Archive for January, 2008
Making English Out Of Fed-Speak (January 2008 Edition)
Posted by: | CommentsThe Fed lowered the Fed Funds Rate by 0.500% to 3.000% yesterday. The move was widely anticipated and so Wall Street’s reaction was muted.
Because it is tied to the Fed Funds Rate, Prime Rate also fell by 0.500% yesterday. Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month’s statements.
In the statement above — as explained by The Wall Street Journal — the Fed expresses concern about the housing and jobs markets, while noting that inflation is less of a worry. This leaves the possibility of future Fed Funds Rate cuts open.
Source
Parsing the Fed Statement
The Wall Street Journal Online
January 30, 2008
http://online.wsj.com/public/resources/documents/info-fedparse0801b.html
History Is A Teacher: Cuts To The Fed Funds Rate Lead To Mortgage Rate Hikes
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When the Federal Open Market Committee adjourns from its two-day meeting today, it is widely expected to lower the Fed Funds Rate.
This does not mean that mortgage rates will fall.
In fact, using history as an indicator, we should expect mortgage rates to rise if the Fed Funds Rate falls.
Remember: The Fed Funds Rate is an overnight interest rate between banks; mortgage rates are long-term rates based on the bond market. These are two very different animals.
The FOMC’s press release hits the wires at 2:15 P.M. ET.
Homeowners Rejoice! New Homes Sales Data Is Weak.
Posted by: | CommentsIf you only read headlines this past week, you may have missed two very important points.
The first story relates to Housing Starts. Housing Starts measure the number of new homes entering the construction phase. The headline blared “Housing starts plunge to 16-year low“.
If you are a homeowner, this is terrific news.
Because home values are governed by Supply and Demand, fewer homes built means that home demand has a chance to rebalance against home supply.
This places upward pressure on home prices nationwide.
When Housing Starts drop, it says more about weakness in builder sentiment that it does about the state of the housing nationwide. Housing Starts are at all-time lows because builders want to sell the product they have before putting more product on the market.
The second story was yesterday’s New Home Sales figures.
The headline read that “US new-home sales slide in record plunge” but, again, let’s look a little deeper.
New Home Sales are defined as homes that are newly built. Stated differently, it specifically counts the number of homes sold that were once classified as “Housing Starts”.
If Housing Starts falls, therefore, we can expect New Home Sales to fall, too. The two data points count the same housing inventory at two different points along a timeline.
These two stories are related but neither should be construed as bad news. As builders cut back on the supply of homes, it should create an increase in relative demand.
For homeowners, this is a positive development.
The Week In Review (January 28, 2008) : What To Watch For
Posted by: | CommentsMortgage rates change from day-to-day, but last week’s volatility was a record-breaker.
After drooping through Tuesday and then skyrocketing Wednesday and Thursday, mortgage rates retreated slightly on Friday.
By weeks’ end, rates were at their same levels from mid-December.
This is in contrast to Tuesday, just after the Fed’s rate cut and before the stock market rally. Mortgage rates had been touching near four-year lows for some home loan products.
This week could be equally hectic because heavy economic data it hitting the wires, and because the Federal Open Market Committee is meeting.
The major activity gets started Tuesday with the Consumer Confidence report.
Markets care about this survey because recessions tend to be self-fulfilling prophecies — if people believe it will happen, it generally does. Therefore, if average Americans are feeling worse about the economy, it may cause stocks to sell-off to the benefit of mortgage rates.
Notice from the graph above how confidence plunged through the second half of last year.
On Wednesday, the FOMC adjourns from its two-day meeting.
What the Fed does will not be as important as what the Fed says. Markets will dissect the FOMC’s press release for clues about our economy’s strength. If the statement cautions about dramatic weakness in the economy, expect mortgage rates to fall on the absence of inflation.
Then, on Thursday, markets get treated to the Personal Consumption Expenditures report. The PCE is a Cost of Living index and is the Federal Reserve’s favored inflationary report. If “normal living expenses” are increasing, it should create upward pressure on mortgage rates.
And lastly, on Friday, the Bureau of Labor Statistics releases the jobs report for January.
Markets are expecting an improvement on December’s figure and if that adjustment is greater than expected, mortgage rates will rise on the belief that the economy is not as weak as previously reported.
It will be a busy week like last week so it pays to think in terms of “payment” instead of “rate”. If you’re in the market for a mortgage and your proposed payment is within budget, consider locking in advance of this data-laden week.
Real Estate Term : Negative Amortization Home Loan
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(Pronounced: NEGH-ah-tive am-ohr-tih-ZAY-shun)
Negative amortization is the process by which a loan’s principal balance increases on a month-over-month basis.
This is in contrast to a “typical” amortization schedule in which the principal balance decreases.
Negative amortization is an optional feature on some home loans.
These mortgages are usually referred to by the brand names “Option ARM”, “Pick-a-Payment”, or “Payment Option ARM”.
Many industry veterans collectively call refer to these types of mortgages as “Neg-Am” loans.
When a Neg-Am mortgage statement arrives each month, the homeowner can choose his preferred payment structure.
- Pay the minimum balance due only
- Pay the interest due only
- Pay the principal + interest payment on a 30-year amortization schedule
- Pay the principal + interest payment on a 15-year amortization schedule
Choice #1 is like making a “minimum payment” on a credit card. It is the only option that adds to the principal balance so, therefore, it is the only negative amortization option of the four payment choices.
In this sense, negative amortization is a choice and not a certainty.
In the early 2000s, Neg-Am loans grew popular as home affordability products. Many homeowners made the minimum payment each month and found that their mortgage balance had swelled.
Some of these homeowners lost their homes.
Because of their complex structure and potentially devasting consequences, NegAm home loans have been dubbed “nightmares” by several media publications.
However, many sophisticated homeowners have successfully applied NegAm loans to help meet their financial goals.
Like all home loans, NegAm products are a better fit for some homeowners than others. Some likely candidates include:
- 100%-commissioned salesperson who want better control over tax deductions
- Owners of multiple investment properties who want better control over cash flow
- Investors who seek leverage in real estate and who clearly understand market risk
Homeowners with questions about negative amortization loans should seek counsel from a qualified mortgage professional.