Elizabeth Rose - Certified Mortgage Planning Spec - DFW, TX

Yesterday, excitement was in the air as traders came back into the market with money in both fists. To balance their risk tolerance, money was flowing freely into both the safe haven of Bonds as well as the Stock market.

As mortgage rates improve, this opens the door to more refinancing. As refinances take place, mortgages are paid off leaving portfolios of Mortgage Back Securities with more cash and less securities. This means they have less risk...and lower performance.

Mortgage Portfolio Managers are holding too much cash, so these big mortgage portfolio's park this money in Treasuries - thus driving the yield on the 10-year Note lower. This is called convexity buying.

As I've said before, the media continues to be off base when they say that "mortgage rates are tied to 10-year Treasures." More likely, the 10-year Treasury is influenced by mortgage bonds.

Mortgage rates improved yesterday by .25% - in just one day's trading. This morning bonds continue to improve and stocks lose steam as traders cash in due to economic worries. However, our charts show us that we are positioned for a sell off in the Bond market as well. While daily and weekly activity continues to be volatile, I still anticipate rates to remain fairly stable over the longer term as long as inflation remains in check.

The polls are open and Election Day has finally arrived. Early voting has had higher turnout than previous elections and today's turnout is expected to be strong as well with reports of very long lines already.

A big job awaits our new President. How will he handle the current economic downturn and challenges we are facing on Wall Street and Main Street? And what will he tackle first?

Today is likely to be a quiet day in the markets as traders wait for the results of today's Election. Bonds are slightly improved and having little reaction to news items. Is this the calm before the storm?

During the day, there may be a lot of noise with news channels calling states early. It is very possible we will experience some short term volatility at the end of the day.

The market may react in the days to come should the election take a certain direction. Keep in mind, inflation is in check. Rates should remain stable after the noise clears.

Whenever the Fed announces a Fed Funds Rate cut as they did last week, the Media typically gets it wrong which leads to much confusion for the consumer. Since the Fed cut last Wednesday, several people have contacted me expecting this will mean lower long term rates. WRONG. Since this might seem confusing, let's unpack this...

The Federal Reserve Bank controls the Fed Funds Rate, an interest rate that banks lend money to each other for overnight borrowing and this Rate is most commonly tied to Home Equity Lines of Credit , Auto Loans and Credit Cards.

Whenever the Fed decides to take action, either by cutting or hiking, it bases its decision on two factors - promote economic growth and maintain price stability, which means keep inflation in check. Last week, the Fed cut by an aggressive .50% to help spur the economy. The lower FFR, brings down the rate on the aforementioned types of loans. But what a cut also does is make the cost of money cheaper to the consumer - this can be inflationary. And inflation is all you have to follow to see how long-term Bonds and home loan rates are doing. If inflation ticks higher, Mortgage Rates higher as well. If inflation remains in check, home loan rates will be stable to improving.

It was no surprise yesterday afternoon when the Fed announced their Interest Rate Decision. The Fed cut 50 basis points as expected, lowering the short term overnight rate to 1%. This is the lowest level since June 2003. There was little reaction in the markets to the news, as it was anticipated.

This morning, it seems that Halloween came early bearing no treats. The Gross Domestic Product (GDP) declined in the third quarter. GDP is a measure of the total production and consumption of goods and services in the U.S. After a reading of 2.8% growth in the second quarter, third quarter showed a decline of 0.3% and consumer spending declined for the first time in 17 years and at the fastest pace in 28 years. While we've all felt the pressure inflation has brought, it is now showing up in the economic reports.

Although the text book definition of a recession is 2 consecutive quarters of negative GDP, many economist have been saying we are already in a recession, and I happen to agree. Keep in mind that these indicators are lagging. It takes a while for consumers to respond to inflation, change their spending habits and the results of that new behavior show up in our economic reports.

So what does all this mean to the consumer, the home buyer? Well, as I wrote yesterday, a Fed Cut does not help long term mortgage rates. In fact, they tend to rise following a cut because of the threat of inflation. However a slowing economy evidenced in today's GDP and Consumer Spending numbers leaves little room for inflation, which helps Bonds. Currently mortgage bonds are slightly lower (worse) and have been trading somewhat sideways for several days. Rates are higher than earlier this week, however keep in mind - they are still extremely attractive and home prices are at lows. It is a great time to be in the market for a new home.

It's hard to call a bottom, both in the stock market and in the real estate market, until it's in the rear view mirror. Friday Stocks were extremely volatile, plunging 700+ pts, then up over 300 points and closing down 128. The Mortgage Bond Market took a bath and lost 109 basis points on the day pushing home loan rates higher.

Speaking of the rear view mirror, looking back in time we can get an interesting perspective on the recent volatility.

A bear market (market moving lower) is defined as a decline of 20%, with a decline of 10% being a "correction". The current bear market began on October 9, 2007. In the year since then, stocks have declined 41% as measured by the S&P 500...a big ole, mean bear.

The previous bear market that occurred between March 24, 2000 and October 9, 2002 experienced a 49% drop. Typically, a bear market lasts for about 12.3 months and experiences a 32% decline.

While the market is jittery, and certainly the credit crisis on Wall Street and Main Street is enough to put anyone on edge, this current bear is right in line with historic time frames and is still slightly better than the bottom of 2002.

Monday, Stocks rebounded and climbed an amazing 936 points, gaining 11% on the day. This rally combined with this historical data just might suggest we have neared (or seen?) the bottom.

As of the moment, Stocks are bouncing around and trying to build on Monday's momentum.

So what will this mean for home loan rates? Unfortunately the recent sell off in Mortgage Backed Securities have pushed prices below their 200 day Moving Average. So this means that in order for Home Loan rates to improve, MBS's will have to overcome a lot of technical damage.

This week, in addition to breaking news on the Rescue Package, may see additional volatility by way of several inflation reports, the first of which arrives on Wednesday. Bonds hate inflation as it erodes the value of the Bond. When inflation is on the rise, Bond prices worsen which means home loan rates worsen. I see Home Loan rates improving over time as this unprecendented credit crunch has yet to impact the economy in a negative way. And when the economy does slow further, Mortgage Bonds and home loan rates should improve.