Consumers benefit from low gas prices and great refinance rates
The american consumer who is the backbone to the economy has taken a lot of blows this year as they struggle to find a bottom to the sagging economy. The recent report on the job market showed a net loss of over 500,000 jobs for the month of November, a staggering number that could continue to grow. There are a few silver linings in today’s economic climate. The dramatic fall out of the stock market has helped to bring down mortgage interest rates to near historic lows. Consumers are benefiting with refinance rates that have not been seen since January of this year. The lower house payments could help to pump some additional income back into the economy. The rapid drop in oil prices is also going to save the average consumer in excess of $50 per month, at a time when this is desperately needed.
The market is very tied into the bailout loan proposals for the auto industry and the anticipation of the President elect Obama’s capital expenditure program. The market could continue to benefit with low rate mortgage loans as the government works in overdrive to try and jumpstart the housing market.
How could Yahoo stock effect mortgage rates
The stock market could be under pressure from the fallout of the Yahoo & Microsoft merger. So what does this have to do with mortgage rates? The connection is strictly tied with investment dollars and decisions. When the stock market is doing well and investors are purchasing equities you tend to see mortgage rates increase as investors pull their money out of the safer bond market and invest in equities such as stocks.
The flipside of this analogy is that when investors are concerned about the direction of their equity investments or perceive higher risk in the stock market they tend to invest into the bond market. When this happens you tend to see mortgage rates decrease. Their is not always a direct correlation between the ten year bond and mortgage rates but this is a common index that investors follow when they are trying to follow the direction of which mortgage rates are heading.
Home owners or potential home owners who are shopping for a mortgage and must determine whether or not to lock or float their interest rate can use the stock market to help gauge what direction interest rates are heading but should be cautious that no one can predict where rates are moving and economic and investor news comes out on a daily basis that can change the markets direction.
Refinance Rates Moving Up!
This year has provided a unique opportunity for home owners to refinance their mortgage into fixed mortgage rates at levels last seen in 2003. In January of this year fixed mortgage rates reached their lowers levels of the past five years and were around 5.25% as the yield on the ten year bond dropped to 3.33%. This brief opportunity to lock into near historical low levels did not last long as mortgage rates jumped shortly their after.
Since early January the market has been under enormous stress following further fallout in the credit markets. Mortgage interest rates have been under pressure due to the tightening of the credit markets and the spread in mortgage securities has increased as investors are looking for a larger premium to hold mortgage loans. This larger spread has elevated the rates on mortgages, even as the yiled on bonds has declined with the turbulent movements in the stock market.
The market is now under further strain as rising oil prices are adding enormous strain on the markets through inflationary pressure. The yield on the ten year bond has moved well above the January lows and mortgage rates are now trending above six percent. The Federal Reserve will be meeting again in a few weeks and may further reduce the Fed Funds rate which would be good for home owners with adjustable raete mortgages or home equity loans, but it is unlikely to aid in helping bring down the rates of fixed rate mortgages. Those homeowners who have been on the fence when considering a refinance should explore locking into a fixed mortgage or securing a fixed mortgage with a float down option.
Credit Squeeze
You can not open a newspaper without hearing the term credit crunch and falling home prices. The financial mess is going full circle, first from main street down to wall street and now back to main street…
The worst time to borrow money is when you really need it desperately, and as many American home owners are finding out, even if they had planned for tough times, lenders are now pulling in their options. This past week Wachovia made headlines for freezing open lines of credit on home equity loans. Large lenders such as Indymac and Countrywide began doing this earlier in the year. The default rates on second mortgages have spiked to such high levels that most lenders are no longer offering second lien products. This puts homeowners in a difficult spot, already banks are being flooded with calls from customers who are trying to pull out all of the equity they can from the home equity lines in fear that the lender could freeze them out.
Complicating matters is most mortgage lenders have now also reduced the amount of equity a home owner is eligible to reifnance. In years past it was not uncommon for home owners to refinance at 95 to 100% of their homes value. Those options are long gone, most lenders now cap the loan amount at 90% of the homes value and even lower if your zip code is categorized as being in a “declining market”. The only option a home owner has to cash out refinance above 90% is through an FHA backed mortgage.
Many economists are predicting the limited access to home equity will result in a dramatic rise in the default of consumer credit cards. Homeowners who have historically used their homes equity to pay off their revolving debt have run out of options and will be stuck to make difficult financial decisions if the market does not improve in the near future.
Government Bailout Options
The long anticipated government housing bailout should be announced within the next two weeks. The economy has seen a number of indirect initiatives in assisting to help the housing market with both fiscal and monetary policy coordinating efforts to help the troubled market. There have been a wide variety of reports on what form of bailout and to what extent the government would become involved.
Critics have argued that the government does not need to increase the tax burden for individuals who did not make poor financial decisions or get greedy trying to refinance their homes into teaser rate programs. However, even the most staunch critics of the government having a direct role in fixing the problem are now beginning to ease on their opposition as the economy heads into a full blown recession and U.S. home values have dropped almost 10% in value over the past twelve months.
There are a number of items all but guaranteed to be incorporated in the upcoming legislation including:
- A larger role for the Federal Housing Administration (FHA)
- Tax incentives to buy foreclosed homes
- Financial incentives for lenders to reduce the balance on mortgages where home owners owe more than the value
- The role of the Fed continuing to grow in oversight of the mortgage market
- Better funding of education and home counseling programs
The real challenge in correcting the downward spiral of the housing market is a simple lesson in economics, supply versus demand. The supply of homes continues to grow with foreclosures and bank owned homes being a large contributor and the demand from buyers is limited because of lenders restricting underwriting guidelines. Fixing this balance will be critical in bringing back the real estate market.