OVERVIEW OF LAST WEEK

On Tuesday, President Barack Obama signed into law a $787 billion economic stimulus plan designed to spur consumer spending and create millions of jobs. The American Recovery and Reinvestment Act contains numerous provisions: roughly $300 billion in tax breaks for individuals and businesses, more than $250 billion in aid to distressed states, and almost $200 billion to upgrade the nation’s infrastructure. The package also includes an $8,000 tax credit for first-time homebuyers, which does not have to be repaid unless you sell your home within three years.
On Wednesday, Obama unveiled the $75 billion Homeowner Stability Initiative. The multi-step plan would help struggling homeowners by providing incentives to lenders, servicers, mortgage holders and borrowers to help modify mortgage loans. The goal is to prevent as many as nine million Americans from losing their homes to foreclosure.

As the week unfolds watch for the stock market to attempt a rally while bonds bounce up and down without a huge change in mortgage
rates. The fed is going to put maximum effort into keeping long term rates low for homeowners and for corporations. Expect a final bond rally to begin within a few weeks-this will be the best opportunity to lock in rates under 5%.

BOND MARKET RALLIES AS STOCKS SLIDE

This week saw the passage of the stimulus bill and information was released on how the mortgage relief plan will be implemented. Apparently, the stock market was not pleased with these plans as stocks sold off all week long. As money left the stock market, it helped the bond market rally and mortgage rates improved. Mortgage rates are staying rangebound between 4.75-5.25% as predicted. In the longterm, there is concern with supply of bonds which will ultimately push rates higher. Near term, lows in the stock market( near levels not seen since 1997) are keeping rates down. Many of my clients locked in excellent rates under 5% this week.
I continue to advise clients that rates are at historic low levels: fed funds rates are already at 0-0.5% so the fed has little means to push rates lower. Waiting for much lower rates will result in losing a great rate for the longterm.
I will post over the weekend with more information about the mortgage relief plan although full details will not be known until early March.

WEEKEND RESEARCH

I spent hours researching this weekend and find that my outlook remains the same. The stimulus bill has passed although most of our elected officials admit that no one read the entire bill which was over 1000 pages long!  At this juncture, we will need to see what the stock and bond market reaction is this week once the bill is signed into law. My review of technical charts and third party research suggests that bonds will bounce around in a vary narrow range which means mortgage rates should remain in the 4.875-5.25 area in the next few weeks.

I still see potential for another bond rally in March which could push mortgage rates slightly lower.   The other unknown is what the government will offer in terms of a plan for relief to stressed borrowers- we expect more details in the next few weeks.  Elected officials opted NOT to include a plan to offer low rates for refinancing in this stimulus bill.

Longer term, bank bailouts and stimulus bills = huge debts, government borrowing=

INFLATION + HIGHER RATES.   Borrowers who can lock in these great rates for purchases or refinances should do so very soon.   After the next rally in bonds, potential for much higher rates could surprise everyone waiting to lock in at 4%.  

UPDATE on RATE IMPROVEMENT

As I predicted several days ago, we did get an improvement in rates. Unfortunately, we also have the stock market retreating back to lower levels and great disappointment with the Treasury Bailout Plans. Market reaction: plans to help the banks move forward lacked details and just seemed to be more of the same. Details on the plan to help with mortgages has yet to be released. I now expect treasuries to trade in a narrow range as huge supplies are coming on to the market. Although our government's most recent auction of treasuries was supported this week, it will be tough to move such a huge supply. I expect the FED to be buyer of last resort behind the scenes.
For the next few weeks, I expect rates to be in a narrow range. I would advise your clients making purchases not to wait too long to lock in reasonable rates. Although the stock market is exceptionally weak today, I do not see a flight to bonds which may be telling us that buyers are not looking for safety today. A stock market rally may be evolving which will compete with bonds for money; thus rates could easily rise back up. Clients who choose to wait for that extra fraction of rate improvement might lose an excellent longterm rate.

STEPPING OUT ON A LIMB- LOOKING FOR RATES TO IMPROVE SHORT TERM

Although we are still awaiting details of the treasury's bank bailout plans, my view of the stock and bond markets lead me to expect an improvement in mortgage rates short-term. Technically, the ten year bond is oversold, and I am seeing signs of money buying this bond. Although there is room for 30 year yields to head higher, a turn is coming which should provide a small relief rally(improvement) in bonds and better rates. After a sharp turn, expect a range bound market in bonds with very little day to day change: the fed will be trying very hard to keep rates low. Congress and the Treasury may offer a plan to offer homeowners low rates BUT once again, where is the money coming from?

CAN THE FED SAVE THE BOND MARKET, THE STOCK MARKET AND THE DOLLAR ?

As we await the final vote of the stimulus package and the full details of the Geithner plan, it becomes evident that the fed is going to have a tough time saving the stock market and the bond market, not to mention the dollar. If stocks improve, money usually moves out of bonds. In order to execute elements of the Geithner plan, the US Govt. is going to have to finance all of the stimulus and bailouts by selling bonds (the money has to come from somewhere!!!). When money is moving to stocks and foreigners are dealing with their own issues, the fed will monetize debt - which means the fed will print money and buy back the bonds the treasury just issued.
If it sounds crazy and you feel confused, you are not alone. The Fed is struggling to find solutions to a massive debt bubble.

Printing lots of money to buy our own bonds in order to keep rates low and finance the govt. spending will kill our dollar. So stay tuned for the full details of the Geithner plan and the results of the stimulus vote while we watch to see which market the Fed helps first.
For my readers who think the Fed will try to save the stock market, keep in mind that the bond market is far larger than the stock market and the low rates are needed to keep lending going in all aspects of our economy.

MANAGING YOUR MONEY

I have added a section below my blog on looking at ways to reduce debt by reviewing fixed items in your budget. When I submit your loan application for review, one of the items being evaluated is your ratio of debt to income. Reducing debt through costs savings will improve your ratio.

Perspective on Current Rates/Roadmap to the Future

This week was volatile for the stock and bond markets. The treasury market has seen a persistent sell-off in longer term dated treasuries which has resulted in higher mortgage rates.
Mortgage rates do not exist in a vacuum but are affected by multiple factors in the economy.
Financial institutions, investors, mututal funds etc. split their allocation of funds between bonds and equities. As stocks fell in the fall, everyone fled to the perceived safety of all US govt. issued bonds and notes. This so-called flight to safety and liquidity led to some investors buying short-term paper for 0% return: people just wanted to park their funds in a safe place. Also, the federal reserve announced their intention to keep buying long-dated treasuries and forcing yields lower. If you thought you might not get more than 3% return on a bond, you might be tempted to lock in today and take the 3% if you worried that next year, the yield would be 2%.

As stock performance has stabilized, it has encouraged some investors to sell bonds and invest that money in stocks. Several weeks ago, Barron's featured a cover article which warned that bonds were the new bubble just waiting to burst which also encouraged much selling of bonds.
In addition to those 2 factors, the government has outlined numerous stimulus plans which will have to be financed by issuing more bonds. This supply of bonds will be overwhelming and difficult to unload at current rates. The bond market can only be controlled so far and then market mechanisms take over. The huge supply of bonds expected at such low rates suddenly makes corporate bonds and stocks look better on a risk reward basis. The flight out of bonds has started. On a short-term basis, bond yields may improve and we may see better rates.
The federal reserve has an enormous task ahead in trying to bring rates back down and will not be able to overcome normal market forces forever.

I try to advise all clients on the best time to lock in a good rate but can't always pick the exact bottom. Mortgage rates change several times a day and constantly fluctuate just as stocks fluctuate. Due to volatile conditions we are experiencing in our economy, I try to view rates from a longterm perspective and a risk/reward perspective. On a historical basis, rates are near lows not seen for decades and very reasonable. Viewing risk/reward, I see that rates might improve to 4.5% if the economy worsens, but I see a greater risk of the bond market bubble popping within the next 8-18 months. I believe we could see rates as high as 7% in a short time if all of the stimulus packages lead to inflation. Therefore, I advise clients to take the best rate for their needs and not wait for the last fraction improvement.

With the treasury announcing plans for handling toxic assets and congress passing the stimulus bill, expect a volatile week for the stock market and mortgage rates.
For the short-term, look for rates to improve and stay within a narrow trading range as the stock market tries to rally. When this rally fails, I look for rates to improve as the bond market has a final rally. No one, including, me can give you exact dates. I can only provide a guide to these events which may also be affected as the "next best bailout package is proposed".

How and when you choose to make a purchase or refinance will depend on your individual needs.