The American economy, like most world economies today, is run on a system of fiat money, or money that is assigned its value by government decree. Since this money has no intrinsic value of its own, its value and supply must be carefully managed and regulated, not just within the nation’s borders but also in accordance with the economies of all other nations. In light of this need for careful stewardship of the economy, the United States maintains a central bank, called the Federal Reserve (or, more commonly, the Fed).

The Fed as it exists today is actually the United States’ fourth attempt at founding a central bank. In the midst of the Revolutionary War, America’s Continental Congress ratified the Articles of Confederation, which, among other edicts, gave Congress the power to issue bills of credit. A private national bank, modeled after the Bank of England, was established shortly thereafter, but was denied the opportunity to become a central national bank due to unease about foreign influence and other political concerns. The official First Bank of the United States was created in 1791, and lasted 20 years before being denied a renewal of charter by President James Madison. The Second Bank of the United States opened in 1816, and it too only lasted 20 years before President Andrew Jackson shut it down. Political opposition to the very idea of a central bank had been a chief culprit of these failures, and it would be almost a century before the United States would try again.

In 1907, a profound financial panic occurred, a direct result of a failed attempt by stock traders to corner the market on shares of the United Copper Company. The failure created a series of bank runs on those institutions that had backed the bid. As is often the case with bank runs, the atmosphere of worry spread nationwide, causing other banks to suffer runs and even leading to the collapse of, at the time, the third-largest financial trust in New York City, the Knickerbocker Trust Company. With no central bank in existence to attempt stabilization of the economy with an infusion of currency, the only reason that the crisis did not fling the country into irreparable economic turmoil was the work of private business tycoons such as J.P. Morgan, who banded together and contributed much of their own capital to bolster the banks. It was this barely dodged catastrophe that led to a series of financial reforms over the next few years, culminating in 1913 when Congress and President Woodrow Wilson passed the Federal Reserve Act.

In structure, the Federal Reserve is unique among the world’s central banks. Although it is designed to function as an entity “independent” of the federal government, thereby limiting its exposure to political influence, the Fed also employs a mixture of private and public sections in its operation—most similar banks in the world operate under either entirely private or entirely public ownership. It is also the only such bank to not make its own currency (which is instead printed by the United States Treasury). The Fed is managed by a Board of Governors, all of whom are presidential appointees, and is also comprised of the Federal Open Market Committee (FOMC) and representatives from twelve other Federal Reserve Banks located throughout the country.

The Fed has been reformed a number of times since 1913, especially so after the recovery from the Great Depression. Currently, its chief mandate is to provide the means to deal with bank panics, but it also sets interest rates, operates as a lender of last resort in case the banking system is in need of capital, and generally regulates the entire money supply by balancing the factors of employment rates and inflation. The importance of these functions to the American economy cannot be overstated. Any competent financial player in any market knows that a key component of success or ruin is an ability to observe, analyze, and possibly predict the actions of The Fed…and any competent Board of Governors is aware that The Fed is being closely watched.

We all hear that “interest rates fluctuate on a daily basis.”  Ever wonder how rates fluctuate over a period of years?  Here’s a quick run-down of historical rate changes over the past five years for two major mortgage products: the 5/1 ARM (adjustable rate mortgage) and the 30-year fixed:

30-YEAR FIXED
The most popular of all mortgage products is still at historic lows – and here’s proof.  In April 2005, the 30-year fixed hovered around 5.5%, spiking to nearly 6.5% a year later.  The 30-year saw ups and downs through March 2009, hovering right below 5%.  Today, the 30-year is still right on top of the 5% marker – and keeps fluctuating on a daily basis.  For payment stability, a long-term length of stay and a monthly principal that will never change, the 30-year fixed may be perfect for your situation.

5/1 ARM
Having an adjustable rate is advantageous to those looking for shorter stays in their new home – and ARM’s often deliver lower rates than fixed products.  Especially now.  In April 2005, 5/1 ARM’s were around 4.85% — and though they fluctuated with trending ups and downs similar to fixed rate products, the 5/1 ARM is now at it’s lowest point in the past five years.

For the most current rates and trends, call me today!

Source: BankRate.com

Market Comment


Mortgage bond prices fell last week, pushing mortgage interest rates slightly higher. The early part of the week saw a reversal of the recent flight to quality buying of US investments, as talks hinted of a Greek bailout by Germany. German Chancellor Merkel dashed those hopes late in the week, causing turmoil in the European Union. As a result, global investor funds returned to the US bond market. Rates improved Friday morning, which helped recover some of the earlier losses.

Unfortunately rates still rose for the week by about 1/8 of a discount point.

The consumer price index Friday will be the most important release this week. The other inflation data and the shortened trading week may also factor into mortgage interest rate changes. The typical back and forth movements of stocks and bonds will also likely take place as uncertainty continues to permeate the financial markets.

Globalization


Economic globalization is the increasing interdependence of national economies through trade, finances, and technology. While economists debate the pros and cons of globalization, it continues to expand.

As a driving force in the global economy, the US often benefits when foreign economies struggle. A prime example is the concern of a Greek economic collapse. Unlike a corporation, a country cannot file for bankruptcy when they can’t make debt payments. One remedy in situations like this has been restructuring the debt, which is mired in uncertainty for investors. The bigger global problem is the fear that a default by one member of the European Union could ripple throughout all the other eurozone countries. In times like this, investors often move funds to safe havens in what is called a “flight to quality.” This is exactly what we saw Friday morning as US debt instruments saw an influx of foreign investment. Bond prices rose which caused mortgage interest rates to fall that morning. From a short-term perspective, it’s great for homebuyers and those refinancing. The long-term effects are less certain. A reversal could easily take place if the EU can prevent a default. This is a prime reason to take advantage of rate dips when they occur.

Market Comment
Mortgage bond prices ended the week nearly unchanged, despite considerable market volatility. Trading was up and down all week. Rates improved the first portion of the week as stocks fell below key psychological levels. Unfortunately, a midweek reversal eroded the earlier improvements. Data was mixed with tame inflation readings, but generally stronger than expected economic activity.

For the week, interest rates were near unchanged.

The Treasury auctions will take center stage again this week. If there is strong foreign demand it will likely spill over to the mortgage bond market. Weak auctions will likely result in mortgage interest rate increases. Employment cost index data will also be carefully watched.

Existing Home Sales
Last week’s existing home sales data shocked the market with a stronger than expected increase. Sales rose 9.4%, considerably stronger than the expected 5.5% increase. Some analysts attribute the surge in sales to the $8000 tax credit which is currently set to expire at the end of November. Lower home prices and historically low mortgage interest rates also factored into the increase. From a national perspective, this is a positive report. However, some major metropolitan areas of the country failed to see improvements, which exemplifies the principle that real estate is local.

There is still uncertainty regarding the future state of the economy. Mortgage rates are great. Take advantage of them while they are still available.

Don’t forget to check for the word of the week on the PERL Mortgage Facebook page. The first email to perl@perlmortgage.com with the mystery word receives our weekly prize!

Market Comment
Mortgage bond prices fell last week, pushing mortgage interest rates higher. Producer Price Index (PPI) data release last Tuesday was much higher that expected and sparked inflation fears. That data set the tone for negative trading early in the week. Thankfully, the Consumer Price Index (CPI), a better gauge of overall inflation, was lower than expected, helping interest rates recover.

For the week, interest rates rose about 3/8’s of a discount point.

The record debt will once again take center stage this week. If foreign demand remains strong, rates should remain the same or even improve. The Fed meeting will be the most significant event this week. While no adjustments are expected, the Fed remarks will be carefully weighed.

New Home Sales
New Home Sales data is compiled monthly by the Department of Commerce’s Census Bureau and is gathered from builders throughout the country. The data represents new home sales for the nation, as well as four areas of the country: the Northeast, the Midwest, the South, and the West. Information on the average price of a home, the number of homes for sale, and the supply of unsold homes are also provided. A slowdown in new home sales tends to lead to a slowdown in housing starts, which will continue to affect other indicators. New Home Sales data is often difficult to predict. Most analysts look at a three-month average in order to see any trends in the growth rate. Surges in the release are often greeted with little more than an average reaction in the bond market. However, the data is significant in showing the condition of the housing sector of the economy.