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Economic Insights

Total Mortgage Demand Surges as Loan Rates Fall, Holidays End

January 9th, 2008 6:42 PM

Mortgage Bankers Association weekly index of mortgage application activity for the week ended January 4, 2008 (Change from the previous week).

All applications: 706.0, up 32.2% from 533.9;
Purchase loan applications: 414.0, up 14.7% from 360.8;
Refi loan applications: 2,494.2, up 53.9% from 1,620.9.
ARM share: 9.3% of total applications down from 9.8%;
Refi share: 57.7% of total applications up from 50.9%;
30-year fixed rate: 6.07% down from 6.17% (per Freddie Mac);
1-year ARM rate: 5.47%, down from 5.53% (per Freddie Mac)

Four-week moving averages (change from the previous week):

Total applications: 624.4, down 4.1%;
Purchase loan applications: 397.7, down 3.5%;
Refi loan applications: 2,031.0, down 4.5%.

Trend:

Total mortgage demand soared, shaking off the holiday hangover and basking in lower interest rates, registering its first weekly increase in a month.

The purchase index also improved for the first time in a month to its highest level in three weeks.

The refi index which had tumbled 43.7% in just three weeks led the surge with but still fell short of its 2007 high of 2,879.8 for the week ended December 7.

The increases came as the rate for a fixed rate loan fell sharply after three steep weekly increases. At 6.07%, the rate for a 30-year fixed rate loan dropped to its second lowest level since October 2005 (6.03%, had dropped to 5.96% at the beginning of December 2007); the rate for a one-year had risen from 5.46% to 5.53% in the last three weeks of December.

The refi share of all applications jumped to the highest level since March 2004.

What it means:

The sharp increase in overall mortgage demand is easy to misread with the noise of holiday shortened weeks, but the near seven percentage point increase in the share represented by refinance applications is the story here.

The jump in refi application activity comes on the heels of a sharp increase in credit card borrowing (in November) reported by the Federal Reserve Tuesday and a decline in personal savings (translation: borrowing) in November, the first since August 2006. The MBA application index still has noise in the background in the form of tighter lending standards which induce multiple applications from borrowers.

Since lenders often look to how applicants handled similar obligations in the past, the applications may not turn into loans with data showing increases in delinquencies in home equity loans and lines of credit. The bottom line remains cautionary for credit card lenders who are often paid off with the proceeds of refinances. That the spike in application activity didn’t come from an increase in purchase applications doesn’t suggest a quick recovery of the housing sector.

Posted by Heath Lefort - Personal Financial Advisor on January 9th, 2008 6:42 PMPost a Comment (0)

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Fed Fund Rate Drops another .50!

January 31st, 2008 7:30 AM

Fed Delivers, Financials Flounder

The Fed has cut a total of 1.25% in 8 days! (A record)

Most of the excitement in Wednesday's session happened in the last two hours of trading after the FOMC decided to cut both the fed funds and discount rates by 50 basis points and a CNBC report suggested downgrades of bond insurers were imminent.

Prior to these happenings the stock market traded in a narrow range, sporting relatively modest losses that were driven by disappointing earnings news from Yahoo! (YHOO 19.05, -1.76) and Merck (MRK 46.69, -1.32), and a fourth quarter GDP report that showed growth of just 0.6% versus the 1.2% consensus estimate.

The GDP report, frankly, wasn't as bad as the headline suggested considering a drop in inventories created a big drag. Final sales, which exclude the swing in inventories and offer a better read on underlying demand, increased 1.9% at an annual rate.

Separately, in a bit of encouraging news, the ADP Employment report showed an estimate of 130K for January private payroll growth. While this report doesn't correlate very strongly with monthly payrolls reported by the government, it has been a decent directional indicator. As such, it sparked some hope that the January employment report on Friday will contain better than expected news.

For the most part, though, the market remain preoccupied with the FOMC decision at 2:15 p.m. ET. It got exactly what it wanted, too, when the FOMC cut the fed funds rate 50 basis points to 3.00% and the discount rate 50 basis points to 3.50%. In turn, the policy directive noted that downside risks to growth remain and that the Fed will act in a timely manner to address growth risks. That acknowledgment was taken as a hint that more rate cuts may be coming.

The major indices rallied in the wake of the decision. The Dow, Nasdaq and S&P, which were all down ahead of the announcement, gained as much as 200, 38, and 24 points, respectively.

Then, the music stopped when CNBC ran a report that one of the two major bond insurers was going to be downgraded by a credit rating agency, perhaps as early as today. As it so happens, Fitch cut its rating on FGIC Corporation and its financial guaranty insurance subsidiaries.

Selling activity quickly accelerated in the wake of these developments and it was pretty much a one-way trade in the final 30 minutes of the session. The major indices all closed in negative territory, led lower by the financial sector, which dropped 1.1%.

The industrials sector, up 0.3%, was the best-performing of the economic sectors on Wednesday, having been propped up by the positive moves made in Boeing (BA 82.87, +1.91) and UPS (UPS 72.02, +1.10) following their earnings reports.

The Gov't cut short term interest rates hoping that the financial market's will improve and they also want to see if the short-term rate cut will affect the spending habit's of consumer's. Keep in mind that the reduction of 1.25 effects equity lines, credit cards, personal loans etc.

If the economy does not show signs of growth in the coming quarter's, we will see interest rates fall to records level's again. Interest rates are currently at a 4 year low and could approach the 2003 level's.

If you know of anyone who might benefit from meeting with me to discuss buying, selling, or refinancing their loan in the next 3-6 months, please let me know!

Sincerely,

Heath Lefort-Personal Financial Advisor

401-461-9987

Posted by Heath Lefort - Personal Financial Advisor on January 31st, 2008 7:30 AMPost a Comment (0)

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Fed cuts rates 75 basis points in emergency move!

January 22nd, 2008 10:00 AM

Marketwatch

WASHINGTON (MarketWatch) -- Hoping to halt a market meltdown and prevent a recession, the Federal Reserve lowered its overnight lending rate by three quarters of a percentage point to 3.50% on Tuesday in a rare move between formal meetings.

The 75 basis-point surprise cut came after global financial markets sold off in dramatic fashion on Monday on fears that bad bets in credit markets could spread further and drive the U.S. economy into recession. See full story on London markets.

"The committee took this action in view of a weakening economic outlook and increasing downside risks to growth," the Federal Open Market Committee said in a statement. Read the text of the statement.

The Fed also lowered its discount rate by 75 basis points to 4%.

It was the largest cut in the federal funds rate since 1982, after the FOMC had driven rates to 20% to kill inflation.

U.S. stocks opened with huge losses. The Dow Jones Industrial Average was down more than 450 points, or more than 3%. Treasurys rallied.

"This move is not an instant fix," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics. "The economy is still staring recession in the face, but at least the Fed now gets it."

With the move coming just eight days before the next scheduled meeting, "there can be no doubt that the timing of this morning's move is aimed at supporting global financial markets after yesterday's global equity meltdown," wrote Joshua Shapiro, economist for MFR Inc.

Some traders said the Fed's move sniffed of panic. "I think that there's an element of thinking that, if the Fed is so worried that it is cutting rates, then that is feeding into fears that the U.S. economy is in really bad shape," said David Page, a strategist at Investec Securities in London.

After a conference call Monday evening among the 10 voting members of the Federal Open Market Committee, the FOMC released a statement early Tuesday saying downside risks to growth remain. One member of the committee, William Poole, president of the St. Louis Fed, voted against the move. One other, Fed Gov. Frederic Mishkin, was absent.

"While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households," the FOMC said. "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."

"Appreciable downside risks to growth remain," the statement said. "The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."

The statement barely mentioned inflation, only saying that the FOMC expects inflation to moderate and will monitor inflation carefully.

As expected, the Bank of Canada cut its key overnight rate by quarter percentage point to 4% at its regularly scheduled meeting.

By cutting rates now instead of waiting a week, the FOMC showed that it's much more concerned about the financial markets and the economy slipping into recession than it was just a month ago, when the committee cuts its target for the federal funds rate by a quarter percentage point to 4.25%.

Over time, rate cuts should stimulate economic growth by making it cheaper to borrow money for consumption or investment. Banks typically lower their prime lending rate for their best customers in lockstep with the Fed. Many consumer and business loans, however, are based on interest rates set in competitive markets, which may or may not follow the Fed's lead.

The Fed has now lowered interest rates by 1.75 percentage points since Sept. 18.

The rate cut wasn't a complete surprise to markets that have been anticipating aggressive rate cuts from the U.S. central bank, though the timing of any inter-meeting rate cut was uncertain.

On Jan. 10, Fed Chairman Ben Bernanke had signaled the Fed's willingness to act boldly when he said it would "remain exceptionally alert and flexible" and was prepared "to take substantive additional action as needed to support growth."

"The rationale for this move today was in Mishkin's speech a week-and-half ago, which argued that at times of severe financial turmoil, policy had to be '"timely,' 'decisive,' and 'flexible,'" wrote John Ryding, chief U.S. economist for Bear Stearns.

It was the first time since Sept. 17, 2001, that the Federal Open Market Committee had changed the federal funds target rate outside of a regular meeting.

The next meeting is scheduled for Jan. 29 and 30. Markets anticipate another rate cut, possibly a half-point cut, at that time.

"The next move or moves depends on the financial markets more than the economic data," wrote Roger Kubarych, an economist for UniCredit Markets

Posted by Heath Lefort - Personal Financial Advisor on January 22nd, 2008 10:00 AMPost a Comment (0)

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