Looking Back And Looking Ahead : May 27, 2008

The market optimism that had pushed mortgage rates lower since late-March reversed last week on ever-rising oil prices and a bleak outlook from the Federal Reserve.

When gas prices reached $3.93 Friday, it re-ignited inflation concerns and inflation, you'll remember, is the enemy of mortgage rates.

As expected, mortgage rates spiked into Friday's market close. 

Markets were closed for Memorial Day but re-open this morning with traders feeling apprehensive about mortgage market investments.  There are many reasons to park money elsewhere, after all.

1. The U.S. dollar is trolling near all-time lows against the Euro
2. Oil markets are returning incredibly high rates of return
3. Big banks are still writing off large mortgage losses

All three of these reasons reduce demand for mortgage bonds and --  because mortgage rates move in the opposite direction of mortgage bond prices -- mortgage rates rise.

This week, a few inflation-related data points will cross the wires including the Fed's preferred inflation gauge -- PCE. 

PCE stands for Personal Consumption Expenditures and it measures the cost of living for ordinary people.  It's the Fed's preferred measurement because PCE accounts for Americans buying more chicken when meat gets expensive, or buying more fruits when vegetables get expensive, et cetera.

PCE is different from the Consumer Price Index because CPI is a "fixed" basket of products.

If PCE is running high, expect the exodus from mortgage bonds to continue and rates to run higher.  If PCE is flat or lower, mortgage rates should fall.

(Image courtesy: Gasbuddy.com)

Smart Money and Renters

Smart Money Magazine Says Renters Have Lame Excuses

It's not often that a mainstream media publication taunts renters into buying homes, but that's exactly what Smart Money does in its latest issue.

The Smart Money Web site "lead-in" reads 5 (Lame) Excuses for Not Buying a Home.  Wow That's a forceful title!

The the article raises very good counter-points to the more popular reasons why renters avoid homeownership.

Owning a home is a serious responsibility and does require commitment.  However, a renter should not feel bullied or hurried into buying because for as much as personal economics are at play, personal emotions are at play, too.  Both deserve respect.

So, renters: Put your blinders on and give the Smart Money article a read.  

Mortgages and Oil

How We Know That Prime Rate Will Likely Rise Before It Falls

Three weeks after adjourning, Federal Reserve officials release detailed minutes of their most recent meeting. 

The April 30, 2008 minutes were released Wednesday and it affirmed traders' beliefs that the Federal Reserve will not be in a hurry to lower the Fed Funds Rate again. 

This is bad news for two groups of people whose borrowing costs are tied to Prime Rate, the interest rate that is 3 percentage points higher than the Fed Funds Rate:

1. Homeowners with home equity lines of credit
2. Americans with credit card debt

Because Prime Rate moves in lock-step with the Fed Funds Rate, it, too, has fallen by 3.25 percent since September and now rests at 5.000 percent.

With the release of the April FOMC Minutes, though, it appears that Prime Rate is more likely to increase than to decrease moving forward.

If your home equity line of credit offers a "convert-to-fixed-rate" option, now may be a good time to consider switching over.  Be sure to talk with your loan officer first, though -- he/she may have alternate options for you.

(Image courtesy: The Wall Street Journal Online)