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
ECONOMIC NEWS FOR THE WEEK: 02/13/2007
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

Kansas City Area Economic News from Carol Poppe

Here's Economic News for this week from Carol Poppe, VP of Residential Lending

REAL ESTATE: As is no surprise, new home sales plunged 17.3% in 2006, the biggest drop in 16 years. The median home price for December was still below the year-earlier price reading, another sign of weakness in the market. However, since the median home price hasn’t changed from a year earlier, some prognosticators feel we have hit the bottom. This is why conforming limits are unchanged from the year before, $417,000. Major homebuilders around the country, like Pulte Homes, saw sharp declines in earnings in 2006 with the slump. What this means to you is it is still a buyer’s market.
BONDS: The Bond prices slipped after this report hinted at stabilization in the housing market. Also the stock market slumped with fears that this information would revive worries about higher interest rates from the Feds. Strong economic growth is good for corporate profits but if growth is too strong, it will cause the Feds to start raising rates again to curb inflation. The Federal Reserve has a policy meeting this week (Tues. & Weds) which at this point, is expected to keep the interest rate unchanged. Since the middle of last year, the focus of the markets has been whether the Fed will be tempted to lower rates to stimulate the economy and avoid a recession. This would have been good for the real estate market. However, now, it is thought that we will see a continued pause, encouraged by solid job growth reports, higher payrolls, and tumbling oil prices. Durable good orders climbed in December, higher than expected. These are items that are meant to last more than 3 years. Excluding defense and aircraft orders, non-defense capital goods orders jumped, following declines in the previous two months. Motor vehicle and parts orders posted the strongest gains/month since August, 2004.
RESULTS: What all this means is that interest rates continue to edge slowly up, rather than the anticipated decline. Since it appears we are not going to see a decline in the second mortgage rates for awhile, be sure your buyers who are needing 95-100% financing look at all options, not just 80/20’s. There are some great new options out there for 100% financing which will give a lower payment than 80/20’s.

Carol Poppe,
VP/Mortgage Lending
10740 Nall Avenue • Suite 210 • Overland Park, KS 66211 Office: 913.652.7302 • Fax: 913.649.3222
Cell: 913.707.1153www.fcbankonline.com