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Mortgage Rates Climb Sharply After Retail Sales Report

March 15, 2012 by Jeff Cost

Retail Sales 2010-2012 The U.S. economy is expanding, fueled by a renewed consumer optimism and increased consumer spending.

As reported by the Census Bureau, Retail Sales in February, excluding cars and auto parts, rose 1 percent to $335 billion as 11 of 13 retail sectors showed improvement last month.

February markets the 19th time in twenty months that U.S. Retail Sales increased on a month-over-month basis.

Unfortunately, what’s good for the economy may be bad for Louisville home buyers and mortgage rate shoppers. Home affordability is expected to worsen as the U.S. economy improves.

The connection between Retail Sales and home affordability is indirect, but noteworthy — especially given today’s broader market conditions.

First, let’s talk about affordability.

Last week, the National Association of REALTORS® released its monthly Housing Affordability Index, showing that homes are more affordable to everyday home buyers than at any time in recorded history. For buyers with median earnings buying median-priced homes, monthly payments now comprise just 12.1% of the monthly household income.

The real estate trade group considers 25% to be the benchmark for home affordability. Today’s payment levels are less than half of that.

The reasons why today’s homes are so affordable are three-fold :

Home prices remain relatively low as compared to peak pricing
Fixed- and adjustable-rate mortgage rates remain near all-time lows
Average earnings are increasing nationwide

Rising Retail Sales, however, can derail the trend. This is because Retail Sales measures consumer spending and consumer spending accounts for roughly 70 percent of the U.S. economy. As the economy expands, the forces that combined to raise home affordability so high begin to wane.

First, in a recovering economy, mortgage rates tend to rise and, throughout 2012 and 2013, home prices are expected do the same. Second, as average earnings increase, it can spur inflation which is bad for mortgage rates, too.

Home affordability is at all-time highs today. But, in part because of February’s Retail Sales data, we should not expect these levels to last. Mortgage rates are higher by 1/4 percent since the Retail Sales data was released — roughly $16 per $100,000 borrowed — and are expected to rise more throughout the spring home purchase season.

Retail Sales are up 6 percent from a year ago.

A Simple Explanation Of The Federal Reserve Statement (March 13, 2012)

March 13, 2012 by Jeff Cost

Putting the FOMC statement in plain English Tuesday, the Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent.

For the fourth consecutive month, the Fed Funds Rate vote was nearly unanimous. Just one FOMC member dissented in the 9-1 vote.

The Fed Funds Rate has been near zero percent since December 2008. It is expected to remain near-zero through 2014, at least.

In its press release, the Federal Reserve noted that the the U.S. economy has “expanded moderately” since the FOMC’s January 2012 meeting, adding that growth is occurring despite “strains in the global financial markets” that pose “significant downside risks” to long-term outlooks.

The Federal Reserve now expects moderate economic expansion through the next few quarters and a gradual easing in the national Unemployment Rate.

The Fed also noted that :

The housing sector remains “depressed”
Labor conditions have “improved further”
Household spending has “continued to advance”

With respect to inflation, the Fed said that rising oil and gasoline prices will “push up” inflation temporarily, but not over the long-term.

At its meeting, the Federal Reserve neither introduced new economic stimulus, nor discontinued existing market programs. The Fed re-affirmed its intentions to hold the Fed Funds Rate at “exceptionally low” levels through late-2014, and to buy mortgage-backed bonds in the open market.

Immediately following the FOMC’s statement, mortgage markets worsened slightly, pressuring mortgage rates higher in and around Louisville.

The FOMC’s next scheduled meeting is a two-day event slated for April 24-25, 2012.

The Fed Meets Today : Protecting Your Housing Payment

March 13, 2012 by Jeff Cost

Comparing the 30-year fixed versus the Fed Funds Rate The Federal Open Market Committee meets today, its second of 8 scheduled meetings this year. As a home buyer or would-be refinancing household in Florence , get ready for changing mortgage rates.

The Federal Open Market Committee is the 12-person sub-committee within the Federal Reserve that votes on the nation’s monetary policy. Led by Federal Reserve Chairman Ben Bernanke, the FOMC’s most prominent role is as steward for the Fed Funds Rate.

The Fed has said repeatedly that it intends to keep the Fed Funds Rate near 0.000 for an “extended period of time”, through 2014 at least.

Unfortunately, this doesn’t mean that Columbus mortgage rates will remain low as well. Mortgage rates are not set by the Federal Open Market Committee. Mortgage rates are set by Wall Street.

As proof that the Fed Funds Rate is distinct from mortgage rates, consider that, since 2000, the difference between the Fed Funds Rate and the average, 30-year fixed rate mortgage rate has been as wide as 5.25% and as narrow at 0.50%.

If the Fed Funds Rate was tied to mortgage rates, the chart at right would be linear.

That said, the FOMC can influence mortgage rates.

After its meetings, the FOMC issues a standard press release to the public which reflects the group’s overall economic outlook. When the FOMC statement is generally “positive”, mortgage rates tend to rise in response. This is because investors often assume more risk in an improving economy and this can harm bond market prices — including those for mortgage-backed bonds.

Conversely, when the Fed is generally negative in its statement, mortgage rates can improve.

Since the FOMC’s last meeting, there has been little about which to be negative with the U.S. economy. Housing and manufacturing are improving; employment is higher; and global markets are regaining their respective footing. The Fed may make note of it. Or, it may not.

Regardless, mortgage rates are expected to move so consider locking your mortgage rate ahead of today’s 2:15 PM ET statement.

There too much risk in floating.

Mortgage Rates Climb Sharply After Retail Sales Report

A Simple Explanation Of The Federal Reserve Statement (March 13, 2012)

The Fed Meets Today : Protecting Your Housing Payment

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