January 27, 2009

Volatility

If we could sum up the markets in one word right now, the word would be "volatility." The past several days we were volatile on the downside for stocks and bonds. And up for oil. It is interesting because at least one pattern was broken. In the past few months rates and oil prices would go lower as the stock market went down. But in the past two weeks the stock market has fallen while rates and oil prices have increased. Is this a new pattern? Such a pattern would be disturbing because lower rates and oil prices are good news for the economy and thus stocks. The question is–why do we have rates going up if the economy is so bad?

One explanation is a "bounce." Rates and oil prices have moved so far so fast that a few bounces upward are likely. Or, it could be that the markets are worried about the government borrowing several trillion dollars for economic stimulus which is rekindling long-term inflation fears. How we go from deflation fears one week to inflation fears the next week is hard to imagine–but that is what breeds volatility. If inflation is the real concern, we may have seen the lows for rates and oil. If it is a technical bounce, we could always bounce back. We won’t try to predict the future here. Excepting to predict more volatility because of such conflicting forces.

The Markets. The streak was broken after 11 straight weeks of lower rates. Freddie Mac announced that for the week ending January 22, 30-year fixed rates averaged 5.12%, up from 4.96% the week before. The average for 15-year fixed rose to 4.80%. Adjustables were mixed with the average for one-year adjustables increasing to 4.92% and five-year adjustables falling slightly to 5.24%. A year ago 30-year fixed rates were at 5.48%. "Fixed mortgages followed bond yields and edged up this holiday week," said Frank Nothaft, Freddie Mac vice president and chief economist. "However, over the first three weeks of 2009, 30-year fixed mortgages averaged 0.25 percentage points below its monthly average for December 2008. As a result, the number of mortgage applications for refis was roughly about 86 percent of all conventional loans over the same time period." Note: If you are interested in receiving an article designed to help you make the right refinance decision, please contact us.

Current Indices For Adjustable Rate Mortgages
Updated January 23, 2009

	Daily Value	Monthly Value
	Jan 22	December
6-month Treasury Security	0.29%	0.26%
1-year Treasury Security	0.42%	0.49%
3-year Treasury Security	1.11%	1.07%
5-year Treasury Security	1.61%	1.52%
10-year Treasury Security	2.62%	2.42%
12-month LIBOR–WSJ		2.406% (Dec)
12-month MTA		1.826% (Dec)
11th District Cost of Funds		3.155% (Nov)
Prime Rate		3.25% (Dec)

 Some cities that were hardest hit by the real downturn are experiencing mini sales booms. Las Vegas real estate properties are down 28 percent in price, but sales of homes are up 15 percent. Motivated buyers accounted for 64 percent of Las Vegas sales in October, says Radar Logic, a derivatives firm. That’s the highest rate in the country. "There’s a pretty active housing market, it’s simply at a lower-priced inventory," says Michael Feder, chief executive of Radar Logic. "And there are now bidding wars taking place over homes in foreclosure." Phoenix and San Diego are reporting similar experiences. "We’re clearing out the bad news," says Kiva Patten, a director at Merrill Lynch specializing in housing derivatives. "By the end of 2010 – that’s where we’re calling the bottom in the forward market. You’re going to get a small price appreciation in 2011," says Patten. "It’s not like the turn is 10 percent per year, it’ll be something like 3 percent or 4 percent." Source: Forbes

The National Association of Home Builders (NAHB) reports a drop in home size to an average 2,438 square feet in last year’s third quarter from 2,629 square feet in the second quarter. NAHB research director Gopal Ahluwalia expects shrinking residence size to be a lasting trend, noting that consumers are more concerned about affordability and recognize that smaller households do not need large dwellings. According to a January NAHB survey of builders, 89 percent have downsized their offerings. American Institute of Architects chief economist Kermit Baker attributes the trend to the weak economy, residential price declines and rising energy costs. Source: USA Today