Stocks and Bonds
The excitement of recent record-level closing highs on Stock exchanges shouldn’t be confused with the real drivers of home loan rates, which are Bond markets and Federal Reserve policy. Stock and Bond markets often have an inverse relationship, which means that when stocks perform well, home loan rates traditionally trend higher. Bond markets do tend to move slower, therefore any major fluctuations in home loan rates will be slow and gradual, unlike the roller-coaster sensitivity of equities markets. Bond markets, however, have had their share of encouraging movements as of late.
What the Fed Said
There were no surprising announcements from the Fed’s latest meeting of the Federal Open Market Committee in late March.
In its Monetary Policy statement, the Fed reiterated that it will continue to purchase $85 billion in Treasury and Mortgage Bonds each month until the labor market improves, and to support a stronger economy. Unemployment remains above 6.5 percent and inflation is projected to be no more than a subdued 2.5 percent.
At the same meeting, the Fed stated that household spending and business investments increased and confirmed that the housing sector has strengthened. Indeed, as builders enter the spring selling season, the Fed’s extension of its record monetary policy stimulus will help keep mortgage costs low and allow for a continued rebound in housing, the industry that was at the center of the financial crisis.
More Housing, More Jobs
Housing is a sector with a huge potential for boosting U.S. gross domestic product and job creation, which are key stimulators and indicators of economic health. Analysts say housing could provide tailwinds strong enough to realize the substantial improvement to the labor market for which the Fed is hoping.
Homebuilders across the nation have contributed to the increase in housing starts, up 28 percent over February 2012. Housing Starts rose 0.8 percent in February to 917,000 homes at an annual rate, while Building Permits advanced 4.6 percent to 946,000, the highest level in almost five years, according to recent U.S. Commerce Department analysis. Gains in home prices and construction will put more Americans to work this year, and that’s good news overall for the health of the U.S. economy.
Recent European news has also given Bond markets a boost. Unremarkable throughout the European recession until only recently, the small island of Cyprus created a frenzy when European officials introduced a policy requiring ordinary citizens to pitch in for the nation’s bailout, including taxing high deposit amounts. Fundamentally, the escalating EuroDrama may further add support to the U.S. Bond market, as investors will likely continue to see our Bond market as a safe haven for their money. And as home loan rates are tied to Mortgage Bonds, this is one factor that could help keep home loan rates near record lows.
This article was taken from my April 2013 issue of YOU Magazine. Click here to view the full newsletter. If you have any questions about your personal situation, please contact me.