Monday, December 17, 2012

FED does it again

A very interesting "Mortgage Matters.." this week from Jim Belote.
The FED is pumping in even more money(millions) into purchasing treasury notes and mortgage backed securities with newly printed money.  Yes, newly printed money...making your dollars worth less..possibly, as noted below, pushing inflation higher.  I have to be honest the noted 2% inflation planned for next year pushed 2.5% due to FED action is nothing to lose sleep over.  BUT the long term affect of 'loose money' policy can be steep devaluation of dollar(translated:  INFLATION).

You will note below that the FED's effort was to reduce mortgage rates to continue the housing recovering.  Yet bonds yeilds went up rather than down thus not helping lower mortgage rates.  Though not tied directly tied to these bonds, mortgage rates do track along bond yields due to investor interest in both.

Still the best time to buy a home with home prices trending up and rates still low....don't miss out.  2013 could be a barnburner!

Keeping you updated on the market! For the week of 
December 17, 2012

Housing has been subdued the past couple weeks and will likely remain subdued through the remainder of the year. The good news is what's been reported on housing has been mostly positive.

The trend continues this week. The Mortgage Bankers Association reports that purchase applications continue to trend higher, rising 1.0% in the December 7 week. This marks the fifth-consecutive volume increase and is a positive indicator for home sales as we head into the new year.

News on the mortgage market has picked up where housing has left off. Federal Reserve Chairman Ben Bernanke announced on Wednesday that the Fed will not only continue purchasing $40 billion in mortgage-backed securities (MBSs) each month, it will also purchase an additional $45 billion in long-term U.S. Treasury securities. Both securities will be pay for with newly minted money.

The Fed's goal is to lower already low mortgage lending rates. The theory is that even lower lending rates will accelerate the housing recovery, thus accelerating the economic recovery. An accelerating economic recovery, in turn, will spur additional job growth. For this reason, the Fed said it will continue to keep interest rates low until the unemployment rate drops to 6.5%. (The unemployment rate is currently 7.7%.)

The Fed's strategy, which creates higher demand for MBSs and U.S. Treasury securities, helps hold mortgage lending rates low. The relationship is inverse: when demand rises for these securities, their price rises and their yield falls.

The graph below illustrates the relationship between a $1,000 10-year note with an initial coupon payment of 6%, which means the note pays $60 in interest annually. When the market rate falls after the note is issued, the note's price rises. A higher price produces a yield that calibrates the lower market rate of interest with the coupon rate.

Mortgage lending rates are tethered to yields on MBSs, which are tethered to U.S. Treasury security yields. In short, by purchasing both Treasury securities and MBSs, the Fed helps keep mortgage lending rates low.
That said, a strange thing happened after the Fed announced it wanted to lower mortgage lending rates even further: The yield on the 10-year Treasury note actually increased (and has been increasing since last week). The 10-year note is a benchmark for the 30-year fixed-rate mortgage.

So what's going on?

The Fed isn't the only player in the mortgage market; the Fed isn't omnipotent. Outside market forces are also an important variable. The risk of price inflation rises with the Fed pumping more money into the financial system. In fact, the Fed itself raised its annual price-inflation target to 2.5% from 2.0%. If price inflation rises, mortgage lending rates will be pressured to follow.

The point we want to emphasis is not to take for granted that mortgage lending rates will fall meaningfully lower. The Fed is implementing a strategy, not offering a guarantee.
Date and Time
Home Builders' Index
Tues., Dec. 18,
10:00 am, ET
45 Index
Important. Housing will become a more important variable in economic growth for 2013.
Mortgage Applications
Wed., Dec. 19,
7:00 am, ET
Important. Purchase applications continue to gain momentum and point to strong sales entering 2013.
Housing Starts
Wed., Dec. 19,
8:30 am, ET
900,000 (Annualized)
Important. Housing is gaining momentum, which is good news for job creation.
Gross Domestic Product
(3rd Quarter 2012)
Thurs., Dec. 20,
8:30 am, ET
2.8% (Annualized Growth)
Important. Growth is expected to be revised higher, but recent indicators point to lower 4 th quarter growth.
Existing Home Sales
Thurs., Dec. 20,
10:00 am, ET
4.9 Million (Annualized)
Important.Sales are trending higher despite supply issues in many local markets.
The Risk of Unintended Consequences
We are obviously the beneficiaries of the Federal Reserve's push for lower mortgage lending rates, but its unprecedented foray into mortgage lending isn't without risk.

The Fed's debt purchases have ballooned its balance sheet to $2.87 trillion in debt assets from $869 billion a few years ago. Because of the Fed's commitment to purchase $85 billion in additional debt each month, its balance sheet will expand to $4 trillion by the end of 2013.

The Fed's expanded balance sheet is cause for concern. The larger the balance sheet, the riskier the Fed's exit strategy becomes. The prospect of rising interest rates means the Fed risks significant losses (because of the inverse relationship we discuss above). What's more, should the Fed
attempt to wind down its portfolio of debt too rapidly, it will roil the Treasury and mortgage-debt markets, thus sending mortgage lending rates higher.

We want to reiterate what we've been reiterating for the past few months: Housing prices are on the rise, while mortgage lending rates remain near historical lows. Housing prices will continue to rise, but there is no guarantee mortgage rates will continue to fall. In short, the benefits of waiting to borrow and buy simply aren't commensurate with the risk of waiting.
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