“Is the glass half empty… or half full?”

"Is the glass half empty… or half full?" That question is one many people are debating when it comes to our economy – yes, the economy is still sluggish… but the slow recovery has helped home loan rates improve. So what developed last week…and what was the impact on home loan rates? Let's take a deeper look.

First, on the inflation front: 6.8%…that's the current year-over-year rate of Producer or Wholesale inflation. And that is hot – very hot! And while Producer or Wholesale inflation doesn't always get passed onto the consumer as evidenced by the relatively benign Consumer Price Index (CPI) inflation readings, at some point one of two things must happen.

  • Businesses who are burdened with increased costs must pass the increase to the consumer by raising prices, thus boosting consumer inflation.
  • If businesses aren't in a position to raise prices because of weak consumer demand, they must absorb the increased costs…thereby lowering earnings and the ability to expand, thus furthering the present slow economic growth.

The takeaway here: One of the Fed's goals for their second round of Quantitative Easing (QE2) was to create inflation and avoid deflation in the hopes of strengthening our economic recovery. It appears that they have been somewhat successful in this goal, as the risks for deflation have somewhat abated. But remember, inflation is the arch enemy of Bonds and home loan rates. If inflation continues to heat up, this could hinder further improvement in home loan rates.

It's also important to note that inflation in China is also on the rise, and inflation abroad becomes inflation here in the US as we import so many items from China. China's buying of our debt has helped keep our home loan rates relatively low for a long time. Home loan rates would likely move higher if China not only slows buying, but were to start selling some of their near $900 Billion worth of U.S. government debt holdings.

And speaking of our debt, Republicans in the U.S. House of Representatives are increasingly dismissive of Treasury Secretary Tim Geithner's warnings that Congress must raise the debt limit prior to August 2nd or risk economic "catastrophe." This will be an important development to watch in the weeks to come.

The bottom line is that, on the glass half full side of things, home loan rates still remain near some of the best levels we've seen this year. If you have been thinking about purchasing or refinancing a home, call or email me to learn more about why now is a great time to benefit from today's historically low rates. Or forward this newsletter on to someone you know who may benefit.

  Forecast for the Week  

This week, Thursday will be an especially busy day when it comes to economic reports. Be sure to look for:

  • A double dose of housing news, first with Tuesday's news about Housing Starts and Building Permitsfor April, followed by the Existing Home Sales Report on Thursday.
  • Job news with Thursday's weekly Initial and Continuing Jobless Claims Report. Last week's Initial Claims were 434,000, above expectations of 423,000 and solidly above the 400,000 mark. Staying below 400,000 is so important in order to put a dent in the stubbornly high unemployment rate.
  • Manufacturing news with Thursday's Philadelphia Fed Index, which is considered an important indicator of the manufacturing industry.

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 and home loan rates were unable to improve past an important technical level and on the hot inflation news. I'll be watching closely this week to see if Bonds and rates can break through this resistance and improve.


Chart: Fannie Mae 4.0% Mortgage Bond (Friday May 13, 2011)
Japanese Candlestick Chart
  The Mortgage Market Guide View…  

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