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Eve Robin Jarrett
MANAGING DIRECTOR
Senior Mortgage Consultant
Manhattan Mortgage
Office: 631-324-1555 x 25
Blackberry: 631-697-3366
e-Fax: 631-514-3654
Email: EJarrett(at)manhattanmortgage(dotted)com
For the week of Sep 13, 2010 // Vol. 8, Issue 37
In This Issue
Last Week in Review: Home loan rates started to shift… but in which direction? Read on for details.
Forecast for the Week: With double doses of manufacturing and inflation news, plus reports on retail sales and jobless claims, plenty of action is ahead.
View: Wondering how much house you can afford? Read on for a simple formula that can help.
Last Week in Review
“ACTIONS SPEAK LOUDER THAN WORDS.” Despite the markets being closed last Monday for Labor Day, there was plenty of market action… and plenty of words from the Fed. So what happened, and what was said? Read on for details.
After the recent 4-month rally in the Bond markets, which has led to some of the best home loan rates in history, money has started shifting over to the Stock market. Why has this happened? Some economic reports have been better than expected in the past few weeks… such as the Jobs Report for August and Consumer Confidence. While that’s great news, it’s important to remember that good economic news – or as has happened recently, better than expected news – often causes investors to move their money out of the safe haven of Bonds to Stocks in the hopes of taking advantage of any gains.
So why does this behavior impact home loan rates? When the economy appears strong or starts to improve, and investors move their money from the safe haven of Bonds to Stocks, a decreased demand for Bonds means that Bond prices move lower. And when Bond prices move lower, it means that Bond yields – and consequently home loan rates – move higher.
In fact, given the recent better than expected economic news, St. Louis Federal Reserve Bank President James Bullard last week shifted away from previous comments he had made about deflation and said that while he sees a slowdown in the economy for the second half of this year, he predicts a pick up in 2011. He also said that the Unemployment Rate will likely fall next year, and business spending should start to rebound.
While continued improvements to our economy are good news, one big impact is that home loan rates will start to increase. And when home loan rates start to increase, they tend to increase quickly. That being said, while home loan rates ended the week about .125-.25 percent worse than where they began, they are still near some of the best levels we have ever seen!
If you or anyone you know would like to learn more about taking advantage of historically low home loan rates while they remain so, please don’t hesitate to call or email me as soon as possible. Or forward this newsletter on to anyone you think may benefit and I’d be happy to talk to them free of charge.
One of the most important actions we can take this time of year is to remember all those who were injured, lost their lives, or lost loved ones on September 11, 2001. May we never forget those we lost, and may we thank those who work everyday to keep our families safe and protected.
WHEN YOU’RE BUYING A HOUSE, THE LAST THING YOU WANT IS TO BUY MORE HOUSE THAN YOU CAN REALLY AFFORD. CHECK OUT THE MORTGAGE MARKET GUIDE VIEW FOR A SIMPLE FORMULA THAT CAN HELP.
Forecast for the Week
This week’s full economic report calendar is sure to bring plenty of action, beginning with Tuesday’s Retail Sales Report. If the news is positive, this could benefit Stocks at the expense of Bonds and home loan rates, so I’ll be listening closely for the details.
We’ll get a double dose of manufacturing news this week, with Wednesday’s Empire State Index, which looks at New York State’s manufacturing sector, and Thursday’s Philadelphia Fed Index, which is one of the most important regional manufacturing indices. Double the inflation information is also on tap this week, first with Thursday’s Producer Price Index, which measures inflation at the wholesale level, followed by the Consumer Price Index on Friday. Remember, inflation is the archenemy of Bonds and home loan rates, so any hint that inflation is increasing could cause home loan rates to worsen.
Thursday also brings another weekly Initial Jobless Claims Report. Last week, initial claims came in at 451,000, better than the 470,000 expected, and representing the lowest number since the week of July 9th. This adds to the improving trend since the recent peak at 504,000, hit a few weeks ago. Meanwhile, Continuing Claims remained basically steady at 4.5 million – which is still a very high number.
Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.
As you can see in the chart below, Bond prices and home loan rates have worsened since the end of August. I’ll be watching closely to see what happens next.
———————–
Chart: Fannie Mae 3.5% Mortgage Bond (Friday, September 10, 2010)
The Mortgage Market Guide View…
Simple Formulas for Affordability and Saving
When people decide to buy a home, the monthly payment is a crucial factor. Conservative underwriting state that borrowers should allocate no more than approximately 30% of their gross monthly income for a house payment. Looked at from another perspective, this means if your monthly income is $4,000, you should keep your house payment under $1,200 a month.
How much home can you afford?
Affordability is a function of home price, interest rate and down payment.
The one key component in home affordability that is at greatest risk today is rates. The fact is that home loan rates are still at historically low levels. But they can’t stay this low forever. In fact, many experts have stated that home loan rates should really be higher than their current levels, due to some of the stimulus that has benefitted Mortgage Bonds. That means that right now homebuyers can get more for their money than they realize, but if rates go up even a little bit they could miss out.
Here’s a simple formula that drives that point home…
In simple terms, every 1% increase in home loan rates decreases the buying power of an individual by 10% in home price. This means that if you qualify for a home priced at $200,000 today and home loan rates increase 1%, the amount you could qualify for would be reduced to approximately $180,000 to maintain the same payment.
If you could benefit from moving to a new home, don’t let this time pass you by. Home prices are starting to stabilize and even increase in many markets, but homes are still at incredibly affordable levels. By making a move now before home prices or rates increase, homebuyers can get more for their money and still get the payment they’re comfortable with.
And for those people who haven’t refinanced in the last 18 months, today’s situation provides you with the opportunity to either cut your house payment… or save even more over the long run, by reducing the term of your mortgage to a 15 or 20 year fixed rate.
As always, I’d be happy to answer any questions and help calculate any scenarios that would help with your decision-making. Just call or email me today.