Loren Johnson, CMPS

The major highlight this week will be Wednesday's Fed meeting. With the fed funds rate close to zero, rate cuts may no longer be an option. The Fed has many other tools at its disposal, though, and the accompanying statement will be highly anticipated.

A wide range of other beconomic data will come out this week as well. Gross Domestic Product (GDP) for the fourth quarter will be released on Friday. GDP is the broadest measure of economic activity. Durable Orders, another important indicator of economic activity, is scheduled for Thursday. The Chicago PMI national manufacturing index will come out on Friday. Housing market activity will be revealed in the Existing Home Sales on Monday and New Home Sales report on Thursday. Consumer Confidence and Consumer Sentiment will round out a busy week.

This past week, Federal Reserve Chairman Ben Bernanke, publicly laid out an aggressive agenda for our central bank and suggested that he's hardly out of ammunition to fight the global financial crisis. He also gave explicit support to efforts by Congress and President-elect Barack Obama to create the largest short-term economic stimulus plan the nation's ever seen.

He cautioned, however, that any stimulus plan would be doomed if problems in the financial and credit markets aren't fixed. Bernanke outlined a number of steps that'll be taken this year to have the Fed purchase, as a buyer of last resort, the distressed assets that financial markets can't price or for which buyers can't be found.

The Fed last month dropped the federal funds rate-an overnight bank lending rate that serves as the benchmark for a wide range of consumer and business lending-to a range between zero and a quarter percent. That's the lowest it's ever been.

Interest rates are a prime tool used by the Fed to stimulate or slow the economy, depending on what's needed. A rate of effectively zero gives the impression that the Fed is now on the sidelines because it can't take rates any lower.

Not so, Bernanke said.

"Even if the overnight rate is close to zero, the committee should be able to influence longer-term interest rates by informing the public's expectations about the future course of monetary policy," he said. In other words, communicating the Fed's thinking is now more important than ever since expectations of future inflation-the rise in prices across the economy-influence investment decisions.

This comprehensive plan also includes sharply increasing the Fed's balance sheet, the listing of its financial obligations, which already has soared from $800 billion last August to more than $2.3 trillion currently.

The Fed's books already include short-term lending to banks and other financial institutions, as well as the purchase of promissory notes from U.S. corporations and mortgage bonds guaranteed by Fannie Mae and Freddie Mac.

Bernanke said that the Fed and Treasury Department next month will begin providing three-year loans to investors willing to purchase top-rated securities whose collateral is recently originated consumer and small-business loans. This move, he said, effectively substitutes a government balance sheet for private-sector balance sheets in the absence of private lending.

"If the program works as planned, it should lead to lower rates and greater availability of consumer and small-business credit," Bernanke said.

By expanding the Fed's balance sheet, he conceded, the Fed effectively is printing money, which history shows could sharply push up inflation. As the financial crisis subsides, the Fed's balance sheet will shrink, Bernanke said, and the Fed "will be able to return to its traditional means of making monetary policy _ namely, by setting a target for the federal funds rate."

When the Fed announced late last year it would purchase $600 billion of debt and mortgage bonds issued or backed by Fannie and Freddie, mortgage rates fell sharply. Now, Bernanke said, the Fed wants to purchase longer-term securities issued by the Treasury Department to lower 15-year and 30-year fixed mortgage rates, boosting the housing market.

"In determining whether to proceed with such purchases, the committee will focus on their potential to improve conditions in private credit markets, such as mortgage markets," he said.

Implicit in that statement, however, is that interest rates may have to increase more than many Americans are accustomed to, or inflation may be higher than the Fed is comfortable with.

Neither will be pleasant choices.

To get us through the early part of this new year, let's get some perspective on what could be driving real estate matters in the weeks to come.

First off, it looks as if low fixed interest rates for mortgages-now around 5%-will be with us awhile. But rates could begin to rise if the stock market recovers. Investors who have flocked to the relative safety of Treasury bonds will shift their money to Wall Street if it seems profitable.

Treasury bonds today offer little or no return to investors, who would at least get a somewhat thicker mattress if they put their money there. As we've seen, investors are really nervous people, and the slightest bit of good or bad news sends them into buying or selling frenzies and the rest of us to the unemployment office.

Which brings us to the less-than-frenzied state of home-buying. Not much of a mood to purchase right now. Refinancing, anyone? My typical refinance file looks like this: A homeowner who owes no more than 80% of the house's appraised value; has decent credit overall and has never been 30 days late on the mortgage in the last two or three years; is an employee who can readily document wages; needs a loan for $417,000 or less; and is refinancing for a better rate, not a cash-out.

Cash-out refis are what got a lot of people into mortgage delinquency and foreclosure. They pulled out wads of equity, then, as circumstances changed, ended up owing up much more than their houses were worth. Either they made small down payments, or got negative-amortization loans, or the property's value fell, or a combination of two or all three of those things. On top of that, people with little equity must get mortgage insurance, and the resulting payments could lower or eliminate the incentive to refi.

Back to buying and selling: Realtors continue to tell me that a lot of sellers still think they can demand high prices for as-is properties. Sellers complain that buyers are too picky. But if your place isn't ready for the market, prospective buyers will move on. If you must put your house on the market now, it makes sense to have it checked by a qualified home inspector first.

During the housing boom, pre-inspections seemed unnecessary. If a buyer balked at a new roof or furnace, another would be along soon.

Not anymore. To sell a house quickly and for a satisfactory price, a seller must make sure the house is close to perfect. If that means spending money to make money, spend it.

So, do you still feel 'change' coming today??? I ask that tongue-in-cheek because the only change that has been going on the past week is Mortgage Interest rates creeping upward about 3/8ths of a percent! I've gotten a lot of e-mails asking me "why", so I thought I would try and answer many of those questions in 1 blog entry!

In a nutshell, investors in Mortgage Bonds right now are scared. A few weeks ago, the Federal Reserve announced a plan to buy up Mortgage Bonds as a way to lower mortgage interest rates. Rates quickly did drop, as investors knew there would be a ready-made buyer for mortgage bonds in the near future....the Fed! The past 2 weeks, the Fed has announced that they have bought bonds, and rates have stayed in a good place. However, 2 things have happened to stop the 'good feelings' by bond buyers.

Number 1- Lower rates do not seem to be translating into more homes being started, built, OR sold. The Fed hoped that lower rates could help kick-start the housing industry. However, all it has seemed to help....so far....are people looking to refinance. We all know that these rates may have spurred 'tire-kickers' into actually writing offers, but those results will be seen months away. In the meantime, the Fed will continue buying bonds to keep rates low, but the 'euphoria' about those purchases helping quickly is now gone.

Number 2- We now have a new President that has vowed to tackle many problems....including a new 'Fiscal Stimulus" package. The only way to pay for that package....is to issue more bonds.....and to put them out into the marketplace competing with Mortgage bonds. We all knows what happens when there is an oversupply of an item, don't we? Well, mortgage bond buyers are now anxious about buying when a big new supply looks about ready to hit the market...so they cool off buying Mortgage Bonds. How does Fannie & Freddie get those bonds to move.....by raising the rate!!!

While it is NO time for gloom-and-doom regarding interest rates, knowing these 2 new forces in the market will help explain why last week's 4.5% interest rate is now suddenly 5%. It's STILL a great rate!! If you have any other questions, please feel free to contact me...and have a great rest of your week!

Now that we have begun a new Presedential era and will embark on what could be the most expensive economic stimulus package in history, Americans will soon discover how unfolding events will affect the housing market. Last year was the nastiest housing market on record. Economists and industry experts expect another dismal year, marked by lackluster sales and falling prices as demand remains weak because of slumping consumer confidence, tighter lending standards and rising unemployment.

Also likely to impact the market: between $60 billion to $100 billion of ALT-A and Option ARM loans which will probably reset early because of falling home prices, an existing inventory of nearly 1 million REOs not yet on the MLS, and more than 1 million homes now in the foreclosure process. Oversupply is a real problem. In November, 4.2 million existing homes (the latest figures available) were on the market from a year earlier, far above the 2 million to 2.5 million considered normal. Meanwhile, home prices dipped 13.2%-the most on record.

Despite the gloomy outlook, experts I've seen expectthe U.S. economy to emerge from recession in the second half of the year once the fiscal stimulus, Federal Reserve rate cuts and Treasury Department actions to strengthen the sluggish economy kick in. This should bode well for housing, as the long-awaited "bottom" materializes, setting the stage for a gradual recovery in 2010.

In the best-case scenario, home sales will rise to some extent and prices, which have dropped 20.3% since peaking in June 2006, will stabilize. Even then, the recovery is expected to be on a region-by-region basis, with some of the hardest hit states-Ohio, Michigan, Indiana, California, Florida, Nevada and Arizona-lagging behind much of the rest of the country.

The continually-growing stimulus package that President-elect Obama is promoting won't in and of itself do anything to correct the housing market, but it could provide a relatively high number of jobs, minimizing unemployment and having a ripple effect across a number of industries. That, in itself, could hasten the end of the recession. As unemployment stabilizes, and the economy starts to recover, low mortgage rates, much lower home prices and government incentives to encourage home buying should start to have a significant effect."

President-elect Barack Obama's massive economic recovery plan, which has a proposed $675 billion to $775 billion price tag, is designed to create or preserve 3 million new jobs through 2010. Nearly 2 million jobs were lost in the first 11 months of 2008, and the economy could lose as many as 3.5 million jobs this year. Unemployment, now at 6.7%, could climb above 9%, a figure not seen since the recession of the early 1980s, before the economy rebounds. Stemming joblessness could go a long way to help alleviate the housing slump. Let's all hope that can happen!

Good luck and Godspeed to our new President!!