More than a handful would-be home buyers stayed on the sidelines this year, waiting for Election Day to pass.
The prevailing thought was that once the new President-Elect was identified, credit markets will systemically unfreeze and housing markets will return to normal.
If history is a guide, this is an unlikely scenario.
Election Day doesn't figure to alter markets any more in 2008 than it did after the four previous presidential elections.
If anything, post-Election Day market reaction has been muted:
But just because the stock market has a history of idling on the day after the election doesn't mean that mortgage rates will rest easy this week. The likely outcome is the opposite, actually.
If investors believe the President-elect will successfully stimulate the economy, stock markets would likely rally, causing mortgage bonds to sell off and mortgage rates to rise.
Or, if investors think the winning candidate will fail to revive the economy, money would flock to government bonds as a place of safety. This dollar flow would occur at the expense of the mortgage market, causing rates to rise in this scenario, too.
Of course, it's as difficult to predict post-Election market conditions as it is to predict the election itself but one thing is for certain -- rates may rise and fall before the week is out, but credit guidelines will remain extra-tight. Getting approved for a mortgage won't be any easier -- no matter which party wins the Presidential Election.
Source
Will the election drive the Dow?
Eamon Javers
Politico
http://news.yahoo.com/s/politico/20081022/pl_politico/14826
As global credit markets deteriorated in October, mortgage markets displayed an unnerving amount of volatility.
Last week was no different.
But, unlike in previous weeks in which rates improved on some days and worsened on others, mortgage rates were mostly higher last week, finishing the month on a surge.
The biggest reason why mortgage rates rose last week is that hedge funds and other investors are still hard-pressed for cash and are dumping their mortgage-backed bond portfolios into the market. The excess mortgage bond supply drove prices lower last week, which, in turn, caused rates to rise.
However, forced selling by hedge funds wasn't the only force working against mortgage rate shoppers last week.
In a move meant to stimulate the economy, the Federal Reserve cut the Fed Funds Rate to 1.000 percent -- the same level widely attributed to starting the global credit crisis several years ago. Low interest rates may stimulate the economy in the short-term, but long-term, they can lead to runaway inflation.
This is terrible for home buyers because inflation causes mortgage rates to rise.
Looking ahead to this week, mortgage markets have a lot of information to digest.
First, there will be four separate speeches from members of the Federal Reserve, plus one appearance by Treasury Secretary Paulson. In each speech, each mention of the word "inflation" will cause mortgage markets to flinch and rates to tick higher.
In addition, Friday is the first Friday of the month which means that the Employment Report hits the wires.
Because markets expect to see high unemployment rates, they're also predicting a slow holiday shopping season. If the jobs data is stronger-than-expected, expect stock markets to gain and mortgage markets to lose, pushing rates higher.
And, lastly, Tuesday is Election Day. Presumably, markets already priced in the likelihood of either candidate winning the election. However, as the voter's President-elect becomes clearer throughout the day, expect volatility in rates as traders rush to change their positions.
Mortgage markets should move lot Tuesday -- we just won't know in which direction until it happens.
(Images courtesy: The Wall Street Journal Online)
When the government nationalized mortgage lending in September, housing analysts predicted lower mortgage rates.
For a brief two-week stint, they were right -- post-takeover, the 30-year, fixed rate mortgage fell below 6.000 percent nationally for the first time in 7 months.
Since then, however, mortgage markets have reversed. Rates are now at pre-takeover levels.
Now, this isn't to say that the nationalization was a failure -- far from it. The government's takeover of Fannie Mae and Freddie Mac accomplished two very important goals:
And, long-term, most people agree, these are essential elements for a U.S. economic recovery. Over the short-term, however, the plan has not delivered the sustained low mortgage rate environment that was envisioned.
The biggest reason why rates are higher is because of Wall Street's manic trading behavior. When the economic outlook shows hints of sun, investors sprint to risky stock markets; when it shows signs of gloom, they flee in favor of ultra-safe treasuries. The buy-sell patterns have led to some of the wildest trading days on record and it's not what the Treasury expected.
See, when the takeover was first announced, mortgage-backed bonds were elevated to "government status". This created new demand for mortgage bonds which helped to push down rates. But, in the weeks that followed, the world's credit markets unraveled and traders sought the dual comfort of safety and liquidity in their portfolios.
That's a combination that only U.S. treasuries can provide. Versus "true" government bonds, mortgage-backed securities are just quasi.
We can't know where mortgage rates will move for certain but, for now at least, the 4 percent range some had predicted is out of reach. (Image courtesy: The Wall Street Journal)
The Federal Open Market Committee voted to cut the Fed Funds Rate by one-half percent today. The benchmark rate now stands at 1.000 percent.
In its press release, the Fed wasted no time addressing the key issue at-hand, stating that economic activity has "slowed markedly", pointing to three main causes:
Furthermore, the voting FOMC members are wary of an "intensification" of the current financial market turmoil.
The announcement's 4th paragraph is noteworthy, too. It lists the plethora of growth-stimulating steps that the Fed has taken so far this year and concludes that credit conditions should improve in time. It does note, however, if markets don't improve in good time, the committee will "act as needed".
In the wake of the announcement, stock markets rallied. Investors liked what the Fed had to say and it drew funds into the stock market from all corners of Wall Street. Unfortunately for mortgage rate shoppers, one of those corners happened to be the mortgage bond market.
The exodus from bonds caused mortgage rates to rise.
It's a common misconception that the Federal Reserve controls mortgage rates and today's market action should help dispel that myth. As the Fed Funds Rate falls back near its 50-year low, mortgage rates are bumping up against a 3-year high.
Source
Parsing the Fed Statement
The Wall Street Journal Online
October 29, 2008
http://online.wsj.com/internal/mdc/info-fedparse0810.html
The Federal Open Market Committee adjourns from its scheduled 2-day meeting today at 2:15 P.M. ET and the markets are eagerly awaiting the central bank's press release.
In it, Fed Chairman Ben Bernanke is expected to address the U.S. economy, the future of credit, and the new Fed Funds Rate.
It's this last point to which mortgage rate shoppers should pay attention -- when the Fed Funds Rate falls, mortgage rates tend to rise.
The inverse relationship between mortgage rates and the Fed Funds Rate is based on the idea that cuts to the Fed Funds Rate are designed to add gas to U.S. economic engine.
In theory, over time, Fed Funds Rate cuts work to improve Corporate America's balance sheets, thereby rewarding shareholders. Therefore, when the Fed Funds Rate falls, or is expected to fall, investors often rush to buy stocks before their prices get bid up. Part of that process, of course, includes selling the "safe" parts of their portfolio which are usually loaded with mortgage-backed bonds.
If you were looking for a reason why mortgage rates tanked Tuesday while the Dow Jones added 11%, now you have it.
The Fed Funds Rate stands at 1.500% and markets are split about how far the FOMC will cut it this afternoon:
Without a consensus opinion among traders, no matter what the Fed does today, a lot of investors will be forced to rebalance their portfolios to account for their "bad bets". This will add to market volatility for sure.
Mortgage rates are calm this morning. The calm likely won't last. If you are floating your mortgage rate and want to avoid additional risk, consider locking your rate prior to the FOMC press release.
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