The Federal Reserve has released the minutes from its most recent Federal Open Market Committee meeting. The Fed Minutes are a detailed meeting recap; the companion piece to the more brief, more well-known press release.
As a comparison, the minutes of the last FOMC meeting contained 60 paragraphs and 7,027 words. The post-meeting press release was just 5 paragraphs and 382 words.
December’s Fed Minutes shows Fed members with a positive, cautious, take on the economy.
Recent data suggests that the U.S. economy is expanding, the Fed said, but “strains” in global financial markets pose “significant risks” to the downside. This tell us that the Fed believes its economy-stimulating programs are working, but that officials remained concerned by events in the Eurozone.
The U.S. economy could be impacted by fallout.
Other meeting consensus included :
- On growth : The economy is expanding, despite slowing in “global economic growth”
- On housing : Data suggests the “depressed” market “could be improving”
- On inflation : Prices are stable, and remain within tolerance levels
The Fed’s analysis was of little surprise to Wall Street, and going forward, Fed Chairman Ben Bernanke wants to keep it that way. The Fed Minutes contained a passage regarding market communication, and how the Fed will be more pro-active about it in the future.
With the release of its minutes, in a section called “Market Policy Communications”, the Federal Reserve showed its plans to release 4 times annually its economic forecasts, and plans for the Fed Funds Rate. This signals in a shift in Federal Reserve transparency.
The Federal Reserve will begin including the forecast in its economic projections beginning after its next policy meeting, January 24-25, 2012.
Mortgage rates were little changed after the release of the Fed Minutes.
Consumer spending continues to rise nationwide, fueled by jobs growth and a rosier outlook for the U.S. economy.
Unfortunately for mortgage rate shoppers in Texas, it may also lead to higher mortgage rates later this week.
Thursday morning, the Census Bureau will release its U.S. Retail Sales data for December. The report is expected to show an 18th consecutive monthly increase, with analysts projecting sales volume higher by 0.4 percent from November.
This would be double the increase from last month, which saw a 0.2 percent increase in Retail Sales.
The Retail Sales report tallies receipts collected by retail and food-service stores nationwide. When the sum of these receipts rise, it puts pressure on mortgage rates to do the same. The connection is straight-forward.
Retail Sales are the largest part of “consumer spending” and consumer spending accounts for the majority of the U.S. economy — up to 70 percent, by some estimates.
As the economy goes, so go mortgage rates.
Remember: today’s ultra-low mortgage rates have been partially fueled by weak economies — both domestic and abroad — going back 4 years. Stock markets have sold off as economies have faltered worldwide, leading investors to seek refuge in the relative safety of U.S.-backed mortgage bond market. The new-found demand for mortgage-backed bonds has helped drop mortgage rates to levels never seen in history.
When economic recovery is apparent, therefore, we should expect a mortgage rate reversal, and should expect for it to happen quickly. Stock markets should rise; bond markets should fall. Mortgage rates will climb. Rate shoppers will lose.
Last week’s strong jobs report sparked hope for the U.S. economy. If Thursday Retail Sales data reveals similar strength, the risk in “floating” your mortgage rate may be too great. The safer play is to lock your rate today.
The Retail Sales report will be released at 8:30 AM ET.
Normally we think of adjustable rate mortgages (ARM) as good options when interest rates are high — which is certainly not the case today with interest rates bouncing around at historic lows.
For buyers and refinancing households, adjustable-rate mortgages are a relative bargain as compared to fixed-ones.
According to Freddie Mac’s weekly survey of more than 125 banks nationwide, mortgage applicants electing for a conventional ARM over a conventional fixed-rate mortgage will save 105 basis points on their next mortgage rate.
“Conventional” loans are loans backed by Fannie Mae or Freddie Mac.
Today’s average, conventional 30-year fixed rate mortgage rate is 3.91% plus points and closing costs. The average rate for a comparable 5-year ARM is 2.86%, plus points and closing costs.
In other words, for every $100,000 borrowed, a conventional 5-year adjustable-rate mortgage will save you $58.15 per month, or $698 per year.
That’s a 12 percent savings just for choosing an ARM.
12 percent is a big figure that adds up over 5 years — especially for households that plan to sell within those first 60 months anyway. There is little sense in paying the mortgage rate premium for a 30-year fixed-rate mortgage when a 5-year ARM is perfectly suitable.
For the reason why adjustable-rate mortgages continue are so much lower than their fixed-rate counterparts, look no further than the U.S. economy. ARMs reflect Wall Street’s short-term economic expectations; whereas fixed-rate mortgages reflect medium- to long-term expectations.
In the short-term, analysts expect the U.S. economy to grow slowly, with low levels of inflation. This supports the U.S. dollar, the currency in which mortgage bonds are denominated. When the dollar is strong, demand for mortgage bonds tends to increase.
This supports lower interest rates.
Conversely, over the longer-term, inflation is expected to return, which devalues the dollar and everything paid in it (e.g.; mortgage-backed bonds). This is why inflation is linked to higher mortgage rates. When inflation is present in the economy, mortgage bonds lose value, driving mortgage rates up.
Adjustable-rate mortgages aren’t perfect for everyone, but in the right situation, they can be a big money-saver and a helpful tool for stretching a household budget. Given today’s rates, the money-saving potential is larger than usual.
Before you choose an ARM, discuss your options with your loan officer.
As the new year begins, there are no shortage of stories telling us what to expect in 2012.
Housing finished 2011 with momentum and mortgage rates closed at the lowest rates of all time.
Some expect those trends to continue through the first quarter and beyond. Others expect a rapid reversal.
Who’s right and who’s wrong? A quick look through the newspapers, websites and business television programs reveals “experts” with opposing, well-delivered arguments views. It’s tough to know who to believe.
For example, here are some “on-the-record” predictions for 2012 :
- Home prices will rise (says Freddie Mac)
- Home prices will fall (says CBS News)
- Mortgage rates will rise (says American Banker)
- Mortgage rates will fall (says the LA Times)
The issue for buyers, seller, and would-be refinancers nationwide is that it can be a challenge to separate a “prediction” from fact at times.
When an argument is made on the pages of a respected newspaper or website, or is presented on CNBC or Bloomberg by a well-dressed, well-spoken industry insider, we’re inclined to believe what we read and hear.
This is human nature.
However, we must force ourselves to remember that any analysis about the future — whether it’s housing-related, mortgage-related, or something else — are based on a combination of past events and personal opinion.
Predictions are guesses about what might come next — nothing more.
For example, at the start of 2009, few people expected the 30-year fixed rate mortgage to stay below 6 percent, but it did. Then, at the start of 2010, few people expected the 30-year fixed rate mortgage to stay below 5 percent, but it did.
All we can know for certain about today’s market is that both mortgage rates and home values are low, creating favorable home-buying conditions nationwide.
At that start of last year, few people expected mortgage rates to even reach 4 percent. Today, rates “with points” price in the 3s.
What 2012 has in store we just can’t know.
If you think 30-year fixed rate mortgage rates are low today — 15-year fixed rates represent an even greater savings, long-term.
According to Freddie Mac’s weekly mortgage rate survey, the average 15-year fixed rate mortgage rate is now 3.27% nationwide with an accompanying 0.8 discount points. 1 discount point is a closing cost equal to 1 percent of your loan size.
The current 15-year fixed rate reading is just one tick above the all-time, 15-year fixed rate mortgage low of 3.26% set in October 2011.
If you’ve ever thought of “going 15″, it’s a terrific time to talk to your lender.
The primary benefit of using a 15-year fixed rate mortgage as opposed to a 30-year fixed rate one is that a 15-year fixed rate mortgage dramatically cuts the long-term interest costs of your loan. The downside is that monthly payments are relatively large.
At today’s mortgage rates, per $100,000 borrowed :
- 15-year : $704 principal + interest monthly
- 30-year : $477 principal + interest monthly
So, for homeowners opting for a 15-year fixed rate mortgage, the monthly principal + interest payments will be 48% higher as compared to a 30-year fixed rate mortgage of the same loan size.
TAXES and INSURANCE will be the same for either loan, since they are based on property value, not the terms of the loan.
Long-term, however, because the 15-year fixed rate mortgage interest rate is lower and because it pays off in half the time of a 30-year loan, a homeowner will save $45,000 in interest costs per $100,000 borrowed.
$45,000 per $100,000 borrowed is a huge amount of savings. It’s monies that can be used for college tuition, home improvement projects, retirement savings, or anything else.
That said, the 15-year fixed rate mortgage is not ideal for everyone.
Of course it requires higher monthly payments, a 15-year fixed rate mortgage may add stress to your household budget. Furthermore, once you commit to a 15-year loan term with your lender, you can’t revert back to a 30-year loan term without a refinance and refinances can be costly.
Be sure of yourself when selecting a 15-year fixed rate loan. The rewards are great, but the risks can be, too.