Tuesday, February 13, 2007

Kansas City Area Economic News from Carol Poppe

Economic News From Carol Poppe, VP of Residential Lending
Here's the most recent economic news from Carol Poppe.
First Community Bank Mortgage Division Carol L. Poppe, Vice President
(913) 652-7302 ph (913) 707-1153 cell
The question is simple enough: What’s going on with mortgage rates? What makes them rise or fall? Is it the Fed? The economy? Inflation? The banks?
The answer is that rates are moved by a number of related factors, and believe it or not, you—Joe/Jane Consumer-- are one of those factors.
Most mortgage money comes from “capital markets” which is where investors interested in purchasing certain kinds of investments come to buy these items. In order to attract investors, sellers of bonds must compete with one another to get investor’s money. They do this by offering a variety of products with differing structures of risk and return over given periods of time.
Who are these investors and why are they so fickle? Mostly, they are people like you, and you want two opposing things, low payment on your mortgage and high return on your investments. You will buy only so many low yielding bonds before you take your money elsewhere for better returns. Investors have 100’s of places to put their money in a crowded marketplace. If the demand falls enough, a change in strategy to attract investors is to raise the rates. Mortgages are priced for sale to attract investors who seek safe, fixed income investments, such as retirement accounts.
Rates have to be high enough to attract investors and low enough to attract mortgage borrowers.
The big unknown in the bond market is “volume.” No one really knows how many mortgages will be originated and then made available for sale (as bonds) in a given period of time. Recently, a quick drop in rates produced a large buildup of loans to be sold to investors as homeowners rushed to refinance. This made way too much bond supply available in too short a time and investors could not absorb it all at once. Too much supply, not enough demand; bond prices had to go down and yields went up. When the yields went up, so did the mortgage rates.
Inflation impacts Treasury, mortgage, and other fixed-income investments. Rising inflation reduces the actual return on a fixed interest rate investment, so with 2% inflation, that 6% mortgage note returns only 4% “real interest.” If inflation is expected to decline for the foreseeable future, you can bet that mortgage rates have some room to fall. Conversely, an outlook which suggests higher inflation ahead will see mortgage rates rise, sometimes very quickly. This is another reason that the Feds watch inflation very carefully. The higher rates can cool demand (slowing economic growth) helping to keep inflationary pressures from forming.
However, contrary to belief, the Fed (The Federal Reserve) doesn’t control mortgage rates. The Federal Funds rate is the overnight interest rate which banks charge each other when a bank needs to borrow money to meet end-of-day reserve requirements. i.e. A bank must have so much cash on hand when the books close at the end of the day and those funds can be borrowed from another bank at this interest rate. It is literally an Overnight Loan. The Fed Funds rate is the shortest of short-term rates and a 30 year fixed-rate is at the opposite end of the scale.
In some ways, expectations of what the Fed might do can be more important than what the Fed actually does.
GOING ONCE…GOING TWICE…SOLD, FOR $36 BILLION! That’s right, if you were in the market to buy new Bonds last week, it was your week! The US Treasury offered $36 Billion in new bonds. The auction was well received during the week. Lackluster buying would have meant that buyers feel that rates will be higher down the road. It was helped along by foreign buyers who love our US Bonds as a safe investment with a high rate of return. Their investment has helped keep bond prices high, and therefore, home loan interest rates low. Bond prices and mortgage rates improved throughout the week, but then lost some ground on Friday, to end the week right back where they started. Some Traders saw prices as topping out and decided to sell and take their profits.
Remember, when the price of Bonds move lower, home loan rates move higher-----------------------------------------------
Thanks Carol for your wisdom and kindness to share this information with my readers!
If you have questions about home loans, please feel free to give Carol a call.
Fran White, Realtor 2007

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