In This Issue…

Last Week in Review: The potential government shutdown dominated the headlines. How did home loan rates react?

Forecast for the Week: Important inflation news will end the week, plus retail sales and consumer sentiment will give us some hints on the mood in the country.

View: What’s in your inbox? That’s an especially important question after a recent security breach. See this week’s View for details about safeguarding your information.

Last Week in Review

There’s a Chinese proverb, which is sometimes referred to as a curse, that says, “May you live in interesting times.” And last week was certainly an interesting one, as much of the week was spent wondering whether there would be a government shutdown. Read on to learn what happened… and what the impact was on home loan rates.

A partial shutdown of the federal government was avoided late Friday night, when Democrats and Republicans agreed on a budget deal and a short-term funding extension little more than an hour before the deadline. The extension cuts spending by $2 billion and will last through next Friday, April 15.

But all the uncertainty leading up to this decision was just one factor that caused Bonds and home loan rates to worsen through the week. On Thursday, as expected the European Central Bank (ECB) raised their benchmark rate in an effort to curtail rising inflation, meaning the Euro now trades at its highest level against the US Dollar since January 2010.

Despite the weakness in the Dollar, the disparity between the two is somewhat surprising, given the economic headwinds and problems that Europe has been facing. But as the saying goes, “Markets can remain irrational longer than we can remain solvent.” At some point, we should expect weakness in the Euro and a rebound in the US Dollar. The passing of the US Budget agreement should help.

So the question remains: Why does this matter when it comes to home loan rates?

A weak US Dollar typically helps Stocks, as it makes our goods and services relatively cheaper for foreigners, thus helping our export business and GDP. And when Stocks are boosted, investors typically move their money from safe-haven investments like Bonds into Stocks to take advantage of gains there. And since home loan rates are tied to Mortgage Backed Securities (MBS), which are a type of Bond, when these Bonds worsen, home loan rates worsen, too.

That said, home loan rates are still relatively incredible, but keep in mind that before long, the Fed and the Treasury will both be selling off their MBS holdings accumulated through their first round of Quantitative Easing (QE1), and it will be tough to see Bonds and home loan rates make meaningful ground once that selling starts.

If you have been thinking about purchasing or refinancing a home, call or email me to learn more about how you can benefit from today’s historically low rates. Or forward this newsletter on to someone you know who may benefit.

Forecast for the Week

The second half of the week is chock full of important economic reports. Be sure to look for:

  • Wednesday’s Retail Sales Report, which is a timely indicator of broad consumer spending patterns. Will this report, along with Friday’s Consumer Sentiment Index, show that consumers are feeling positive about our recovery, or will things like high gas prices and worries about inflation dampen these numbers?
  • Thursday’s weekly Initial and Continuing Jobless Claims Report. Both Initial and Continuing Claims were inline with expectations last week, and show the job market continues to slowly improve.
  • A double dose of news on the all-important subject of inflation, with Thursday’s Producer Price Index (which measures inflation at the wholesale level), and Friday’s Consumer Price Index. Inflation is the arch enemy of Bonds and home loan rates, and signs of inflation in these reports could cause them to worsen.

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 worsened through the week due to a variety of factors. I’ll be watching closely this week to see if they are able to change direction.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday Apr 08, 2011)

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