Monday Market Update - Eye on the Ball

Monday Market Update – Eye on the Ball

When there is lots of noise on a topic, it can be hard to keep your eye on the ball. The US debt ceiling negotiation (and I believe this is the last week it will be called anything close to a “negotiation,” next week I expect the word “crisis” to be used) and the debt crises (these are real, honest, to goodness crises) in Europe (namely Greece and Italy) are distractions in what has become another summer to grab hold of low rates. World events, I believe, are beyond our control on a daily basis. The movement of markets in reaction to or preparation for the outcome of these events is, similarly, beyond our control. What we can control, and I encourage you to do this, is the individual tiles that form the mosaic that is your financial picture. You can choose to save for retirement (a great idea), spend on a vacation (a good, but often costly idea) or reduce either your monthly mortgage outlay (lower interest rate) or shorten the path to free and clear home ownership (short term loan). Now, right now, is a great time to make decisions about your mortgage.

Here is some news about the market:

Mortgage bond prices rose last week, which helped mortgage interest rates improve. Rates started off on a good note Monday as European debt worries re-ignited. Italy made headlines as the newest country mired in debt concerns. The Treasury auctions showed decent foreign demand. The financial markets experienced some volatility mid-week following comments by Fed Chairman Bernanke, which indicated additional stimulus might be needed to boost the economy. We saw some negative movements Friday morning following higher than expected core inflation on the consumer side.

Mortgage bonds ended the week better by about 5/8 of a discount point.

Housing Starts

Housing starts data is a leading indicator of the state of our economy. This report, provided by the Bureau of the Census, takes into account data from both single-family homes and multi-family dwellings. Building permit information is also released with the housing starts data. By knowing the number of permits issued monthly, analysts can attempt to estimate for the upcoming months. Normally, starts are 10% higher than permits since not all locations are required to have a building permit.

Housing starts and permits give a warning of future economic activity. In effect, a rise in housing starts can lead to a fall in the bond market and vice versa. Consumers tend to hold off on the purchase of new homes, new cars, and other big-ticket items if they are worried about the future of the economy. Housing is an important part of our economy. Continued declines in housing starts can lead to continued economic slowdown and essentially a deeper recession. On the other hand, increases in housing starts could signal a possible reversal.

From the opposite perspective, changes in interest rates often lead to changes in housing starts. High interest rates can cause a significant decline in home sales, which can lead to a drop in housing starts. Just the opposite happens when rates drop and is one of the additional reasons the Fed is trying to keep rates low. Low mortgage rates affect both home sales and housing starts.

The housing market is a vital component in sustaining the economy. The continued weakness of the housing market has many worried. Many economists believe housing will continue to suffer. There is still uncertainty regarding the future state of the economy. Interest rates are historically low. A cautious approach is wise to protect against future volatility.

The tug-of-war now being played in the economy could lead to lower rates in the near term, but so many factors are pointing to higher rates. If you are in a position to buy or refinance now, take control of your future and do so.

I want to help. Please email or call me at 847-920-8030.

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