Last Week in Review

"BE WILLING TO MAKE DECISIONS." General George Patton. And that's exactly what the Fed did last week at their regularly scheduled Federal Open Market Committee meeting. But just what did they decide...and what do their decisions mean for home loan rates?

The Fed said they are going to ration out the remaining commitment of Mortgage Backed Security purchases through the first quarter of 2010. There will be no additional buying, but instead, a longer weaning off of the program. There was some speculation about the Fed increasing the amount of buying above the $1.25T committed to, and last week's statement is the Fed's nice way of saying "no." They will not be buying more in quantity, but what they will do is attempt to provide a smoother transition to normal market conditions.

It is a given that once the Fed ceases its purchases, that interest rates will climb significantly higher...most likely back above the 6% area. So instead of a hard transition with a large bump in rates, the Fed is attempting to allow rates to gradually rise. This means that waiting to purchase or refinance will very likely mean a higher interest rate.

Their decision also means that the Fed's remaining purchases will all be lower in quantity, as the remaining allotment for purchases will be spread over a longer period of time - and additionally, will not necessarily be spread out as evenly as their past purchases - which could lead to more volatility for rates in the near term.

In other news, Existing Home Sales and New Home Sales were reported slightly less than expected, but both reports continue to show signs of an improving housing market. The inventory of unsold existing homes fell to its lowest inventory level since April 2007, while the inventory of unsold new homes dropped to its lowest level since January 2007. While some of the decline in new home inventory may be due to builders constructing fewer homes - these reports indicate that the housing market is indeed showing signs of life.

Remember, with home loan rates still low - but slated to increase with the Fed's recent decision - as well as a juicy tax credit for First Time Home Buyers that is going to expire on November 30th, it makes sense to get off the fence if you've been considering a purchase or refinance. Or do you have a family member, neighbor, friend or coworker who might benefit from getting some good home loan advice? I'm always glad to get your referrals, so simply let me know who I might be able to help.

THE DECISION TO BUY A HOME IS ONE OF THE MOST IMPORTANT FINANCIAL DECISIONS YOU CAN MAKE...AND OFFERS GREAT FINANCIAL BENEFITS AS WELL. WITH HOME LOAN RATES LOOKING TO MOVE HIGHER, CHECK OUT THIS WEEK'S MORTGAGE MARKET VIEW TO LEARN MORE ABOUT WHY HOMEOWNERSHIP MAKES SENSE.

Forecast for the Week

There are several important economic reports in store for this week, the biggest likely being Friday's Jobs Report for September. The Jobs Report for August showed a troublesome 216,000 jobs lost for the month, with prior months revised to show an additional 50,000 jobs lost. In addition, the last report showed that the Unemployment Rate for August jumped to the highest level in 26 years, at 9.7% from July's 9.4%. This is more than double the rate of unemployment from just two years ago and significantly higher than the 5.9% average during the past 40 years. The Unemployment Rate portion of the Jobs Report is often seen as more reliable than the job loss numbers since it is an actual survey, where about 60,000 households are contacted - so this is a particularly important element of the report, as we watch to see signs of an improving economy.

Also this week, we have a read on Consumer Confidence coming on Tuesday, while Thursday brings the Fed's favorite gauge of inflation, the Core Personal Consumption Expenditure (PCE) Index, found within the Personal Income Report. Thursday will also bring another weekly Initial Jobless Claims Report, just ahead of the Labor Department's big Jobs Report coming on Friday.

It will most certainly be a full week of news, particularly as the aforementioned tension in the Middle East continues to simmer. There is a meeting scheduled for this Thursday with representatives from six nations to discuss this situation further.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. As you can see in the chart below, Bonds were able to mount a late-week rally through a key "ceiling of resistance", and this move higher for Bonds caused home loan rates to improve. I'll be watching closely to see if Bonds can hold their ground, and continue in this improving direction in the week ahead.

Chart: Fannie Mae 4.5% Mortgage Bond (Friday Sep 25, 2009)

The Mortgage Market View...

Financial Benefits of Home Ownership

There are a number of personal and emotional reasons to buy a home. But there are also some strong financial reasons to make the investment. In addition to exceptional home affordability and near historic interest rates, here are some important financial benefits of owning a home:

Increased Net Worth: Few things have a greater impact on net worth than owning a home. In a comparison of renters versus homeowners, the Federal Reserve Board of Consumer Finance found that the average net worth of renters was just $4,000 compared to homeowners at $184,400.

A Big Tax Deduction: One of the largest tax deductions available is the amount of interest paid on a mortgage. In fact, a $150,000 home at a 5.50% interest rate can add up to approximately $8,000 in first year's interest. This amounts to a significant savings - effectively reducing the amount of a homeowner's monthly loan payment.

Long-Term Appreciation: Over the last few years, home prices have corrected and become more affordable. While that's good news for potential buyers, it has overshadowed the long-term appreciation of a home's value. The reality is, despite market ups and downs, real estate historically appreciates around 6% per year. Even if you calculate a modest appreciation of 3%, a home purchased today for $150,000 should grow in value to $364,000 over 30 years.

$8,000 Tax Credit: Don't forget, the government is offering an $8,000 tax credit for first-time homebuyers - or for folks that haven't owned a home during the past three years. However, the program is scheduled to end soon. In fact, the Internal Revenue Service recently reminded potential buyers that they must complete their first-time home purchases before December 1, 2009 to qualify for the special credit, which means the last day to close on a home and qualify for the credit is November 30, 2009.

If you're considering purchasing a home or refinancing, this is an ideal time. Call or email me today to discuss your specific situation and how you can benefit from today's market.

The Week's Economic Indicator Calendar

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Economic Calendar for the Week of September 28 - October 02