Stock market drop provides refinancing opportunity
The month of June has brought on one of the largest drops in the stock market in the past fifty years. The stock market has dropped by over 10% as investors are fearing a catastrophic slow down to the economy. The main reason behind the huge drop has been the rapid rise in oil prices that are looking to end the month of June approaching $145 per barrel.
The only good news to come out of this huge decline in the stock market is that mortgage interest rates have started to retreat as well. Earlier in the month mortgage rates looked certain to be heading towards 7% as the yield on the ten year bond approached 4.3%. Over the course of two weeks, mortgage rates jumped up by almost 1/2 of a percent and the ten year bond topped out at 4.26%. Since this point the bond market has regrouped as investors have fled out of the equity positions looking for more stable investments, despite the threat of inflation.
Fixed rate long term mortgage were heading back towards six percent as the market heads into the month of July. This is good news for homeowners who have yet to refinance and are looking to fix in their interest rates. The drop in interest rates will also be welcome news for home buyers who are capitalizing on a great home buying market. Keep an eye on the stock market and ten year bond as a leading indicator of where refinance rates are heading as this remains an extremely volatile market.
FOMC agenda
Ben Bernanke is in a no win situation. He has tried to jump start the housing market by improving the credit markets. Agressively cutting down the fed funds rate to a level of 2% this year should have been a major help. The relief has been very short lived. The spread between conforming and jumbo loans is still over two percent and the housing market is not showing any immediate signs of a recovery. While politicians sit by and do nothing in Washington, home owners continue to see their home equity disappear.
The Fed is no longer in a position to focus exclusively on the housing market. They have lost their ability to influence this market as oil prices, inflation and a declining dollar on now the major focal points of the market. The overall economy is feeling a rapid strain from the rapid increase of oil prices and the stock market has dropped to levels last seen in early January. The fed is not likely to raise the fed funds rate in June, but could start going down this road as early as the fall. They will need the government to try and jump start the housing market in a similar fashion to their sucess with keeping spending moving forward with the economic stimulus package passed earlier this year.
Is it a good time to buy a home?
There are thousands of home buyers sitting on the side lines trying to time the very bottom of the housing market, wondering when the time to buy may be. The time to buy may have already passed many of these individuals by. The opportunity to purchase a home at the very rock bottom of prices may be overshadowed by the offset of higher mortgage interest rates. The month of June has seen mortgage rates increase by over 1/2 of a percent on most loan programs. This rapid increase is equivalent to about 10k in price negotiation on a 200k mortgage when assesing a home purchase. The half of a point increase raises a borrowers payments by approximately $60 per month for the entire loan term.
Home buyers who are contemplating purchasing and still need motivation should look towards the stock market and comments regarding inflation and the fed funds rate for further motivation to move forward. Many economists now believe that the Fed will be forced to raise the fed funds rate in the fall of 2008 to help stem the rapid rise of inflation, primarily caused by the rapid increase of oi prices. Mortgage rates are not likely to decrease should inflation keep rising as sharply as it has in the past two months. For every 1/2 percent that mortgage rates move up on a 200k loan, it affects the borrowers net buying power by about 10k. Meaning, they are now paying the same payment on 190k as they would have had at 200k due to the higher interest rate.
Mortgage rates zoom up
Mortgage rates have moved up fast in the month of June. The ten year bond finished at 4.1% in trading on Tuesday, June 10th the highest level it has been in 2008. Fixed rate mortgage loans are now well into the six percent range with the national average hovering around 6.5%.
The market has been under severe pressure from the rapid increase with oil prices. There is a growing concern that the level of inflation in the market will continue to grow, despite the slow down with the overall economy as energy prices continue to climb. The economy has been quite resiliant in the 2nd quarter. Ben Bernanke recently issued statements stating that he believed inflation would slow down as the economy slowed down, but many investors are now concerned that the Fed would look to increase the fed funds rate as early as the fall of 2008. The housing market has yet to break out of its down turn and higher mortgage rates will place a further strain on this industry.
Consumers who may be in the market to buy a home or are considering a refinance should act soon to lock into fixed rate mortgages as there is a good chance interest rates will continue to move up through the course of the summer.
Dollar gains focus
The value of the dollar is becoming a larger focus of the Federal Reserve. The recent rate cuts in early 2008 have had a significant role in escalating the dollars slide. The Fed has no direct ability to improve the dollars value against other foreign currencies, but they are accutely aware that the recent cuts have diminshed the value to an all time low agains the Euro.
The slide of the dollar has a number of key issues. The recent run up of oil prices is said to be linked to the value of the dollar declining, thus having a greater impact on oil and gas prices as these are global commodities. This past year has seen the conversion of one dollar to one euro fall to a record low of 62 cents per Euro, before recently climbing to 64 cents. This decrease is certain to have an impact on Americans traveling abroad as well as U.S. firms who have global operations.
The Fed will be closely watching the upcoming economic data including the job markets as welll as inflationary data to determine how soon they may actually begin raising interest rates. If the market sense some slight improvements, it would not be unquestionable to believe the Fed could start raising the Fed Funds rate as soon as the early fall, even if the U.S. real estate market has not fully recovered.