Tuesday, December 16, 2008

Zero Interest Rate Policy

If there is any doubt the United States has blown itself into one giant bubble economy, supported only by debt - not jobs - one only has to look as far as the inter-bank lending rate reduction announced today by the US Federal Reserve. The United States has reduced the overnight lending rate again. But this time they agreed to set a RANGE policy (this is new territory, people) of 0% to .25%. We have now officially entered ZIRP, or Zero Interest Rate Policy.

The US is now in a balancing act. To discover what happens if we slip, go do some research on Japan's lost era. They tried zero interest rates when their economy crashed in the 1990s. ZIRP didn't work out very well for them. As you consider this, it would be mindful to also remember that Japan was not the holder of the world's reserve currency at the time.

The Fed's outlook today maintained that the economy will struggle for a sustained period. Yet, despite the bleak outlook, and in a twist to this story, if you are financially secure, or you are a solvent bank, you can now practically get (or borrow) money for nothing.

Wednesday, December 03, 2008

Mortgage Rates Down, Applications Up

This morning's CNBC Bonds Report provided confirmation backing up a suspicion we've been harboring. Although our forecast has been that over the long term mortgage rates would increase, its likely we are now experiencing a drop preceding an upside reversal.

The US' Federal Reserve Chairman, Ben Bernanke, has been trying to reset the wheels of credit, while driving down mortgage rates to prompt buyers to jump back into the housing markets. So far most efforts to set a floor in housing have failed.

However, in the last few weeks, as the Fed has pumped liquidity into the system, and many of the swaps and other financial "assets" were cleared by the ISDA* bond markets have finally responded, thereby pushing mortgage rates down. *Throughout Sept and Oct the International Swaps and Derivatives Association cleared the qualified financial contracts of Lehman, WaMu, Freddie Mac, Fannie Mae and other collapsed firms with derivative financial products, credit default swaps, and other contracts on their books.

This certainly does not mean our nation's economic problems are over. But, it does offer the brightest ray of hope we've seen in months! In the short term we believe mortgage rates will fall even further from today's low of 5.25%, 30 year fixed. Although it's really tough to call markets, Bill Gross of Pimco (a funds manager) essentially agreed this morning. Gross anticipates mortgage rates will fall as much as one full basis point below the current rate. We'd feel more comfortable projecting at least another half point, conservatively.

Last week mortgage applications nearly doubled according to the Mortgage Bankers Association. With rates falling and applications rising, a nice short-term trend is now being set in place. If you are a home buyer, you may want to wait before locking in your rate. If you are a home owner, it may be time to review your existing mortgage terms and consider calling your favorite loan officer to run some numbers.

Unfortunately, at this point we are unsure if falling mortgage rates will last longer than two or three months. But we are hopeful that at least one positive housing related trend, albeit temporary, is finally developing.

Stacey Barrington is a licensed Broker in the State of South Carolina. This information is not guaranteed or warranted, and in no way constitutes investment advice. All personal investments should first be reviewed by a qualified mortgage lender, tax advisor, legal consultant, and/or the attorney of your choice.