Should I Lock Or Float This Week : June 24, 2013

Mortgage_Market_on_June_25thHave you ever been on a roller coaster? Not the little one that comes to your state fair every year, but the big one that you spend days preparing yourself for that inevitable ride of your life. Well, comments by Fed chairman Ben Bernanke after last week’s FOMC meeting caused quite the upheaval in financial markets, and put investors on the proverbial roller coaster, as they anticipated the potential effects of any rollback of the Fed’s policy of quantitative easing (QE). Chairman Bernanke said that the Fed may begin reducing its $85 billion monthly purchase of Treasury securities and MBS toward the end of this year.

Bernanke made it very clear that any decision about QE would be based on careful review of current and developing economic conditions. QE is intended to keep long-term interest rates low; any reduction of the QE securities purchases could cause mortgage rates to rise.

Sacramento housing prices up 18% from last year

Wednesday’s news involved the Fed’s FOMC meeting and press conference. The Fed stated after the meeting that it expects moderate improvement in economic condition and noted that housing, which was a primary cause of the economic downturn, is now leading the economy’s recovery.

The Sacramento market has dealt with very low inventory of homes for sale, and coupled with historically low interest rates, there are many buyers chasing just a few homes for sale. According to the local Board of Realtors, there has been only a three-week supply of available homes for sale. This is simple economics; when demand exceeds supply, prices rise. For Sacramento, that rise has been fast – Last year, the price of residential homes in Sacramento jumped 18%.

Nationally, over 13 million properties are underwater and 1.7 million are in default or foreclosure. 700,000 more homes have already been foreclosed but are being held by lenders as REO’s. These rising prices in home values locally, have enabled many to sell their homes for above break-even as “Conventional Sales” are up 64% from a year ago. According to the Sacramento Bee, forecast for the Sacramento region suggests Jobs, new home construction, and personal incomes are poised to rise over the next four years.

But, let’s be mindful of market forces that will and could work against this improving real estate market. You all know rates have come way up in recent weeks. In addition, we are not sure how the Sequestration (mandatory, across-the-board spending cuts) will affect our local economy. Sacramento real estate attorney, Steve Beede points out that we have not yet begun to feel the effects of this landmark decision. Iregardless, of what side of the argument you stand on, the dramtic cuts in spending will result in job losses and possibly higher costs as these cuts are absorbed. Beede states, “that means more upside down owners putting their homes on the market as short sales and less available buyers with the resources or loan qualifying ability to buy those homes”.

What’s Ahead For This Week

Next week’s scheduled news includes a number of housing related reports, FHFA Home Prices, the Case-Shiller Home Prices Report and New Home Sales are set for release Tuesday.

The Gross Domestic Product Report comes out on Wednesday. On Thursday, data for weekly jobless claims, consumer spending and pending home sales will be released.

Friday brings the Chicago Purchasing Managers Index and the Consumer Sentiment Index.

The data released in these reports will continue to inform the Fed’s decision-making with regard to bond purchasing and interest rate policy. It’s possible though, following the aggressive market sell-off activity from last week, that we may see a softening in long-term rates over the course of this week. But let’s be clear – I am in a locking bias and am recommending my clients lock loans on any smidgeon of improvement in the coming days.

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