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On the first Friday of each month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.
More commonly, it's called the "jobs report".
The jobs report is a sector-by-sector look into the U.S. economy and whether businesses are hiring -- or firing -- workers. This is one of the reasons why its release is so hotly anticipated each month -- the jobs report can reveal a lot about the state of the U.S. economy.
Last month, the economy shed 62,000 jobs.
Now, many people will assume that job losses like this are terrible for the U.S. economy. Sometimes, that's true.
This month, it's not.
Given the ongoing tug-o-war between inflation and recession, markets are somewhat pleased with the June job loss figures because job losses reduce the likelihood of inflation in the U.S. economy.
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Inflation is considered by many -- Ben Bernanke included -- to be among the top threats to the U.S. economy -- it devalues the dollar and leads to increases in the Cost of Living.
Inflation also threatens home affordability because mortgage rates tend to rise when inflation is present.
June's job losses -- while bad for those impacted -- is helping to relieve inflationary pressures on the economy and that is boosting markets performance this morning. Stocks are slightly up, and mortgage rates are slightly down.
(Image courtesy: The Wall Street Journal)
In the summer of 2005, sub-prime mortgage lending was at its peak. Rates were relatively low and lending guidelines were relatively loose.
At the time, the "standard" sub-prime mortgage product was the 3/27 ARM.
The 3/27 had a few basic traits:
- A fixed, 3-year "starter rate"
- Every six months thereafter, the mortgage rate changed
- The formula by which it changed was (4.999 percent + the 6-month LIBOR rate)
If the loan was interest only, it usually converted to principal + interest at the first adjustment, too.
Because the summer of 2005 was the peak of sub-prime lending, it makes sense that the summer of 2008 is the peak of sub-prime adjusting.
For homeowners with adjusting sub-prime loans, there is some (relative) good news out there.
Today, the 6-month LIBOR hovers near 3.15 percent, meaning that an adjusted mortgage rate will be in the neighborhood of 8.15 percent.
This is versus the rate of 10.30 percent that sub-prime borrowers faced last summer when LIBOR was much higher than it is today.
Adjustments of any size can strain a household budget, though, so if you're a sub-prime borrower and your pending adjustment will cause financial strife, be proactive -- talk to your lender before you miss a payment.
Lenders are often more willing to talk with "current" borrowers than with delinquent ones.
(Image courtesy: Washington Post)
As flood waters ran through Iowa and other Midwestern states, the nation's corn supply was thought to be in danger.
Prices spiked in the wake of the floods, adding to the already-peaking grocery bills that many Americans are now bearing.
But yesterday, in a surprise report, the Agriculture Department said that many farmers had over-planted corn earlier in the season in order to cash in on corn's rising market value.
The abundance of planting is offsetting a portion of the flood damage and this year's harvest is now predicted to be the second highest on record.
For Americans in need of a home loan, this is terrific news because more corn supply means lower food prices and that puts a hold on at least one source of inflation.
Inflation is the enemy of mortgage rates.
The revised outlook for this year's corn supply is now so much better than it was yesterday that the price of a corn bushel fell by 30 cents at the Chicago Board of Trade -- the maximum allowable amount by rule.
Now, rapid movements in the price of corn may not seem relevant to everyday life, but even the smallest of details about the economy can trickle down and impact you as a homeowner.
The strength of the housing market may be correlated to consumer confidence and consumer confidence is definitely tied to the Cost of Living. And the same goes for the mortgage market -- it's all related to inflation.
With a surprise crop of extra corn, things may look just a little bit better.
Source
Corn Crop Largely Intact, Despite Floods
Scott Kilman
The Wall Street Journal, July 1, 2008
Mortgage rates improved last week, marking the first time since mid-May that has happened.
The rate drop is the result of how mortgage markets interpreted the Federal Reserve's Wednesday press release.
In it, the Fed said:
- Inflation pressures should lessen soon
- Growth should remain steady this year
- The credit market is currently fragile
Separately, none of this was news to the markets. But considering all three statements together, investors grew nervous of leaving money in the stock market -- specifically in financials.
Post-Fed announcement, there was a wave of selling that dropped the Dow Jones Industrial Average nearly 20 percent from its October 2007 high.
As stocks sold off, though, mortgage shoppers were benefiting.
Rates ticked down in the Fed announcement's wake because the mortgage bond market acted as a "safe haven" for traders. More demand for mortgage-backed bonds caused rates to fall, accented by a favorable run very late in the day Friday.
This week, the momentum may continue, or it may not. There is a lot to capture traders' attention in this holiday-shortened, four-day work week.
The biggest data release of the week will undoubtedly be Thursday's Unemployment Report, but there are also two Fed speakers stumping, as well as Treasury Secretary Paulson speaking about the economy.
As the week goes on, more and more traders will be leaving for the long weekend so expect rates to move with greater force as Thursday afternoon gets nearer. And, if stocks haven't regained favor with investors by then, expect that mortgage rates will have a good week.
A Home Equity Line of Credit is bank product that grants homeowners access to the equity in their home at anytime, usually using checks.
Often called a HELOC, these equity-based credit lines function very much like credit cards:
- The rate is adjustable, tied to Prime Rate
- There is a minimum monthly payment
- There is a pre-set spending/credit limit
But different from credit cards is that a HELOC is "guaranteed" by real estate and with real estate values in question nationwide, many banks are exercising a little-known clause in the HELOC contract.
With alarming frequently, banks are reducing the pre-set spending limits on their active equity lines. Via USPS, lenders are notifying homeowner with $100,000 HELOCs that their new HELOC limit is $25,000, for example.
And the banks aren't being discriminate based on payment history or local real estate conditions, either -- it's happening everywhere with equal force.
The good news is that banks will accept appeals on HELOC reductions on a case-by-case basis.
One way to appeal a HELOC reduction is:
- Call your lender's Customer Service line. Do not send an email.
- Politely ask why the HELOC limit was reduced. Listen carefully to explanation.
- Explain why you would like your HELOC reinstated. Acceptable reasons may include home improvement projects or improper home valuation by the lender.
- Be prepared to write a formal letter, if asked. Address the issues explained in #2.
Banks will typically not reinstate a HELOC if a borrower has been delinquent on payments, or lives in a severely depressed neighborhood. However, because lenders rely on computer models to assess risk, it's always a good idea to ask.
Sometimes the Human Element of an appeal can work in your favor.
The Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent this afternoon, as expected.
In its press release, the Federal Reserve noted the co-existence of inflation and recession.
On inflation, the Fed said that energy and food prices are contributing to an "elevated state" of inflation, but that it expects price pressures to ease "later this year and next year".
On the topic of recession, the Fed seemed a bit more concerned.
Overall, markets reacted favorably to the press release; both stocks and mortgage rates showed signs of improvement in the statement's wake.
Source
Parsing the Fed Statement
The Wall Street Journal Online
June 25, 2008
http://online.wsj.com/internal/mdc/info-fedparse0806.html
The Federal Open Market Committee adjourns from its 2-day meeting at 2:15 P.M. ET today. It's widely expected that the group will leave the Fed Funds Rate unchanged at 2.000 percent.
However, it's not what the Fed does today that has markets so interested. It's what the Fed will say.
One of the Federal Reserve's roles is to promote stability in the U.S. economy by protecting it from two major threats:
- Inflation
- Recession
The Federal Reserve's primary weapon against both of these hazards, though, is the same -- the Fed Funds Rate. To combat inflation, the Fed raises the Fed Funds rate. To fight recession, it lowers the Fed Funds Rate.
But in today's economy, there is evidence of both inflation and recession meaning that the Federal Reserve is likely to leave the Fed Funds Rate unchanged for fear of setting the economy too far towards either threat.
Therefore, markets will be left looking for clues in the carefully-worded press release signed by Federal Reserve Chairman Ben Bernanke and the other voting members of the FOMC.
If the Fed admits added vigilance against inflation, it's expected that mortgage rates will fall because inflation causes rates to rise. By contrast, if the Fed harps on the downside risks in the economy, it's expected that mortgage rates will increase.
Either way, today's press release should be a market-mover.
If you're currently floating your mortgage rate or are deciding between different lenders, be aware that mortgage rates will enter a period of extreme volatility this afternoon.
It may be prudent to complete your rate shopping before 2:00 P.M. ET.
Most homeowners make four housing-related payments each month:
- Principal on a mortgage
- Interest on a mortgage
- Taxes on the real estate owned
- Insurance for the real estate owned
Collectively, these payments are known by the acronym PITI but don't let it fool you -- a homeowner's monthly expenses are still called PITI even if one or more of the elements doesn't apply.
For example, a homeowner with an interest only mortgage does not pay principal each month.
Additionally, condo owners typically don't pay homeowners insurance -- they pay a monthly assessment and/or maintenance fees to an association instead.
But regardless for what it stands, determining a comfortable PITI should be every homeowner's starting point when looking for a new home. PITI is the monthly housing cost, after all, and by knowing what fits in your budget, it's a lot easier to compare homes and their related expenses.
It's certainly better than asking the bank "how much home can I afford" -- all that's going to tell you is the P and the I. As a homeowner, you need to know all four.
PITI is most commonly pronounced pee-eye-tee-eye.
(Image courtesy: Contractor-Books.com)
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Mortgage rates edged higher for the fifth straight week and the benchmark 30-year fixed-rate mortgage is now at a 10-month high.
One reason why rates are spiking is because the temporary jolt from higher energy and food costs is starting to look like a longer-term trend.
For example, high energy prices get a lot of press, but its 19.4 percent increase since last year is dwarfed by the 64.8 percent increase in the price of grains over the same period of time.
Eventually, as businesses spend more because of these rising costs, they have no choice but to pass those costs on to consumers.
This very topic figures to loom large this week as the Federal Open Market Committee gets together for a 2-day meeting, adjourning Wednesday. The overwhelming expectation is that the Federal Reserve will hold the Fed Funds Rate steady at 2.000 percent.
However, it won't be what the Fed does that should impact mortgage rates this week, but what it says. The Fed's press release will hit the wires at precisely 2:15 P.M. ET and markets will look for clues about how Ben Bernanke & Co are viewing inflation and its impact on the sagging U.S. economy.
If the Fed indicates that fighting inflation is its primary goal, expect that mortgage rates will fall because inflation and mortgage rates tend to go in opposite directions.
Conversely, if the Fed says it promoting growth in the economy is paramount and that the country can sustain additional inflationary pressures for now, expect that mortgage rates will rise.
There is other data hitting the wires this week including:
- Consumer Confidence (Tuesday)
- New Home Sales (Wednesday)
- Existing Home Sales (Thursday)
- Personal Consumption Expenditures (Friday)
Of all of these data points, only Personal Consumption Expenditures should have a major impact on rates. PCE is the Federal Reserve's preferred inflationary measurement.
Flooding in the Midwest has displaced thousands of families and caused billions of dollars in damages.
It may also cause mortgage rates to rise.
As the extent of the damage becomes more clear, prices for grain and livestock are soaring. For example, a host of dietary staples are suddenly more expensive at the supermarket, including:
- Meat
- Pork
- Chicken
- Dairy
- Eggs
Rising food prices are considered inflationary and inflation tends to make mortgage rates rise.
But of all the foods that are increasing in price, it's corn whose price is rising the most -- up 70 percent so far since January. This is mostly because flood waters damaged up to 3 million acres of harvest in Iowa, our top-producing state.
Corn, of course, is a primary feed for livestock, so rising prices make it more expensive for farmers to raise hogs, cows and chickens. These higher costs get passed along to consumers and contribute to a higher Cost of Living around the country.
After facing (and adjusting) to rising gasoline prices, Americans are facing higher costs again -- this time at the supermarket. And if food prices don't recede with the flood waters, Americans may find that they're getting hit in a third place -- right in their mortgage rates.
Source
Hog Farmers Face a Perfect Storm
Ilan Brandt, Joe Barrett
The Wall Street Journal, June 20, 2008
(Image courtesy: The Wall Street Journal Online)
