Investors purchasing government bonds, Keeping our mortgage rates low!!

Wow- last week I said that I had confidence in our government to resolve the debt issue. I hate to say this but I am beginning to have my doubts. If the Democrats and Republicans are as far apart in reaching an agreement as they say they are, then we have a potential economic train wreck on our hands. As I wrote last week, in the event that there is no agreement, the cost of borrowing will increase. In turn, if the ratings agencies lower the credit rating of the U.S. Government, then the interest rate increases could be significant.

Investors have been running scared out of the stock market purchasing government bonds in fear that the stock market will get hit hard if Congress does not resolve this issue in the next couple of days. You may ask, "Why would investors purchase government securities when there is fear of the government defaulting on debt and interest payments"?

The answer is that even though there is risk of default in the near future, ultimately once the debt ceiling is raised, the government will make good on all the payments and interest owed. This keeps investors comfortable in purchasing government debt. As long as investors continue to purchase government debt, mortgage rates will remain low.

The low rates for mortgages may play a part in the fact that this week we did receive both positive and only slightly negative reports on housing. The S&P Case-Shiller Home Value Index showed that home prices remained little changed in the last 30 days. Slightly negative news contained in the report is that overall home prices were lower by 3.6% from the same time last year. Although home prices remain lower, the gap is nothing significant.

The New Home Sales Report showed mixed information in that on one side it was reported that new home sales declined 1.0% from the prior month. The positive news in the report is that the median price of new homes being sold is actually higher by 7.2% from a year ago. That is a significant jump.

Mortgage applications were down slightly from the prior week. Purchase applications dropped 3.8% and refinances were down 5.5%. I personally am not paying much attention to this report in that the purchase drop can be something that fluctuates from week to week.

The most positive report on housing came from the Pending Home Sales Report. This report showed that sales increased 2.4% in June and that we also have 19.8% more homes in contract for purchase than the same time last year.

The true reading to determine if housing is moving in the right direction is the Existing Home Sales Report that will come out in July. This report will be a clear indictor of whether all these pending transactions actually make it to closing. Recently we have seen articles that have been talking about buyers backing out of contracts. July's report will tell us the real deal.

I believe that once the government takes care of the debt ceiling, housing reports will improve towards the latter part of the year. Let's remember, right now we are in the summer months and traditionally housing slows down.