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July 20, 2010
There are many "spreads" between financial instruments. In theory, certain financial indicators act conversely to each other. A prime example is the stock vs. bond markets. In a perfect world, if we get bad economic news, this is bad news for stocks but good news for bonds. In other words, the stock market should fall and rates should go down, as the bond market rises as rates go down. Why? A slow economy hurts corporate profits but takes pressure off of inflation. In the recession we just experienced, the Federal Reserve Board (Fed) lowered rates significantly because we needed as much economic stimulus as possible and there was little danger of igniting inflation. In addition, when the stock market falls, investors tend to take money out of the stock market and are more likely to invest in the "safety" of bonds. What is happening right now in the markets could be explained by this very situation. As the economy has slowed down, the stock market has fallen and the bond market has improved, or rates have gone down. Yet the relationship is not perfect. On June 18, the Dow closed at 10,451 and the 10-year bond yielded 3.22%. By July 2 the Dow was down to 9,686 and the 10-year bond was now yielding 2.96%. A few weeks later, on July 15, the Dow closed at 10,359, recovering most of the way back to the level of June 18. Yet, the 10 year bond yielded 2.98%. Why did the stock market come back as rates stayed low? There are a few possible explanations. For one, the crisis in Europe has seen investors around the world turning to a safe-haven in Treasuries, independent of what has happened with our economy. We can also surmise that the stock market had moved too quickly and was due for a correction, which was exactly what happened on Friday. Again, it is always hard to predict the future and this means not only the direction of financial instruments, but the relationship between instruments as well. The good news is the fact that rates are very low and that means more help for our economy. Judging by the reports we saw this past week on retail sales, manufacturing and consumer confidence, we need the help.
Current Indices For Adjustable Rate Mortgages
The housing market has improved in the last two years to the extent that John Burns Real Estate Consulting sees the market as possibly approaching the beginning of its next up cycle. Three factors needed for such a transition include demand, supply and investment, as the firm noted in a March 2008 report. More than two years later, job growth is coming back slowly and renters are beginning to recognize favorable buying conditions. New home construction is at an all-time low and is likely to remain low until REO inventory clears. As for the investment situation, rates on home loans and home prices fell dramatically since March 2008, creating the best buyer affordability conditions in about 30 years, the firm said. "We are at Stage 1 (The Bottom) and heading into Stage 2 (The Beginning)," CEO John Burns said in a statement today. "While we think Stage 2 will last longer than usual, we want to point out that the downside of investing in housing right now is about as low as you will ever see." Source: HousingWire Building and modifying homes to accommodate multiple generations is increasingly popular as more Americans struggle to accommodate both their older parents and their grown children under the same roof. The National Association of Home Builders’ International Builders Show this year featured a single-level residence with a master suite at each end. "The grandparents’ suite included universal design elements along with a small kitchenette," says Stephen Melman, director of economic services at the NAHB. "The concept for this home was that the parents could get help with their kids from the grandparents, while the grandparents benefited by having household maintenance chores and meals taken care of for them.” Melman said that it is difficult to predict whether this trend will diminish when the economy improves, but he pointed to the growing number of ethnic groups where multi-generational living is expected as a sign that the trend may stick. Source: Washington Times
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Watching The Spreads 
The Markets. Rates were stable at historic lows again this past week. Freddie Mac announced that for the week ending July 15, 30-year fixed rates averaged 4.57%, the same as the previous week. The average for 15-year fixed fell slightly to 4.06%. Adjustables were mixed with the average for one-year adjustables falling to 3.74% and five-year adjustables increasing to 3.85%. A year ago 30-year fixed rates were at 5.14%. "Fixed-rate loans continued to hover at 50-year lows, thereby supporting homebuyer affordability and refinance activity. Over the past month, about four out of five conventional applications and more than one-half of FHA and VA applications were for refinance. Compared to the recent peak in 30-year fixed rates 13 months ago, current rates are a full percentage point lower. With today’s rates, homebuyers would save about $1,500 each year on a $200,000 loan compared to rates last June," indicated Frank Nothaft, vice president and chief economist, of Freddie Mac. Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.
International home buyers are increasingly attracted to property in the U.S., according to the National Association of Realtors ®’ 2010 Profile of International Home Buying Activity. Several factors, including the strength of the dollar, the value and desirability of U.S. real estate, and the emerging economic recovery, continue to drive international interest in owning a home in this country. “ NAR President Vicki Cox Golder said “The U.S. continues to be a top destination for international buyers from all over the world. Foreign buyers understand the value of owning a home in this country." The survey released today, covers the period between April 1, 2009, and March 31, 2010. During that time foreign buyers, including those with residency outside the U.S. as well as recent immigrants and temporary visa holders, are estimated to have purchased $66 billion of U.S. residential property, or 7 percent of the residential market. “Several factors have contributed to an increase in international buyer interest in the U.S.,” said Golder. “A large majority of Realtors® report the changes in value to the U.S. dollar have had a strong impact on the international real estate business. In addition, perceptions abroad about trends in the U.S. real estate market have led many international clients to believe purchasing a home in the U.S. is more affordable than in their country and holds more value.” Source: National Association of Realtors® 