If you’ve been watching the economic news, you’ve probably noticed that market experts and traders have been keeping a close eye on the Commerce Department’s Personal Spending and Personal Income reports. Obviously, those reports provide insight into the health of our economy, but did you know they also influence home loan rates? That’s right, personal spending can actually influence the interest rates that are available when you purchase or refinance a home.
Here's why. It has to do with something called the velocity of money. Even though the government keeps pumping money into the system, nothing happens until that money is spent or lent – and passes from one hand to another or one business to another. The speed at which this money passes between parties is called the velocity of money.
With the job market still very sluggish, consumers aren't spending much money these days, and businesses are still reluctant to spend money to make investments in their business. With the present velocity at low levels, inflation remains subdued and that's good for home loan rates. That's because rates are tied to Mortgage Bonds, and inflation is the arch-enemy of Bonds, so low inflation is good for Bonds and rates. However, once velocity increases, the excess money in the system will cause inflation – which is bad for rates, since even the slightest scent of inflation can cause home loan rates to worsen.
Recent economic data – a slight scent of recovery...
"The question now is whether mortgage rates will remain in the current range or make another move," says Anthony Hsieh, chief executive of loanDepot.com, a direct mortgage lender in Irvine, Calif. The answer will depend largely on the direction of the U.S. economy, which Hsieh says appears to be "firming up."
"Unemployment is starting to stabilize. Housing is stabilizing, although there are still soft pockets. Stocks are up, and there are inflationary fears with energy prices going up, so directionally and logically, we're in for potentially higher interest rates," he says.
Adding weight to that view was a report this week that manufacturing activity expanded for the 17th consecutive month in December. Manufacturing strength showed up in autos, metals, food, machinery, computers and electronics sectors, though housing-tied industries continued to struggle, according to the Institute for Supply Management in Tempe, Ariz. Just last week we also found out that the National Retail Federation expects 2010 holiday sales to have increased by 3.3% versus a slight 0.4% gain in 2009.
The past, present and future...
Last Monday the national benchmark 30-year fixed-rate mortgage dropped 8 basis points to 4.94 percent, according to the Bankrate.com national survey of large lenders and a year ago, the mortgage index was 5.26 percent. Four weeks ago, it was 4.89 percent.
Personally I locked and closed several loans at 3.875% about 60 days ago. Now if you would have told me I would have been locking rates in that low 10 years ago when I started in the mortgage business I would have said you were CRAZY!
Today those same loans would be locked in at 4.750%, almost 1% point higher.
Now here’s the math...
So a $200,000 note at 3.875% based on a 30 year term would run you approximately $937.45 a month while same deal at 4.875% would run you $1,054.13 a month. So some borrowers are seeing that waiting 60 days will cost them an additional $116.84 a month. Over 30 years that is an additional $42,062.40!
While we certainly want to see better economic recovery news in the near future, we have to remember that there's an inverse relationship between good economic news and Bonds and home loan rates. Weak economic news normally causes money to flow out of Stocks and into Bonds, which helps Bonds and home loan rates improve. Strong economic news, on the other hand, normally has the opposite result.
Currently, home loan rates are at a historically low level, but that situation won’t last forever. That means now is an ideal time to purchase a home or refinance before the velocity of money – and rates – change. If you or anyone you know would like to learn more about the current economic situation and how to take advantage of historically low home loan rates, then please contact me.
*Nothing in this publication constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes; it does not constitute an advertisement and is not to be construed as a solicitation. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to information concerning LoanSouth Mortgage, Inc nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a substitute for the exercise of their own judgment.
*Rate and economic data is from Bankrate.com, CNN Money and Mortgage Success Source, LLC
Brandon Byrd, Mortgage BankerNMLSR License # 209657, A Georgia Residential Mortgage Licensee #23200
Questions? Contact: Bbyrd@loansouth.com, 404-915-8252
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