Looking Back And Looking Ahead: October 20, 2008

Last week, the Dow Jones Industrial Average recorded both its largest one-day point gain and second-largest one-day point loss in history.

Mortgage markets got whipsawed, too.

From day to day, huge rate swings made mortgage rate shopping difficult. It wasn't uncommon for lenders to change pricing 3 times per day.

When the week closed, though, rates were lower than at Market Open Monday, marking the first week of improvement in mortgage rates since early-September.

Last week's constant mortgage rate movement had several causes:

-- Retail Sales data was weaker than expected
-- The Federal Reserve report showing a slowdown in all 12 regions
-- New evidence that commodity inflation pressures are easing

The biggest driver was -- and continues to be -- trader uncertainty.

As measured by the "Fear Index", market volatility reached an all-time high last Thursday. Investors moved into cash positions, selling assets of all types -- including mortgage bonds. This created an excess supply of bonds on the market which drove down prices and, in turn, pushed up rates.

But, there was a demand-side issue impacting rates last week, too.

If you'll remember, the first $250 billion of the government's Rescue Plan was meant to buy bad mortgage debt. Last week, however, those plans changed. Instead, the $250 billion was applied to the balance sheets of the nation's largest banks.

This caused an immediate $250 billion reduction in mortgage bond demand and the reduced demand further depressed prices. Again, mortgage rates rose as a result.

This week, with very little economic data, expect psychology, politics and corporate earnings to drive mortgage rates -- more than 20% of the S&P 500 will report their July-September 2008 numbers.

If earnings are weak, expect mortgage rates to rise on concerns about recession; lately, that has been the market pattern. Conversely, if earnings are strong, expect mortgage rates to improve.

(Image courtesy: The New York Times)

Looking Back And Looking Ahead: October 14, 2008

Throughout the feverish activity on Wall Street last week, mortgage bonds sold off with force, driving mortgage rates to their highest levels since July.

It was the fourth straight week in which mortgage rates worsened.

But, with the mortgage markets closed Monday, stock markets rallied to their largest one-day gain in history.

The Dow Jones' gains are expected to push mortgage rates down today, but not nearly enough to recover last week's losses. The market-wide carnage was mostly the result of a fear that has not been completely removed from investor psychology.

Until that fear is purged, therefore, expect mortgage rates to move on the dual basis economic data and market mentality. This will likely lead to rapid rate changes that will make shopping for a mortgage rate difficult.

This week, look for key inflation data including the Producer Price Index on Wednesday and the Consumer Price Index on Thursday.

Both measure the "cost of living" and reflect on price pressures in the economy. If costs are rising, it's considered inflationary and that tends to edge mortgage rates higher.

In addition, Retail Sales and Consumer Confidence data will be released this week and carefully watched. If either (or both) show strength, markets may interpret the data to be inflationary as well, further adding upside pressure to mortgage rates.

(Image source: The Wall Street Journal)

One Good Thing About The Stock Market Tanking Yesterday

Monday, the Dow Jones Industrial Average closed below the psychologically-important 10,000 level for the first time since 2004.

Despite the milestone-marker breach, however, there was a large group of Americans with reason to cheer. As stocks sold off, mortgage markets rallied to the benefit of home buyers and mortgage rates shoppers everywhere.

Conforming mortgages rates improved yesterday.

Most interesting here is that rates improved for the same reason that the stock market fell.

Because of lingering concerns about the worlds' economies, investors lost their collective appetite for risk Monday. In response, they sold their stock positions and parked the proceeds in the "safe haven" of U.S. government-backed debt.

The extra demand for safe investments pushed up the prices on mortgage bond which, in turn, pushed down mortgage bond rates.

Now, we can't predict when the market's risk appetite will return, but when it does, expect money to flow into stocks just as quickly as it left.

All year long, with respect to stock markets, it's been either "everybody in" or "everybody out" and, for now, it's everybody out. This is why mortgage rates fell Monday.

But, when the momentum shifts -- and it will shift -- mortgage rate shoppers would do well to be prepared. Be ready to lock that mortgage rate because as soon as the stock market reverses course, mortgage rates will head higher.

And if stocks recover as quickly as they tanked, expect mortgage rates to spike badly.

(Image courtesy: USA Today)

The Two Groups Of People That Benefited The Most From Wall Street's 6th Largest Point Loss Ever

Yesterday, the stock market suffered its largest one-day point loss since September 17, 2001, and its sixth-largest point loss in history.

Not everyone got punished, however. Two groups of people, in particular, welcomed yesterday's losses:

1. Home buyers out shopping for a mortgage
2. Homeowners that snoozed through last week's mortgage rate drop

See, as the stock market dropped yesterday, investors anxiously moved their money away from risky investments like stocks and into the safe haven of government-backed debt.

This includes mortgage-backed debt, of course.

As traders poured into bonds, bond prices rose. They did so beginning at Market Open, all the way into Market Close. And, because mortgage rates move in the opposite direction of mortgage bonds prices, mortgage rates fell Monday. A lot.

Today, the Federal Open Market Committee meets, adjourning from its scheduled conference at 2:15 P.M. ET. In the Fed's press release, among other things, markets expect Ben Bernanke & Co. to address the financial system's stability -- or lack thereof -- that helped to fuel Monday's selling action.

If markets find the Fed sympathetic, expect stock markets to rally, and mortgage rates to rise.