Coachella Valley Mortgage Home Financing Blog: Sean's Weekly Market Newsletter Click to View

Last Week in Review

"OPINION HAS CAUSED MORE TROUBLE ON THIS LITTLE EARTH THAN PLAGUES..." Voltaire. And lately, there have been a lot of opinions about inflation being voiced from Fed officials, respected economists, and the media. But what does all this talk really mean for our economy and home loan rates? Here's what you need to know.

On Friday, the Consumer Price Index (CPI), which measures the prices US consumers pay, came in lower than expected for January. The chart below shows the year-over-year headline CPI at 2.6%, below expectations of 2.8%. What's more, when volatile food and energy are removed from the equation, the "Core" Consumer Price Index was actually negative - and the last time that happened was 28 years ago.

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Chart: Consumer Price Index

So, if the CPI Report shows that inflation is currently non-existent, why are so many people expressing concern? The reality is that the factors which are currently restraining inflation pressures could easily swing the other way.

In fact, Kansas City Fed President Thomas Hoenig recently said, "Fiscal policy is on an unsustainable course. The US Government must make adjustments in its spending and tax programs. It is that simple. If pre-emptive corrective action is not taken regarding the fiscal outlook, then the United States risks precipitating its own next crisis." And part of the crisis Mr. Hoenig is warning of is the possibility of hyperinflation, which occurs when prices rise so quickly that a currency becomes worthless.

Hoenig recently reminded us that he has a framed picture of a 500,000 German mark bill in his office...which would have purchased a home in 1921, but due to sudden inflation, wouldn't purchase a loaf of bread just two years later. Adding to the inflation talk, recent Produce Price Index Reports, which measure inflation at the wholesale level, have shown a trend higher in wholesale inflation. January's report, for example, was significantly higher than expected, due to rising energy costs.

Also chiming in with an opinion, Philadelphia Fed President Charles Plosser made some interesting comments regarding monetary policy and sales of assets that the Fed currently owns. Mr. Plosser stated that the Fed should begin to sell off their stockpile of Mortgage Backed Securities (MBS) as the economic recovery gains strength. With the Fed MBS buying program ending soon, and the Fed now potentially turning into a seller of MBS, Bond prices and home loan rates will very likely worsen over time. (More on this in the special "Video View" below...don't miss it!)

In other news, the Empire State Manufacturing Index came in higher than expected and up from January's reading. The report also showed business activity picking up and business leaders forecasting better economic conditions in the coming months. In addition, Housing Starts for January came in better than expected and at the highest level since July, thanks in large part to the extension of the Homebuyer Tax Credit.

Bond prices were unable to improve after falling below an important technical level this week, and as a result, home loan rates ended the week worse than where they began.

MANY PEOPLE ARE ASKING FOR OPINIONS ABOUT WHERE HOME LOAN RATES ARE HEADED...AND WHY. CHECK OUT THIS WEEK'S MORTGAGE MARKET GUIDE VIEW FOR A SPECIAL VIDEO THAT EXPLAINS HOW AND WHY HOME LOAN RATES MOVE...AND WHAT IT MEANS RIGHT NOW.

Forecast for the Week
	While it's hard to say what opinions might be uttered this week, there will definitely be plenty of news in store. We'll get a look at the housing market with Wednesday's New Home Sales Report and Friday's Existing Home Sales Report. It will be interesting to see if these reports are looking more positive, as many buyers are working to take advantage of the Homebuyer's Tax Credit before it expires this spring. If you want to learn more about this Tax Credit and how it might help you or someone you know - don't hesitate to get in touch with me, I can share all the details and important timelines. Also this week, we'll get several reads on the health of the economy with Thursday's Durable Goods Report - which gives us an update on consumer and business buying behavior on big ticket items that last for an extended period of time - and Friday's Gross Domestic Product Report, which is the broadest measure of economic activity. Tuesday's Consumer Confidence Report and Thursday's Initial Jobless Claims Report will also be important to watch. Last week's Initial Jobless Claims and Continuing Claims numbers were higher than expected, showing that the labor market is still struggling. The bottom line is that while some of the recent economic reports have had encouraging signs, the economy needs to create jobs and regain consumer confidence before any positive opinions on the economy will become reality. And as if it won't be a week jam packed full of opinions already, Fed Chairman Ben Bernanke will be weighing in with some thoughts of his own, as he testifies before Congress on Wednesday and Thursday. 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 ended the week below an important technical level. I'll be watching closely to see if Bonds can reverse course and move higher this week, which would result in an improvement for home loan rates.
Chart: Fannie Mae 4.5%% Mortgage Bond (Feb 19, 2010)

The Mortgage Market View...

Rates May Be Headed Up Soon...But Why?

You've heard a lot over the last several months about historically low home loan rates...but lately, you've probably been hearing the buzz that interest rates may be heading up in the near future, due in part to the Fed ending their purchases of Mortgage Backed Securities.

All of this begs the question: How and why do rates move...and what is happening right now?

The answer involves a number of factors and can seem complex. But it doesn't have to be!

To help you understand how interest rates move, take a look at this easy to understand video. You'll learn what the Fed has been doing to keep rates low, as well as the connection between interest rates and Mortgage Backed Securities.

Take a look at the following video now for an easy explanation:

How Rates Move - and What it Means Right Now

The Week's Economic Indicator Calendar

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Economic Calendar for the Week of February 22 - February 26

Date	ET	Economic Report	For	Estimate	Actual	Prior	Impact
Tue. February 23	10:00	Consumer Confidence	Feb	55.0		55.9	Moderate
Wed. February 24	10:30	Crude Inventories	2/19	NA		3.08M	Moderate
Wed. February 24	10:00	New Home Sales	Jan	355K		342K	Moderate
Thu. February 25	08:30	Jobless Claims (Initial)	2/20	460K		473K	Moderate
Thu. February 25	08:30	Durable Goods Orders	Jan	1.5%		0.3%	Moderate
Fri. February 26	08:30	Gross Domestic Product (GDP)	Q4	5.3%		5.7%	HIGH
Fri. February 26	09:45	Chicago PMI	Feb	59.0		61.5	Moderate
Fri. February 26	10:00	Consumer Sentiment Index (UoM)	Feb	74.0		73.7	Moderate
Fri. February 26	10:00	Existing Home Sales	Jan	5.50M		5.45M	Moderate
Fri. February 26	08:30	GDP Chain Deflator	Q4	0.6%		0.6%	HIGH