Housing Starts and Existing Home Sales are showing significant improvement in the market.

Housing Starts and Existing Home Sales are showing significant improvement in the market.

Well we all know what hit the fan this week after the Fed made their market announcement about the future of interest rates.  Although the Fed did not change a thing in regard to monetary policy, the markets reacted as if the sky was falling and both the bond and stock market tanked for 2 days straight.

On Wednesday the Fed Open Market Committee announced that as the economy continues to improve they will begin rolling back their stimulus program. They estimated that at the current rate of improvement that the tapering of the stimulus program MAY begin towards the end of the year.  You will notice that I capitalized the word “may” because even though the Fed did not give a definitive time frame for action, the markets acted as if the tapering was happening today.

The sharp simultaneous declines in both markets is unusual but not surprising.  The stock market dropped over 500 points in 2 days since the Fed report because investors believe that when the government slows down the stimulus program the economy will suffer.  Some investors believe that the Fed withdrawal will push the economy back into a recession.

Bond market investors know that the Fed has been keeping interest rates artificially low.  When the Fed reduces their bond buying the price on bonds will drop eating away at the value of the investor’s bond holdings.  To minimize losses bond investors sold off big portions of their holdings which rapidly drove bond yields higher.  Rates have been rising over the last couple of weeks based on expectations of the Fed’s message on Wednesday.  Even though the Fed did not announce any changes in monetary policy, the mere hint that things will change in the future (which everyone knows was coming) sent investors scrambling.  Because of speculation on the future of Fed policy, mortgage rates have increased approximately ¾% from their record lows.

On the positive side, housing reports continue to show continued improvement.  Three important reports released this week, The Housing Market Index, Housing Starts, and Existing Home Sales all show significant improvement in the real estate market.

Housing starts for the month of May increased 6.8% after plunging 14.8% the prior month.  Existing home sales surged 4.2% and are 12.9% above a year ago.  The Housing Market Index released by home builders show a significant increase in builder optimism.  Overall housing activity remains at subdued levels in part due to a lack of inventory.  However, as existing homeowners hear more and more about the improving real estate market it is likely that more properties will come up for sale which will bode well for increased real estate activity in the coming months.  More housing reports are on tap for next week.  These reports are expected to follow this week’s reports and show significant continued improvement.

JJ Mack
916-517-1800
jj.mack@apmortgage.com
www.apmcroseville.com

Experts are not expecting any reversal in mortgage rates and rising rates will continue.

Experts are not expecting any reversal in mortgage rates and rising rates will continue.

The stock market has been on a moderate decline for the week based upon the lingering comments from Ben Bernake as well as the ADP Employment Report coming worse than expected.  Fed Chairman Bernake last week commented that the Fed is moving closer to ending or reducing the bond buying program which is keeping interest rates artificially low.  Although the Chairman did not say when the Fed would taper the program down, the fact that consideration to ending the program is growing, investors are selling their bond holdings which is driving up yields.

On top of the Feds comments, the ADP Employment Report came in with lower employment numbers than most experts predicted.  The consensus prior to the report was that hiring in the private sector increased 171,000.  The report came in much lower at 135,000.  Additionally, last month’s figures were revised downward from 119,000 down to 113,000.  Expectations are that the national employment report will show an increase in the labor force of 167,000 with the unemployment rate to remain at 7.5%.  One thing which we can be pretty sure of is that if the report comes in better than expected, mortgage rates will rise sharply.  The report is to be released Friday at 8:30AM EST which is after the release of this newsletter.

The recent rise in mortgagerates has impacted mortgage applications dramatically.  Purchase applications declined for the prior week by 2% however refinance applications declined a whopping 15% which is on top of the prior week’s 12% decline.  Experts at this point are not expecting any significant reversal in mortgage rates and the trend of rising rates is likely to continue.

The economy is no longer reeling from the recession and economic reports are getting stronger little by little each month.  With every good report, the odds on the Fed slowing down their bond purchase program increases.  Mortgage rates in many states are over 4% at this point.  Although rates are still incredibly low, borrowers have gotten used to seeing rates in the low to mid 3% range so anything above that appears high.  Like everything else, consumers will get used to seeing mortgage rates in the 4’s and accept it.  We have gotten used to high unemployment, absurd government spending, and political scandals everywhere.  Getting used to higher mortgage rates will be easy.

In a sign that the auto industry, especially the foreign automakers, BMW and Mercedes plan to keep production running through the summer for most models which goes against the usual tradition of stopping production during the summer months.  U.S, automakers have also experienced growth in car sales however they have not make any announcement regarding summer production plans.

JJ Mack
916-517-1800
jj.mack@apmortgage.com
www.apmcroseville.com