Possible Resolution to European Debt Crisis This Week

October 25, 2011 by · Leave a Comment 


European debt problems are the primary focus for investors this week. European officials have been meeting over the last week and hope to release a plan for a comprehensive aid package for debt-ridden European countries by as soon as Wednesday. Officials are divided on what the necessary steps are to take to help ease debt problems in troubled nations. With large countries such as Italy and Spain continuing to experience debt troubles, the potential cost of a bailout could be very high. It has been difficult to gain political support in stronger countries, such as Germany and France, for aid to the weaker countries. For the countries that are at risk, it has been extremely difficult to implement the austerity measures required to receive aid, as the riots in Greece clearly demonstrate. Given the conflicting goals of all of the parties involved, the optimal solution is not clear. Whatever the outcome, it will likely have a significant impact on mortgage rates. A decisive plan to prevent the spread of debt problems could cause investors to reverse the flight to safety trade, leading to higher mortgage rates. On the other hand, a plan which disappoints investors could produce an increased flight to safer assets, causing mortgage rates to move lower. I know this issue feels like a long ways away and, heck, it is half way around the globe, but it has the potential to hit a lot closer to home than you might think. We’ll know a lot more over the next few days.

The housing data released last week was mostly better than expected. September Housing Starts increased 15% from August to an annual rate of 658K units, far above the consensus forecast of 595K units (as shown in graph below). This was the fastest pace in 17 months! Nearly all of the gains came from multi-family units, though. September Existing Home Sales fell 3% from August, which was close to expectations. The inventory of unsold existing homes declined 2% to an 8.5-month supply.


This week, Durable Orders and New Home Sales will be released on Wednesday. Gross Domestic Product (GDP), the broadest measure of economic growth, and Pending Home Sales will be released on Thursday. Core PCE inflation and Personal Income will be released on Friday. Consumer Confidence and Consumer Sentiment round out a busy schedule. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. And, as mentioned above, the results from the European Union Summit will most likely be revealed sometime around mid-week.


ARM’s – Are They Still Worth Talking About?

October 25, 2011 by · Leave a Comment 

With mortgage interest rates at an all-time low, most borrowers are flocking to fixed-rate loans.  About 95% of borrowers over the first half of 2011 have chosen a fixed-rate loan.  And, with rates this low, why wouldn’t they?  There is stability and security in knowing the monthly payment will never change.

So what about adjustable rate mortgages (ARM’s)?  I am not talking here about the true 1 Year ARM where the rate changes every year, but a more conservative 5 or 7 year ARM where the rate is fixed for 5 or 7 years before the rate can change.  Are these still valid options that should be considered?  Would someone be crazy to even consider one?

In some recent markets, the answer would rightfully have been “yes, they would be crazy” and the main reason was that the rate was not low enough to justify the risk associated with the rate being able to adjust at some point.  But, in the current market, the answer is an emphatic “no, they would not be crazy” because the spread between fixed and ARM rates is so great.  Check out the rates below and notice that the rate is approximately 1% lower for a 5 year ARM than a 30 year fixed-rate.  On a $250,000 loan, this is a savings of approximately $125 per month!  The truth is that in both up and down housing markets, there’s a place for ARM’s in specific situations. Here are some examples:

  • The borrower expects to move from their home within 5-7 years or less.  The ARM would always be the best choice in this case.
  • The borrower plans to pay down the balance of the mortgage significantly within next 5-7 years.  Even if the rate rises a lot after the fixed-rate period is up, the fact that the borrower has paid down their balance significantly will prevent the payment from going up much, if at all.
  • The borrower’s income is expected to rise substantially in the future and a lower payment over the next 5-7 years will help the borrower’s budget greatly.
  • The borrower is savvy and although he/she can afford a higher payment, the preference is to minimize the payment and to invest the savings in other areas with the expectation that more money will be earned as a result.

For many borrowers, an ARM may be the best mortgage choice they can make.  It may even make the difference in being able to qualify for the home they wish to buy.  So, what is the best way to figure out if an ARM is a good fit?  The answer is by asking a lot of key questions such as:

  • Does the borrower fully understand the jargon and mechanisms of an ARM?  An understanding of the index, margin, and caps is critical.
  • Can they afford both the introductory payment (fixed for 5 or 7 years) and the higher payment if rate was maxed out? 
  • Is the borrower comfortable with the associated interest rate risk of an ARM?  This might not be the best choice for a worrier.

Keeping an open-mind to an ARM and understanding the value and benefits of considering this option is a wise thing to do because, in the end, an ARM just may be the best loan option for you or your customer!

Employment Report Exceeds Expectations

October 12, 2011 by · Leave a Comment 


The USeconomy received a dose of good news with Friday’s strong Employment Report. Against a consensus forecast of the addition of 60K new jobs, the economy actually added 103K jobs in September! Also, the data for July and August was revised higher by 99K jobs. More good news to pass along as well as the Unemployment Rate did not increase as many had feared and remained at 9.1% (see graph below). In addition, Average Hourly Earnings, a proxy for wage growth, increased 0.2% from August. Much weight is put on the monthly Employment report and to have a report come in this strong should ease the concerns of many investors that another recession is on the horizon. One month does not a trend make, though, and we’ll need additional strong Employment Reports in the months ahead to pull out this economic rut.

Mortgage rates are higher this week mostly due to Friday’s strong Employment Report.  In addition, last week European officials made available additional aid packages for struggling European nations and banks if needed. The effect on US markets was that investors were more willing to invest in riskier assets, which helped stocks but hurt bonds and mortgage rates.

The most significant economic report released this week will be Retail Sales on Friday. Retail Sales account for about 70% of economic activity. In addition, the other significant economic data to be released this week will be the minutes from the Federal Reserve’s September 21st meeting on Tuesday, Trade Balance figures on Thursday, and Import Prices and Consumer Sentiment on Friday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. The mortgage markets are closed on Monday for the Columbus Day holiday.