Forecast for the Week 

The credit markets are closed on Monday in observance of Columbus Day, and the week features a light economic calendar after that.

  • The Fed’s Beige Book will be released on Wednesday. The Beige Book contains anecdotal information on the current economic and business conditions from the various regional Federal Reserve Banks across the country.
  • Thursday brings another weekly Initial Jobless Claims Report. Last week, claims rose from a two-month low as the labor market is still trying to dig its way out of a hole.
  • On Friday, we’ll see how inflation is doing at the wholesale level with the Producer Price Index. Plus, the Consumer Sentiment Report will be delivered.

In addition, earnings season kicks off this week and this could impact trading—and in turn, impact the path of home loan rates.

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 chart below shows Mortgage Backed Securities (MBS), which are the type of Bond that home loan rates are based on.

When you see these Bond prices moving higher, it means home loan rates are improving — and when they are moving lower, home loan rates are getting worse.

To go one step further — a red “candle” means that MBS worsened during the day, while a green “candle” means MBS improved during the day. Depending on how dramatic the changes were on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning.

As you can see in the chart below, Bonds prices worsened last week after some better than expected manufacturing and other economic data. However, home loan rates remain near record lows and I’ll be watching closely to see what happens this week.

Chart: Fannie Mae 3.0% Mortgage Bond (Friday Oct 05, 2012)
Japanese Candlestick Chart

The Mortgage Market Guide View… 

A Simple Story:

How to Explain the Impact of Inflation on Home Loan Rates

In the wake of the Fed’s QE3 (or Quantitative Easing) announcement, consumers may be wondering how this new effort to stimulate the economy may impact the mortgage and housing markets.

And they’d be right to wonder.

That’s because one of the consequences of QE3 could be inflation—which is the archenemy of Bonds and home loan rates.

Here’s a narrative you can use to explain to your clients why this is important…

Imagine for a moment that you are going to lend your very own money to someone to buy a house. So you go through all the paces to determine this person is a good credit risk, you do the loan, and you start receiving $1,500 per month as your regular payment. You then of course take that $1,500 and start loading up your shopping cart with the goods and services you need on a monthly basis…food, clothing, medicine, gas, and so on.

But over time, you notice something happening…

Every month, you are getting slightly less in your cart than you did the month before, for that same $1,500 you are spending. Why? Because costs are on the rise–that’s inflation.

Now imagine that you are once again going to lend your very own money to another person to buy a house. You go through all the paces once again, and determine that the person is a good credit risk.

You want the same shopping cart full of “stuff” that you got last time in return for doing the loan, but this time you realize that you can no longer get that same cart full with $1,500. Due to inflation, you now need $1,700 to buy those same goods and services.

As a result, you will need to charge a higher interest rate to compensate you for the ongoing impact of inflation. This is why home loan rates change when there is a fear of inflation in the air.

Economic Calendar for the Week of October 08 – October 12

Economic Report
Wed. October 10
Beige Book
Thu. October 11
Jobless Claims (Initial)
Fri. October 12
Producer Price Index (PPI)
Fri. October 12
Core Producer Price Index (PPI)
Fri. October 12
Consumer Sentiment Index (UoM)
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