the Treasury market and stocks. The Treasury market (10 and 30-year bonds) lost significant ground early in the week as investors fled the low yields, opting to purchase Mortgage Backed Securities instead. For the week, interest rates on government and conventional loans fell by 3/8’s of a discount point.

The consumer price index Friday will be the most important event this week. The bond market closes early Friday in observance of Martin Luther King Day on Monday, January 19th.

Treasuries
The 10 and 30-year Treasury bond yields are often viewed as “benchmarks”, reflecting the overall state of interest rates in the US economy. Many people track these bonds as a barometer for mortgage interest rates. However, the Treasury and mortgage markets trade independently.

The supply and demand characteristics of Treasury bonds and mortgage-backed securities (MBSs) differ significantly. Treasury securities represent money needed to fund the operations of the US government. MBSs, on the other hand, represent borrowing by homeowners. Demand for mortgage credit is seasonal and is also affected by the state of the overall economy.

In the absence of information directly related to the mortgage interest rate markets, Treasury information can be useful. However, mortgage interest rates can vary significantly. In fact, many times the Treasuries will trade wildly while MBSs only see minor price changes and vice versa. Thus, differences between Treasuries and MBSs sometimes lead to misleading price change differentials.

Market Comment
Mortgage bond prices remained nearly unchanged last week holding mortgage rates steady. Trading remained extremely volatile with daily movements often exceeding ½ of a discount point. The Treasury auctioned a total of $66 billion in two and five-year notes last week in the continued effort to fund the massive bailout programs. Traders remained concerned about the large supply of new debt being created by the TARP program. For the week, interest rates on government and conventional loans fell by 1/8 of a discount point.

The financial markets remain volatile amid uncertainty. With the thin trading conditions and shortened trading week, the fluctuating trading pattern will likely continue.

The Year Ahead
2009 will begin in a similar fashion as 2008. Last year at this time, 30-year fixed mortgage interest rates were historically low. Most pundits predicted steady interest rate increases with little or no opportunities for additional refinancing. Mortgage interest rates spiked higher as oil prices and inflationary fears hit all-time highs this past summer. Then the global economic turmoil hit full force and economies across the world stumbled. The housing market continued to weaken and the Fed and US Treasury had to step in to buy mortgage-backed securities in an effort to push mortgage interest rates lower. Now, 30-year fixed rate mortgages remain low. Once again, future predictions are all over the board.

The future of the economy is in debate but most of the recent signs show a short-term struggle. The only certainty is that until the economy gains some stability, mortgage interest rates are likely to be unsteady. Historically, mortgage interest rates drop slowly. In contrast, rates increase at a much faster pace. One negative day often erases a month’s worth of improvements.

As the Fed continues to purchase mortgage bonds, mortgage interest rates may lower. However, we are in unprecedented times. The Fed isn’t the only player in the mortgage bond market and there are many others buying and selling the securities. The Fed does not directly dictate that mortgage interest rates will be at a certain percentage. Rates are determined by the supply and demand for mortgage-backed securities. As of late, every time the Fed purchases mortgage bonds, rates have headed lower, only to jump back up as others sell into the Fed buying.

Only time will tell if the Fed can accomplish the goal. With mortgage interest rates relatively low, capitalizing on current levels protects against future volatility.