Mortgage Rates Continue Down With Flat Economic Data

August 13th, 2010

All the economic data released this week presented a very flat picture of the national economy. The positive first quarter has been replaced by stagnation. As investors, economists, politicians and regulators argue over what the data mean and what to do next, you benefit with continued lower mortgage rates to input for your mortgage calculator estimates.

The economic data

In July 2010, consumers continued to be very modest in their purchases, with retail sales increasing only 0.4 percent from June; take away those auto purchases and retailers only saw an increase of 0.2 percent in sales from the prior month. Be it clothes, refrigerators or books, Americans are not buying new goods. Perhaps this is because for the third time in 4 weeks the number of initial applications for unemployment insurance went up last week with 484,000 jobless filing claims.

Due to the lack of spending, and therefore demand, the Consumer Price Index for July 2010 was a flat 0.3 percent increase from June and is only 1.2 percent higher than July 2009. Further compounding the woes of American businesses is that what is being bought is more likely to be from China or other countries besides the United States as the trade deficit widened to $49.9 billion.

The beneficiary of this non-positive economic news is you. Using mortgage calculators to determine your mortgage refinance savings or new home loan purchasing power you are seeing the benefits of continued low mortgage rates due to the economic malaise.

The Fed response

If you want to start an interesting discussion ask a group with an investor, a politician, a banker and an economist, “What can the Federal Reserve do to stimulate the economy?” There is a good chance the question will be met with some silence. With the Fed rates at or near zero there is little more that can be done to stimulate spending, investing and growth by lowering rates. So what, if anything is the Fed to do?

It seems not even the Fed itself knows. In a statement on Tuesday following its meeting the Fed stated, “The pace of economic recovery is likely to be more modest in the near term than had been anticipated.” Meaning, there is no real growth happening now. To prevent higher rates the Fed is churning funds received from the payoff of mortgages in its $1.25 trillion mortgage portfolio to purchase Treasury bills and bonds.

Rather than selling any of its mortgage portfolio accumulated from 2009 through March 2010 on the open market and causing home mortgage rates to rise, the Fed is seeing the portfolio decline due to the refinancing of mortgages to lower mortgage rates. By using the proceeds from these early payoffs the Fed is able to keep the cost of U.S. debt, i.e. Treasury offerings, low by recirculating its money from homeowner debt to government debt.

The mortgage data

Despite the inching down of interest rates for the past several weeks mortgage applications are not increasing at a very rapid pace. For the week ending August 6 the Mortgage Bankers Association in its Weekly Mortgage Applications Survey announced that its index increased only 0.6 percent from the prior week. Both refinance applications and purchase applications grew very slightly. Refinance applications consisted of 78 percent of the total applications taken for the week.

Refinance calculators should be very busy determining monthly mortgage savings according to Freddie Mac. On Thursday Freddie released its Primary Mortgage Market Survey showing the average 30-year fixed-rate mortgage with a cost of 0.7 origination points has dipped yet again to 4.44 percent — another all time low.

Jobs, no consumer spending, and negative trade balances all add up to a flat economic summer in America. Whether you are using a monthly mortgage payment calculator for a refinance or home purchase, flat economic news means low rates for the near future.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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