"SLOW AND STEADY?"

Last week, the economy appeared to be slowing. But despite the negative economic news, Bonds and home loan rates held steady and were unable to improve further. 
 
Let's look at what happened and what it means...
Housing Starts and Building Permits, which are leading indicators of the new home construction market, both came in below expectations that were already low. If you consider the significant amount of foreclosures and inventory overhang weighing on the market, it is no surprise to see a weak indicator on new home construction. 

Broadly speaking, foreclosures and short sales are expected

"LIFE IS A MIXED BLESSING, WHICH WE VAINLY TRY TO UNMIX" - author and journalist Mignon McLaughlin.

The labor market and the economy saw their own mixed blessings last week, when three different employment reports were released. Unlike Mignon McLaughlin’s quote above about life, these mixed job reports can actually be untangled. So let’s break down what we learned about employment last week...and, just as importantly, what’s going on with home loan rates.
 
After two disappointing employment reports earlier last week - in the form of the ADP National Employment Report and the Initial Jobless Claims Report - the labor market finally received some good news on Friday when the Labor Department released their official Jobs Report that showed 244,000 jobs were created in April. That was far above all expectations... and it was the biggest private job increase since 2006! 

"SLOW AND LOW, THAT IS THE TEMPO..."

Just like these lyrics from the "Beasties Boys" song, slow and low have been the tune for the Bond market recently, as we’ve seen our slow economy cause home loan rates to move lower recently. What’s been happening, and where are the economy and rates headed? Read on to learn more.

WHEN IT RAINS, IT POOR’S...

With the US already facing tough decisions over its national debt, the credit rating firm Standard and Poor's last week cut its credit outlook on the US from stable to negative. Standard & Poor’s also said the US’s AAA credit rating could be cut within two years, if headway isn't made in closing the budget gap. This is important because countries have credit ratings, just like individuals. 

But what does all this mean? Let's break it down...
First of all, it’s important to note that the downgrade to the credit outlook was a long time coming, and Traders in the pits even joked that S&P is late to the party with this call. For more information about different countries credit ratings - as well as your own state’s credit ratings - check out this Credit Ratings Link.

All joking aside, this is a serious issue, as the last thing the US wants to endure is an outright credit downgrade. That would make the interest expense on the US debt even more burdensome - and, remember, we are all on the hook for this debt and the carrying costs.

But if this was a long time coming, what sparked the change in outlook? The S&P cited the wide political divide amongst Congress as a major hurdle to meaningfully lower the federal budget deficit. Both parties want to lower the deficit but there is stark disagreement on how to get there. Hopefully, the S&P's actions will spark a fire in Congress to get serious and get something done.

How does this issue impact Bonds and home loan rates?
The national debt concerns won’t be addressed easily, especially when you remember that the country is approaching the debt-ceiling limit on May 16th. So in the immediate future, this will make for more volatility in the markets as headlines gyrate both Stocks and Bonds. Bonds are in an even tougher spot in the long term - and here's why:

First... if the US government is successful in taking action to lower the budget deficit and avoid an outright credit downgrade, then we should expect a longer duration of accommodative Fed monetary policy, as the Fed doesn't want an economic slowdown to recreate a "deflationary" environment. If things do slowdown significantly, we may start hearing debate for a QE3 (or a third round of Quantitative Easing), which would not be good for Bonds and home loan rates.

Second... if the US debt received an outright downgrade, it would be really bad for Bonds. As it stands now, this doesn’t seem likely and you shouldn’t be overly alarmed. But, it’s important to understand what is at stake here. The bottom line is that with some extra belt tightening as a result of this issue, we could expect to see slower economic growth in the future, as government spending would have to slow immensely to help close the budget gap.

"YOU’RE HOT THEN YOU’RE COLD..."

Katy Perry’s hit song "Hot N Cold" is all about contradictions. And each week the markets receive their share of news that seems contradictory... but may not be. The inflation reports from last week provide an excellent example - so let’s see what they really said and why it matters!

Last week, two inflation reports came in. The Core Producer Price Index (PPI) reported

People say that "life is full of surprises."

And last week’s Jobs Report offered a few surprises of its own. But were those surprises positive, and what do they mean for home loan rates overall? Read on for details.
The headline Jobs Report number showed that 216,000 jobs were created in March, which was a positive surprise as this was above expectations. 

In addition, 230,000 jobs were created in the private sector, which was also better than expectations and offset a decline in government jobs. A small 2,000 upwards revision to February's prior release added some more jobs as well.

In addition, the Unemployment Rate surprisingly dropped to 8.8%, which is the lowest unemployment rate since March of 2009. Remember, the Unemployment Rate is derived from the Household Survey (exactly as it sounds, from calls made to households), and is considered to be more accurate than the Current Employment Statistics or Business Survey (again as it sounds, from calls made to businesses), which is used to determine the headline jobs number. 

The one negative within the report is Hourly Earnings coming in at 0.0%. This is the second month in a row where earnings growth is 0.0%. Why is this significant? If earnings don't grow, people have less to spend and as a forward looking indicator on job growth, it shows that businesses are presently not under any pressure to raise wages. This means they may not have to hire new people as quickly because they may have room to raise wages for present workers down the road. 

Overall, the Jobs Report was a good report and reminds us that the trend in the labor market is improving. But keep in mind, while lowering unemployment is good for our economy overall – as are the other two goals (creating inflation and boosting Stock prices) of the Fed’s current Quantitative Easing (QE2) program – these goals can also lead to higher home loan rates over time.

In fact, inflation continues to be a growing concern both around the world and here in the U.S., as several members of the Fed, including St. Louis Fed President James Bullard, have expressed concern that if the Fed waits "too long (to remove accommodative monetary policy) we will get a lot of inflation in the United States and around the world." 

What does this mean in the long run? Like the Treasury Department, at some point the Fed will start selling some of its massive holdings and unwind their QE1 and QE2 purchases. And when it does, not only will the Bond market lose a buyer in the Fed, but they will gain a seller and this will make it hard for Mortgage Backed Securities and home loan rates, which are tied to these types of Bonds, to meaningfully improve.

"It’s not a matter of IF, but WHEN!"

That old adage proved true last week as the fiscal problems in Europe came back to roost as predicted - even after being overshadowed recently by news from Japan and the Middle East.

Despite all the focus on government debt in Europe, it’s important to note that the problems are more than just financial; there is also a ton of political capital at risk. The stronger and more fiscally conservative Euro member countries

"It’s a small world after all..."

That notion was especially evident last week, with both the news in Japan and the Middle East impacting our markets. Here’s what happened, and what the impact was on home loan rates.

The first thing to understand is the concept of "safe haven trading." At times

"And now... the rest of the story" - Paul Harvey.

 With his famous line, Paul Harvey pointed out for years that there’s more to every story - and often those hidden details influence what happened. With that in mind, let’s look at the “rest of the story” behind last week’s news items, which had alternating impacts on Bond prices and home loan rates.

 
First, let us start by sending our thoughts and prayers to the families affected by last week’s earthquake and tsunami in Japan.

"I’ve got just what the doctor ordered...."

And last week, the Jobs Report certainly had just what the doctor ordered for our economy. What did the report say, and what are the implications for home loan rates? Read on to learn more.

 

"Fear comes from uncertainty," wrote the poet William Congreve.

Last week, however, the markets were moved by fear and by uncertainty that were unrelated. On the one hand, unrest in the Middle East drove up Oil prices and pushed investors into the safety of Bonds - while on the other hand, fear of inflation limited the gains that Bonds experienced. To see how those elements impacted home loan rates, let’s take a deeper look at each.

"You sound like a broken record..." or so the cliché goes

	And lately that saying certainly applies to the phrase the media has been repeating recently: Don’t fight the Fed.  So what does "Don’t fight the Fed" mean exactly,

Help Elderly Parents From a Distance

If you don't live close enough to mom and dad to help them with daily money tasks, there are professionals who can.
By Cameron Huddleston, Kiplinger.com

Regular readers of the Kip Tips column know that I've written a lot about helping parents with their finances because I have had to help my mother, who is diagnosed with Alzheimer's disease, with hers. In the March issue

"Should I stay or should I go now? If I go there will be trouble, and if I stay there will be double!" - The Clash

	The unrest in Egypt has been boiling for the past few weeks, as protestors took to the streets and Egyptian President Hosni Mubarak contemplated whether to stay in power... or step down.

"Bad news goes about in clogs, good news in stockinged feet." Welsh Proverb.

And there was certainly both good and bad news in last week’s Jobs Report. Here’s what we saw...and what this means for home loan rates. 

The Labor Department reported that just 36,000 jobs were created in January, with only 50,000 jobs created in the Private sector, much lower than the numbers anticipated. However, there were upward revisions to both November and December, which added another 40,000 jobs than previously reported. 

 
But that’s not the only bit of good news in the report. The Unemployment Rate fell to 9%, down from 9.4% last month, rather than increasing as had been expected. In addition, the U6 or "real" rate of unemployment, which includes discouraged workers and those who have accepted part-time employment for economic reasons, fell to 16.1%, from the previous month of 16.7%...and reflects the lowest level since April 2009!

So what does all of this mean when it comes to home loan rates?

It’s important to remember two things:

First, the Fed’s goals for their current Quantitative Easing policy (dubbed QE2) where $600 Billion is being injected into the economy are to (1) boost Stock prices, (2) create inflation, and (3) lower the unemployment rate.
Second, while these goals are designed to stimulate our economy and keep our recovery moving forward, they are also unfriendly to Bonds and home loan rates. 

In recent weeks, we’ve seen evidence of all three goals: Stocks been improving, the unemployment rate has declined, and we've seen an increase in global unrest of late, not just in Egypt, but in other parts of the world as well... and much of this centers around runaway inflation in commodities and food. 

This means that the old trading saying, "Don't Fight the Fed" is still ringing true. If the Fed wants to accomplish its three QE2 goals at the expense of Bonds and home loan rates, they probably will.

"A house is not a home unless it contains food and fire for the mind as well as the body." - Benjamin Franklin.

Last week, the housing market received some food and fire for the mind, but not everyone was at home with the news. 

 
First, the good news. The housing market received a serving of good news last week, as New Home Sales reportedly rose 17.5% in December to come in better than expectations.

"Bet your bottom Dollar?" These days the more appropriate question is: Where is the bottom of the Dollar?

Let’s take a look at why... and what this could mean for home loan rates!

1. Some of the Dollar’s drop is attributed to the recent strength in the Euro, which has gotten a boost from some positive stories of late, like Spain and Portugal's ability to sell debt in the Bond market without crisis. But the question is...have Europe's problems gone away? No - there will be more problems ahead for the region and as they emerge, we should see a reversal in the Euro's strength along with improvement in the US Dollar.

2. Another reason for the Dollar's weakness is the Fed’s Quantitative Easing

Tax Deadline Extended! But What If You Need More Time?

This year, instead of your tax filing being due on Friday, April 15, you’ll have a few extra days to complete and file your taxes. That means your tax filing isn’t due until Monday, April 18, 2011.

The three extra days have been added because of Emancipation Day, which is a little-known Washington, D.C. holiday that celebrates the freeing of slaves in the district. The holiday actually falls on Saturday, April 16 this year, but will officially be observed on Friday, April 15. As a result, the IRS pushed the filing deadline to Monday, April 18 - since the tax code states that filing deadlines can’t fall on Saturdays, Sundays or holidays.

Still Need More Time?
If you need more time to file your taxes, you can submit Form 4868 for a six-month extension. You can learn more about extensions on the IRS website.

Problems Paying?
But what do you do if you’ve completed your tax returns

"Whistle while you work." Snow White.

That’s something more people have been able to do lately, as the labor market continues to steadily improve. Here’s what December’s Jobs Report showed... and what it means for home loan rates. 

The top 5 hits last week that Traders and Bond investors appeared to be singing... and why.

"Wild thing! You make my heart sing!" - By The Troggs. Traders found themselves singing one minute only to be screaming the next, as Bonds saw huge swings up and down of 100 basis points on multiple days last week.


Remember, home loan rates are based on Mortgage Bond prices, so huge swings in Bonds causes home loan rates to shift as well. This underscores why it’s so important to work with a knowledgeable professional who understands how interconnected the market is and can help homeowners lock in at the most opportune times.

To help make sense of the volatility, here’s a montage of the top 5 hits last week that Traders and Bond investors appeared to be singing... and why.