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Rates on the rise, but Washington gave us the heads-up long ago
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It's been a roller-coast of sorts in the financial market where home mortgage
is concerned, but in the long haul the Fed has done what they said they were
going to. What exactly? Simply put: Over the course of the past eight months,
the Fed has raised the Federal Funds rate from 1.0 percent (45-year low) to 2.5
percent.
Made clear from the beginning of the uphill turn in rates, the intentions of the
Fed have been simple. They were to continue to elevate rates at a "measured"
pace until it is no longer accommodative (whatever that means). To decrypt /
elaborate: The Fed objective is to keep inflationary pressures and expectations
in check throughout the year 2005.
The powers-that-be in Washington DC have seemingly done a good a job
convincing markets and economists alike of the intent. This is evidenced by low
long-term posted rates nationwide today.
We are asked, When the Fed says it wishes to be less 'accommodative,' what
does it mean? Two things.
- The actual Fed Funds rate (that is, factoring in inflation) is still
close to zero, which continues to be stimulating the economy.
- Second, the Fed is indicating concern that there is much liquidity
remaining in the system.
The December 14, 2004 Federal Open Market Committee meeting stated "a
significant degree of liquidity might be contributing to signs of
potentially excessive risk-taking in financial markets as evidenced by quite
narrow credit spreads, a pickup in initial public offerings, an upturn in
mergers and acquisitions activity".
Noteworthy:
Chairman Alan Greenspan likely wants a neutral monetary policy by the end of his
term next January. Consistent with this we believe that the Fed Funds rate will
be at 3.5 percent by the end of the year.
The Feds actions to raise short-term interest rates have calmed market fears of
inflationary pressures and have had the effect of lowering long-term interest
rates and flattening the yield curve.
More:
Since June of 2004 when the Fed began raising short-term rates, 10-year
Treasury rates have plummeted from a monthly average rate of 4.73 to 4.09 as of
February 4, 2005. At the same time 1-year Treasury rates rose from 2.12 percent
to 2.93 percent over the identical course of time. characterization of the yield
curve will have different effects on various parts of the mortgage marketplace.
The 30-year fixed mortgage stood at 5.63 percent as of early February, which
showed a drop of approximately 0.60 percentage points. This is likely to put
pressures on ARM pricing (adjustable-rate mortgages). Many lenders are offering
greater initial rate discounts in order to maintain their current production.
ARM loans are staying near the 35 percent mark with respect to origination
volume in 2005, latter part of the year will define lower shares.
Purchases:
Because of continued low mortgage rates, we can expect home sales stay strong
but at slightly lower levels than 2004 record highs, economic strengths should
keep home prices moving up, with an average increase of 7 to 8 percent this
year.
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