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March 24, 2009
The readers of this column must think we are obsessed with the idea of lower rates and the effect of these lower rates upon the economic recovery. We do seem to be addressing the same topic again and again. Well, it appears that the Federal Reserve Board is no less interested in this goal. The Fed has lowered short term rates close to zero. Conventional thinking would say that this is all the Fed can do. But no, the Fed is not stopping there. In a widely anticipated move, the Fed announced after its meeting last week that they will be purchasing $300 billion in Treasuries to go along with mortgages they also have been buying. Even though the move was anticipated, the bond market rallied significantly and long-term rates dropped a full one-half of one percent in a matter of hours. Lower rates and easier credit are keys to generating a housing recovery which is a necessary prerequisite for the economic recovery to take place. For the past few months long-term rates have been drifting upward because the markets are concerned that all the money the Fed is printing to purchase these securities will bring us inflation in the long-run. This is literally setting up a tug-of-war. For the moment the Fed has gained the upper hand. We expect worries about inflation to persist. Oil prices are rebounding and the latest consumer price index was higher than expected. These worries should put upward pressure on rates. In other words, you should enjoy the good news regarding rates while you can.
Current Indices For Adjustable Rate Mortgages
Americans stayed put last year, according to U.S. Census Bureau data. During the last decade, millions of people living in colder and higher-cost areas sold their homes and moved to places like Florida and Nevada in search of cheaper homes and better jobs. Last year, with homes hard to sell and jobs harder to find, people stayed in older metro areas and populations in gritty cities like New York City and Philadelphia were more stable. For instance, a net of 15,000 people left Cleveland for someplace else in 2007-2008, compared with a net of 21,000 between 2005-2006. Sunbelt metro areas affected the most were those with the worst housing markets. For instance, the Phoenix area gained 50,000 domestic migrants in 2007-2008, half as many as it did two years earlier. Las Vegas increased by a net 14,000 domestic migrants, two-third fewer than two years ago. Fewer new residents are depressing economies in troubled Sunbelt cities. Not only is it hard to sell the large number of unsold homes when there are fewer newcomers, but also a disproportionate share of existing residents are employed in the construction and real estate industries. Source: The Wall Street Journal
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Fixed rates eased lower in the past week, but the survey was released before the Fed’s action was felt in the markets. Freddie Mac announced that for the week ending March 19, 30-year fixed rates averaged 4.99%, down from 5.03% the week before. The average for 15-year fixed fell to 4.61%. Adjustables were mixed with the average for one-year adjustables increasing to 4.91% and five-year adjustables falling to 4.98%. A year ago 30-year fixed rates were at 5.87%. "Long-term mortgages followed bond yields lower for the second week as reports of slower industrial production suggested that business spending might ease this year," said Frank Nothaft, Freddie Mac vice president and chief economist. "Output at factories declined for the fourth consecutive month by 1.4 percent in February driven by declines in computers and machinery and experienced the largest 12-month drop since June 1975. Following the March 18th Federal Reserve monetary policy statement, which announced further spending initiatives on financial assets, long-term bond yields plummeted. Yields on 10-year Treasury bonds fell by about a half percentage point after the announcement, marking the largest one-day decline since October 20, 1987." 
