Mortgage Market Report 04/18/2011 Provided by Bob Joyce of Reliant Mortgage Company, LLC

Bob Joyce
Loan Officer
Reliant Mortgage Company, LLC
Phone: (617) 365-9432
Fax: (978) 818-6635
License: NMLS ID# 196322

Last Week in Review

WHEN IT RAINS, IT POOR'S... With the US already facing tough decisions over its national debt, the credit rating firm Standard and Poor's last week cut its credit outlook on the US from stable to negative. Standard & Poor's also said the US's AAA credit rating could be cut within two years, if headway isn't made in closing the budget gap. This is important because countries have credit ratings, just like individuals.

But what does all this mean? Let's break it down...

First of all, it's important to note that the downgrade to the credit outlook was a long time coming, and Traders in the pits even joked that S&P is late to the party with this call. For more information about different countries credit ratings - as well as your own state's credit ratings - check out this Credit Ratings Link.

All joking aside, this is a serious issue, as the last thing the US wants to endure is an outright credit downgrade. That would make the interest expense on the US debt even more burdensome - and, remember, we are all on the hook for this debt and the carrying costs.

But if this was a long time coming, what sparked the change in outlook? The S&P cited the wide political divide amongst Congress as a major hurdle to meaningfully lower the federal budget deficit. Both parties want to lower the deficit but there is stark disagreement on how to get there. Hopefully, the S&P's actions will spark a fire in Congress to get serious and get something done.

How does this issue impact Bonds and home loan rates?

The national debt concerns won't be addressed easily, especially when you remember that the country is approaching the debt-ceiling limit on May 16th. So in the immediate future, this will make for more volatility in the markets as headlines gyrate both Stocks and Bonds. Bonds are in an even tougher spot in the long term - and here's why:

First... if the US government is successful in taking action to lower the budget deficit and avoid an outright credit downgrade, then we should expect a longer duration of accommodative Fed monetary policy, as the Fed doesn't want an economic slowdown to recreate a "deflationary" environment. If things do slowdown significantly, we may start hearing debate for a QE3 (or a third round of Quantitative Easing), which would not be good for Bonds and home loan rates.

Second... if the US debt received an outright downgrade, it would be really bad for Bonds. As it stands now, this doesn't seem likely and you shouldn't be overly alarmed. But, it's important to understand what is at stake here. The bottom line is that with some extra belt tightening as a result of this issue, we could expect to see slower economic growth in the future, as government spending would have to slow immensely to help close the budget gap.

That said... home loan rates remain historically low right now. However, there are a lot of headwinds for Bonds down the road and last week's credit outlook downgrade was just another one.

Now's the time to learn more about these issues and see how you can take advantage of the current low home loan rates and affordable home prices. It only takes a few minutes to look at your specific situation. Call or email to get started.

Forecast for the Week

This week will be jam-packed with economic reports that can have a big impact on the markets and home loan rates:

• We'll see more housing news this week with the New Home Sales report right away Monday morning, followed by the Pending Home Sales report on Thursday.

• Consumers are also in the news this week. First, we'll see the Consumer Confidence report on Tuesday, followed by the Consumer Sentiment Index on Friday. Both those reports give us some insight into how confident consumers are in the economy. Second, we'll get a look at Personal Spending and Personal Income on Friday - which provide insight into the financial picture of consumers.

• The Federal Reserve holds its FOMC meeting this Tuesday and Wednesday, with the release of its Policy Statement coming Wednesday afternoon. As always, what the Fed says could impact home loan rates.

• Speaking of the Fed, we'll see the Fed's favorite gauge of inflation this Friday in the Personal Consumption Expenditures report.

• We'll also get a read on the economic recovery with Wednesday's Durable Good Orders, which gives us an update on consumer and business buying behavior on big-ticket items that are designed to last for an extended period of time, like furniture, televisions, appliances, vehicles, copy machines, and so on.

• On Thursday, the markets will see the latest report on Gross Domestic Product (GDP) - which is the broadest measure of economic activity - as well as Friday's Chicago PMI, which is a good indicator of overall economic activity.

• The Jobless Claims report also comes out Thursday. In the latest week's report, Initial Jobless Claims fell but still remained above that pesky 400,000 level as the job market continues to be a thorn in the side of the economy. Until we can see a pattern of unemployment claims well below 400,000, we will not see a significant fall in the Unemployment Rate.

• Finally, on Friday the Employment Cost Index (ECI) will be released. The ECI is one way to evaluate wage trends and the risk of wage inflation, as well as possible price pressures. This is important to the housing industry because if wage inflation threatens, it is possible home loan rates will rise through Bond prices dropping.

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 parallel black lines on the right side of the chart below, Bonds hovered in a tight range and were unable to improve much last week due to rising Stocks and inflation concerns.

Those two elements only add to the headwinds for Bonds and indicate that now may be the ideal time to take advantage of low home loan rates. Call or email to see how you can benefit by acting now.

Bob Joyce

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