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Last Updated:
Feburary 07, 2011

Feburary 2011 Summit County Real Estate.Net Notices

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Get ready for a busy week of economic reports and news that could impact home loan rates!

We’ll start off Tuesday morning with the Retail Sales report for November, as well as the Fed’s final FOMC Meeting and Policy Statement of the year coming on Wednesday.

We’ll also see new inflation reports starting on Tuesday with the Producer Price Index (PPI), which measures inflation at the wholesale level. The very next day, we’ll see the Consumer Price Index (CPI) with a look at inflation on the consumer level. With all of the recent talk over inflation concerns in the future, it will be important to see what these reports reveal - since inflation is the archenemy of Bonds and home loan rates.

We’ll also get a dose of manufacturing news in the Empire State Index, which looks at New York State’s manufacturing sector, and is a good gauge of manufacturing overall. On Thursday, we’ll also see the Philadelphia Fed Index, which is another important manufacturing report. Those two indices have the potential to impact the market, since they indicate the health of the manufacturing sector in the US.

Thursday brings the Initial and Continuing Jobless Claims Report. Last week, Initial Jobless Claims came in at 421,000, which was below expectations. That was encouraging news, but we still need to see consistent readings below 400,000 before real confidence in the labor market can take hold.

Finally, we’ll see more housing news this week, when reports on Housing Starts and Building Permits in November are released on Thursday.

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"All good things must come to an end..." or so the popular saying goes. And right now, many people are wondering if this sentiment holds true for the historic low rates we’ve seen this year. Here’s what last week’s news suggests.

First, it’s important to understand that home loan rates are based on Mortgage Backed Securities, which is a type of Bond. Bonds typically help provide some built in "assistance" when the nation is suffering economic headwinds. For example, negative economic news serves to help Bond prices improve and rates decline, including home loan rates. This is helpful to have when the economy is struggling, as buyers of all products - including homes - need the extra incentive of low rates to be encouraged to buy.

But now, the sharply higher expectations for future economic growth has caused rates to climb - particularly including home loan rates, since the Fed announced its second round of "Quantitative Easing" or QE2 on November 3rd. With QE2, the Fed will purchase $600 Billion in Treasury Securities through mid-2011 to keep our economic recovery on track.

But is there any likelihood rates can rebound? Many experts expect that home loan rates will continue to move higher over time because:

At its meeting last week, the Fed left the door open for further QE programs if our economic recovery requires which, like QE2, could hurt Bonds and home loan rates. Congress passed the $858 Billion Tax Cut Bill, and while this is a good economic stimulus, in the short run it adds to the ever-growing deficit - also bad for Bonds and home loan rates. Last week’s Producer Price Index and Consumer Price Index Reports showed that the Fed appears to be on track with their goal of stimulating a bit more inflation. Inflation erodes the value of the fixed return provided by a Bond, which causes home loan rates to rise.

It’s important to understand that rates don’t simply rise in a straight line. In fact, Bonds and home loan rates did have a late-week rally last week, and that trend of rates worsening with improving dips here and there like we saw last week may be what’s in store for us in the weeks and months ahead. At the end of the day, the ongoing and potential addition of further stimulus from the Fed, combined with the stimulus from the tax cuts, will make it tough for Bonds and home loan rates to return to the levels seen earlier this year.

But the good news is that home loan rates are still extremely attractive right now. If you have been thinking about purchasing or refinancing a home, call or email me now to get started. Or forward this newsletter on to someone you know who may benefit from today’s historically low rates.

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It will be a holiday shortened week, with the Bond Market closing at 2:00pm ET Thursday and both the Stock and Bond Markets closed Friday in honor of the Christmas holiday. But there will be plenty of action first, including:

A double dose of housing news with Wednesday’s Existing Home Sales Report and Thursday’s New Home Sales Report. Wednesday also brings a read on the economy with the Gross Domestic Product Report, which is the broadest measure of economic activity.

Big inflation news comes on Thursday with the Personal Consumption Expenditure (PCE) Index, which is the Fed's favorite gauge of inflation, plus there’s also the Personal Income and Personal Spending Reports, which give us some information on the consumer perspective of the economy.

Thursday’s Initial and Continuing Jobless Claims Reports will also tell us if the good trend continues - last week’s Initial Claims was the second lowest number seen during 2010, and also the third decline in four weeks. 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.

Bonds and home loan rates rallied at the end of last week.

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Traders found themselves singing one minute only to be screaming the next, as Bonds saw huge swings up and down of 100 basis points on multiple days last week.

Remember, home loan rates are based on Mortgage Bond prices, so huge swings in Bonds causes home loan rates to shift as well. This underscores why it’s so important to work with a knowledgeable professional who understands how interconnected the market is and can help homeowners lock in at the most opportune times.

To help make sense of the volatility, here’s a montage of the top 5 hits last week that Traders and Bond investors appeared to be singing... and why.

#1 "Monday, Monday... so good to me." - By The Mammas and the Papas

Last week started out with Bond prices receiving a nice bump on Monday thanks to strong demand for the Treasury Department’s auction of $35 Billion in 2-Year Notes.

#2 "Bonds in low places." - To paraphrase Garth Brooks

On Tuesday, the Treasury Department auctioned off another $35 Billion... this time in 5-Year Notes, which carry more inflation risk. That auction wasn’t received nearly as well and sparked a sell off of Bonds.

To make matters worse, the sell off was exacerbated by the ultra-thin holiday trading volume. In other words, with many Traders out of the office for the holidays, there simply weren’t enough buyers in the market to offset the selling. So when prices dropped on Tuesday, the selling pressure gained momentum with each sale and the losses grew more dramatic. The end result was a drop of 100 basis points in Bond prices!

#3 "I’m Back. Bonds have lifted. And raised the gifted." - To paraphrase Kid Rock

What a difference a day makes! Just one day after Bonds dropped 100 basis points, the opposite happened and Bonds saw a huge upswing. How was that even possible? Bargain hunting and a strong performance by the Treasury Department’s 7-Year Note auction were the catalysts behind the move, as buyers came out in droves and pushed Bonds up 119 basis points!

#4 "Home sweet home!" - By Mötley Crüe

Volatility wasn’t the only story that hit home last week. The final S&P Case-Shiller Home Price Index for the year was also released last week. According to the report, home prices in 20 metropolitan cities fell 0.8%, which was below the 0.1% improvement that was expected and the sharpest year-over-year decline in a year. This was not a good report, and when you consider more foreclosures coming to the market, it is likely that home prices could remain under pressure for part of 2011. Stubbornly high unemployment has played a role in seeing meaningful improvement in housing.

#5 "You’re unbelievable!" - By EMF

The volatility continued throughout the week, swinging another 54 basis points on Thursday alone. But in the end - through all the ups and downs - Bonds and home loan rates were able to finish the week strong. That means home loan rates are still unbelievably low as we start the new year.

That means you still have something to sing about. Despite the overall negative trend, home loan rates are still near historic lows... at least for the time being. That may not be the case in the weeks and months ahead. Call or email today to start the process - it only takes a few minutes.

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The new year kicks off with a bang, as nearly all of the reports due out this week are rated as having the potential for a high impact on the markets!

We start off right away Monday morning with the ISM Index. This is the king of all manufacturing indices and is considered the single best snapshot of the factory sector, so it has the potential to move the markets if it doesn’t meet expectations that it will come in better than the prior reading.

Tuesday brings us the first release of FOMC Minutes of the year. Although the Fed has already released its policy statement, the markets will be examining the minutes closely for indications of the Fed’s thinking regarding important topics like inflation, rates, and the overall economy.

We’ll also see some important employment news this week. First up is the ADP National Employment Report on Wednesday, which measures non-farm private employment. The report is expected to show fewer jobs created in December than the previous reading of 93,000 jobs created in November.

The ADP Report will be followed the next day with another round of Initial Jobless Claims on Thursday. In last week’s report, Initial Jobless Claims was reported at the lowest level since July 2008. That was good news for the labor market, but we still need to see if this report was skewed by the holidays or if it was the start of a trend lower in new unemployment claims.

The big news of the week will be the release of the all-important Jobs Report this Friday. The Average Work Week and Unemployment Rate are expected to hold steady, while Hourly Earnings and Non-Farm Payrolls are expected to rise. 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.

The important thing to note is that the overall trend for Bond prices has been downward, which is not good for home loan rates. But last week, Bonds were able to finish strong, which demonstrates that there are opportunities to benefit from positive shifts in the market and low home loan rates despite the overall negative trend.

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Here’s what December’s Jobs Report showed... and what it means for home loan rates.

The Labor Department reported that 103,000 jobs were created in December, and private job growth was 113,000. While these numbers were below the recently ramped up expectations, they do show that the trend in the labor market is improving. Also noteworthy are the upward revisions to the prior two months readings, showing 70,000 more jobs created than had been previously reported.

And yet, the real shocker in the report was a significant decline in the unemployment rate to 9.4%, which is the lowest unemployment rate since May of 2009.

So what did we learn from this Jobs Report?

1. While positive news, this Jobs number was still soft enough to support the Fed continuing on their plans for a full dosage of QE2 for the economy... and this won’t be good for Bonds and home loan rates, as it carries along some real inflation threat down the road.

2. The recent tax package and lower tax rate extensions have not yet had enough time to be seen or felt in the economy, so those factors should help provide further improvement in the labor market in future months... but also will create inflation - bad news for Bonds and home loan rates.

The bottom line for right now is that the familiar chant "Don't Fight the Fed" continues to ring true. The Fed is intent on creating inflation, lowering the unemployment rate and raising Stock prices...and they have already been somewhat successful. QE2 will likely keep coming until the employment picture improves significantly, and this is all going to be unfriendly for Bonds and home loan rates ahead.

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Last week, Congress was busy at work on negotiations to extend the Bush-era tax cuts. That news kept a lid on any improvement for Bonds and home loan rates, due to the prospect of an ever-increasing deficit.

And adding to the troubles for Bonds and home loan rates last week was news that inflation is growing in China... and growing fast. How does that impact us? Remember, it's a global economy, so Bond prices all over the world worsen on news of inflation, which is bad for home loan rates.

So the big question is: Will home loan rates go back down?

Although rates are still near historic lows, they have been headed up... and indications are that those unbelievably low home loan rates may be behind us. In fact, there are only a few things that would bring back the lows that we saw in early November:

Realistically, the chances of these events happening are unlikely - and in the end, rates may see some brief and fleeting improvements, but many experts believe they will likely continue to creep up over time. And when you include the stimulative action of extending the present tax rates and adding further cuts, it’s tough to see Bonds or home loan rates improving much.

The good news is that home loan rates are still extremely attractive and are still near historic lows for now. If you or someone you know has been thinking about purchasing or refinancing a home, NOW is the time to call or email to get started.

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We may have a holiday shortened week ahead, but the markets will be filled with plenty of action. The Treasury will be buying $99 Billion in 2, 5 and 7-Year Notes on Monday, Tuesday and Wednesday. And meanwhile, economic reports for the week begin on Tuesday with the Gross Domestic Product Report, which is the broadest measure of economic activity, and also the Existing Home Sales Report. Also, the "Meeting Minutes" from the Fed’s most recent meeting on November 2-3 will be released.

On Wednesday, we'll have a virtual feast of economic reports just ahead of Thanksgiving. We'll get another round of housing news with the New Home Sales Report, plus another read on the economy with the Durable Goods Report, which gives us an update on consumer and business buying behavior on big-ticket items that are designed to last for an extended period of time. Not to be left out, there will be jobs news via the Initial and Continuing Jobless Claims numbers, and inflation news via the Personal Consumption Expenditures (PCE) Index, which happens to be the Fed's favorite gauge of inflation.

It's been a volatile few weeks for Bonds and home loan rates as they've been attempting to stabilize. With so many economic reports on tap this week, the volatility will likely continue. If you have any questions about your situation, call or email me anytime!

By the way, the financial markets will be closed all day on Thursday in honor of the Thanksgiving holiday, while on Friday the Stock and Bond markets will close early, at 1:00 p.m. ET and 2:00 p.m. ET respectively. 

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As many of you I am sure are aware, the federal government passed the "SAFE Act", which requires that sellers who finance properties to owner occupants be a licensed mortgage originator or use a mortgage originator to process their loans. The term "Residential Mortgage Loan" was not clearly defined by the Feds, and different states have opted to include or exclude this from the licensing requirement.

Now, two jerks named Dodd and Frank have passed a new law that requires not only licensing but requires that you actually QUALIFY your buyer. I thought the whole idea of seller financing was because your buyer COULD NOT qualify for a regular loan?

You can do up to 3 transactions (per entity) per year, but ONLY if there's no balloon in your note (not advised). So, effective asap, all seller financed loans have to be done through license mortgage originators, or, in the case of the Dodd-Frank Act compliance, through a licensed real estate broker. Not clear is the federal definition of "Residential Mortgage Loan", so until the feds clear it up we have to assume that land contracts are within the definition.

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Health Care Reform Bill Does Have Tax Implications for Second-Homeowners and Others

You have probably received an alarming email from a colleague that states that the Obama Health Care Reform Bill approved includes a 3.8% real estate transaction tax. This is UNTRUE. However, your Board researched the issue and discovered last week that the so-called “Medicare” tax places a 3.8% tax on unearned net investment income for those who report an adjusted gross income over $200,000 for an individual or $250,000 for a joint filing. Of important note, the tax on the net capital gains resulting from the sale of real estate will remain exempted up to $250,000/individual and $500,000/joint. Your Government Affairs Director contacted NAR to determine its implications for second homeowners and rural agricultural land owners. In an email last week, NAR Chief Deputy Lobbyist Jamie Gregory said, “Yes, most of the emails going around on the new tax are inaccurate. Yes, there will be some ramifications for second home and other investment real estate markets. NAR was opposed when the proposal was put forward and in fact was the only real estate organization to act quickly enough to oppose it. The proposal started being discussed on a Tuesday, was released publicly on the committee website on Thursday and was passed on Friday. The problem we now have is with "Pay-Go' now being law, any revenue provision that is proposed for elimination must have a corresponding offset to balance it out. Fortunately this provision does not go into effect until 2013, so we have time to strategize how best to deal with it.” The mountain boards will be monitoring any developments with theissue and have offered to testify on the impacts of this tax on second homeowners and ultimately resort economies.

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Overall, Traders were caught by surprise last Friday when the Jobs Report came in way below estimates. The private sector numbers also disappointed. But let’s look at some important information behind the headline number.

First, on a positive note, last week’s report included upward revisions to the past two months. Those revisions showed that the economy produced 38,000 more jobs than previously reported. What caused these revisions? The headline number of jobs lost or created comes from the Business Survey or CES (Current Employment Statistics) Survey, which surveys about 140,000 businesses and government agencies - and uses the birth/death ratio to help calculate or guesstimate the monthly number. Because there are often inaccuracies with that guesstimate, the real final numbers show up in future monthly revisions.

Second, on a grim note, the Unemployment Rate ticked up to 9.8%, from the prior month's 9.6%. It’s important to note that the unemployment rate is derived from a survey from the Labor Department called the Household Survey or Current Population Survey (CPS) - and this survey is more accurate than the business survey as the information comes from actual phone calls to 50,000-60,000 households.

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So when all is said and done, last week’s Jobs Report begs the following questions going forward:

  1. Was the recent string of economic reports more hype than actual signs that the economy was improving?
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  3. Will future reports coincide with last Friday's weak Jobs Report?
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  5. Or was the Jobs Report’s weak reading just a small bump on the road to recovery, with potential future upward revisions tempering November’s numbers like we saw happen with the last two months?

Time will tell, but one thing is for sure: The Fed was watching the Jobs Report closely and will likely use the weak report as evidence to pump the full dose of Quantitative Easing 2 (QE2) into the economy. Remember, Quantitative Easing is the concept of the Fed becoming a buyer of Treasuries and Bonds to try and stimulate the economy. While QE2 may be good for the economy, it is likely to be unfriendly to Bonds and home loan rates, as we saw last week when Bonds and home loan rates ended the week worse than where they began.

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Compared to last week’s busy economic report calendar, this week is light on scheduled reports. But between QE2, Treasury auctions, and the uncertainty in Europe, the volatility in our markets is sure to continue... and that’s certainly no hype.

Thursday brings the Initial and Continuing Jobless Claims Report. Last week, Initial Claims were reported above expectations at 436,000. However the 4-week moving average did decline to the lowest reading since August 2, 2008. While this was good news, it was tempered by the weaker-than-expected Jobs Report data last Friday. Remember, we need to see Initial Claims make a sustained movement below 400,000 for the market to feel confident that labor is recovering.

Also, the Treasury will sell $32 Billion in 3-Year Notes on Tuesday, $21 Billion in 10-Years on Wednesday and $13 Billion in 30-Year Bonds on Thursday. It will be interesting to see how these auctions perform in light of the recent spike higher in yields. Ending the week will be the Consumer Sentiment Index on Friday.

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