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October 31, 2012

Last week in review (October 22 - 26, 2012)

After last week’s Fed meeting, bonds and home loan rates are still standing near record best levels. Read on for details.

Table source: Mortgage Success Source

After last week’s regularly scheduled meeting of the Federal Open Market Committee (FOMC), the Fed reaffirmed that its latest round of bond buying (known as Quantitative Easing or QE3) would continue until our economy can stand on its own. This means that the Fed reaffirmed that they will purchase $85 billion of mortgage bonds per month through the end of the year, and at least $40 billion per month thereafter until the labor market substantially improves.

The Fed acknowledged that inflation, in the short-run, has picked up due to higher energy prices. Remember that one of the goals of QE3 is to avoid deflation and actually create inflation. Hints of inflation can frighten bond investors—causing both bonds and home loan rates (which are tied to mortgage bonds) to worsen—because inflation can reduce the value of fixed investments like bonds. Though the Fed noted that longer-term inflation expectations are stable, this is one story to keep a close eye on in the coming weeks and months.

The quandary for the Fed is that all of the money printing through QE1 and QE2 has not boosted spending or demand (in economics this is referred to as aggregate demand and aggregate spending) as evidenced by the anemic Gross Domestic Product (GDP) numbers we have seen of late. The advanced (first of three readings) of GDP for the third quarter of 2012 was reported last week at just 2.0%. But there was some good news last week, as New Home Sales jumped 5.7% in September from August and Durable Orders (orders for products lasting at least three years) rose more than expected. 

What does all of this mean for home loan rates? Renewed worries over the debt crisis in Europe (Spain in particular) will keep investors glued to the safe haven of the bond markets for some time, benefiting home loan rates as a result. However, a continued rise in inflation is a real possibility.One that could have a negative impact on both bonds and home loan rates.

The bottom line is that now is a great time to consider a home purchase or refinance, as home loan rates remain near historic lows.

In the news this week (October 29 - November 2, 2012)

Table Source: Mortgage Success Source


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