Saturday, January 2, 2010

Listen to the Pros--Rates Won't Be Low Much Longer

With the start of 2010, many wonder if the debacle of 2008-2009 is behind us. Is the Economy really on the road to recovery. If you are like me, I am always looking for insight from the people in the know.

Frequently, we must listen to many sources to have the proper picture. As a Realtor, I am privy to insights that I wish to pass on to ensure you make the best decisions for your family. Susan Haynes sent me this very helpful Summary and I share it with you! If you need a great mortgage officer, you can contact Susan via email at susan.a.haynes@bankofamerica.com.

The "bold" sections are mine as they point out what others are saying that the low 5% rates won't be here forever. So the time to act is NOW!


Weekly Economic Summary--January 1, 2010

For the week of December 21-25th, probably the most important bit of news to report is that the 10-year Treasury security note yield climbed from 3.548% at the beginning of the week to 3.748% two days later and, according to Bloomberg.com, ended the week at 3.80%. Why is it rising so rapidly? The first reason is that the markets are currently in a very positive mood about the near-term future of the economy. Manufacturing seems to be turning up along with employment numbers and consumer confidence. Personal income is growing slightly. The numbers continue to please investors, and the stock market has finally gotten into the spirit of the higher numbers again. A better future for the stock market and the overall economy generally means that interest rates begin to rise, as the stimulus of lower rates gives way to the foot-gently-on-the-brakes of higher rates. Though analysts assure us daily that inflation won’t begin a serious rise for many months, there is still a consensus that an improving economy will cause the Federal Reserve to cease its support of lower interest rates, and perhaps even raise the fed funds rate well before it was recently expected to. The second reason that 10-year note rates are rising so convincingly is closely related to the first. As interest rates climb, existing Treasury notes providing lower yields to their investors become less valuable. Those investors, therefore, very often raise rates further by selling off their Treasury securities when they become convinced that the interest rate trend is turning and that their holdings are about to lose value. We have noted a narrowing spread between the 10-year note and the 30-year average mortgage rate, suggesting that mortgage rates may be about to rise. Even more significant is the spread between 2-year notes and 10-year notes, which makes up what is called the “yield curve.” A year ago, that spread was 1.27%. Now, though, the spread has widened very significantly to 2.81%. (Before the recession, the yield inverted rather prophetically, with short-term rates lower than long-term rates, a condition that sometimes precedes an economic downturn.) So far, the two spreads have accurately predicted, along with other factors, rising interest rates. The situation, therefore, is well worth watching carefully.
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