The Fed's Statement on Interest Rates

Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.

Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the committee decided today to continue expanding its holdings of securities as announced in November. In particular, the committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.

The committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

This Week's Market Commentary

This week brings us the release of six economic reports to be concerned with in addition to some very important testimony from Fed Chairman Bernanke.

One of the reports is considered to be very important, but nearly all of the week’s releases have the potential to affect mortgage rates. There is nothing of relevance scheduled for release tomorrow or Friday, so the middle part of the week should be extremely active for mortgage rates.

The week’s first piece of data is January’s Durable Goods Orders data early Tuesday morning. It gives us an important measurement of manufacturing sector strength by tracking orders at U.S. factories for items expected to last three or more years. A larger decline than the 1.3% that is expected would be good news for the bond market and mortgage rates as it would point towards manufacturing sector weakness. This data is known to be quite volatile from month-to-month, so large swings are fairly normal. A small variance from forecasts would not be a big deal.

Tuesday also brings us the release of February’s Consumer Confidence Index (CCI) during late morning trading. This Conference Board index measures consumer confidence in their personal financial situations, giving us a measurement of consumer willingness to spend. If consumers are feeling good about their own financial situations, they are more apt to make large purchases in the near future. Since consumer spending makes up over two-thirds of the economy, related data is considered important in terms of gauging economic activity. It is expected to show an increase in confidence from 61.1 in January to 62.5 this month. A lower reading would be considered good news for bonds and mortgage rates since it would indicate consumers are less likely to make a large purchase in the near future.

The first of two revisions to the 4th Quarter GDP reading is scheduled for release Wednesday morning. Analysts’ forecasts currently call for an annual rate of growth of 2.8%, matching the initial estimate that was posted last month. It will be interesting to see where this figure falls and what its impact on the markets will be. Generally speaking, higher levels of activity are bad news for the bond market, while a sizable downward revision would be good news and could lead to improvements in mortgage pricing.

Fed Chairman Bernanke will deliver the Fed’s semi-annual testimony on the status of the economy late Wednesday and Thursday mornings. He will be speaking to the House Financial Services Committee Wednesday and the Senate Banking Committee Thursday morning. Market participants will watch his words very closely. He is required to deliver this testimony twice a year, which is considered to be of extreme importance to the financial markets. We almost always see the markets move as a result of what he says during this testimony. Look for him to address the unemployment and housing sectors along with Europe’s financial issues specifically and their impact on the overall economy. His testimony begins at 10:00 AM ET with a prepared statement then is followed by Q & A with committee members. I am expecting to see the markets fluctuate during this session, possibly affecting mortgage rates also.

The Fed Beige Book is the next report scheduled for release and it will be posted Wednesday afternoon. This report details economic activity throughout the country by Fed region. The Fed relies heavily on this data during their FOMC meetings, so look for a potential reaction during afternoon trading Wednesday. It probably will not cause a major sell off in the stock or bond markets, partly because Mr. Bernanke will have access to this info when testifying to Congress. However, it could give us some finer details that we won’t hear directly from Chairman Bernanke, so it is worth looking at.

January’s Personal Income and Outlays data will be released at 8:30 AM ET Thursday, which gives us an indication of consumer ability to spend and current spending habits. Current forecasts call for an increase in income of 0.4% while spending is expected to rise 0.3%. A larger than expected increase in spending would be bad news for the bond market and could drive mortgage rates higher because it would mean consumers spent more than thought. Since consumer spending makes up over two-thirds of the U.S. economy, the bond market does better when spending is slowing. Good news would be a smaller than expected increase, or better yet, a decline in both readings.

The Institute for Supply Management (ISM) will release their manufacturing index for February late Thursday morning. This index measures manufacturer sentiment and can have a pretty large impact on the financial and mortgage markets if it varies from forecasts. It is expected to show a small increase from January’s 54.1 to 54.5 this month. This is important because a reading above 50.0 means more surveyed manufacturers felt business improved during the month than those who felt it had worsened, meaning growth is likely in the manufacturing sector. If we see a weaker than expected reading, the bond market could rally. But, a higher than forecasted reading could lead to major selling in bonds, causing mortgage rates to rise Thursday morning.

Overall, look for a pretty active week for mortgage rates. Wednesday will likely be the biggest day of the week, but Tuesday may also bring noticeable movement in mortgage rates. The least important day will probably end up being tomorrow or Friday unless stocks stage a significant rally or sell-off. However, we may see movement in rates several days this week, so please maintain contact with your mortgage professional if still floating an interest rate.

Top Six Tax Benefits of Homeownership

Homeownership has many benefits, including tax deductions for those who qualify. Here are six of the top tax advantages of owning a home:

1. Write off the interest you paid on a mortgage up to $1 million, as long as the property is your main or secondary residence. This deduction really pays off during the first few years of owning a home, when interest accounts for most of your payment, also known as home acquisition debt.

2. Deduct the interest you pay on home equity loans of up to $100,000, so long as you are not subject to the alternating minimum tax or AMT (unless you use the loan for home improvement).

3. Deduct your state and local property taxes from your federal income taxes, where applicable.*

4. Deduct your home buying expenses, including loan origination fees, prorated interest on a new loan, or prorated property taxes.*

5. If you sold your home in 2011, you may not have to pay federal income taxes on the earnings from the sale, up to $250,000 for single filers and $500,000 for joint filers, as long as you used the home as a primary residence for at least two of the five years prior to selling. Some states, including California, offer this as well.

6. Rent your home out for up to 15 days and keep the income generated – it’s not taxable.

*Not an eligible deduction if you are subject to the AMT.

Tax Time Preparation: The Mortgage Interest Deduction

It’s that time again when Uncle Sam picks your pocket for taxes and, if you are writing out a check this year, you might want to ask yourself if a nice, fat mortgage interest deduction would come in handy next year.

For many people it certainly will. Mortgage interest is tax deductible. This means it is one of the expenses that reduces the amount of income on which you pay taxes.

Many, if not most, people who do not own houses, also do not itemize their deductions. That makes sense because if they added up all their potential deductions, the deductions would not be greater than the standard deduction. In 2011, the standard deduction for single people is $5,800. The standard deduction for married people is $11,600.

The beauty of the mortgage interest deduction is that it allows you to deduct all the interest you pay on your home loan. During the first years you pay on a home loan, nearly everything you pay is interest — up to 75 percent of your payment.

That nice deduction can reduce the taxes you owe, while allowing you to live in the house you want.

In this economy, owning a home also offers you some subtle protection from inflation. Inflation is an increase in the general level of prices for goods and services over time. So you notice that your grocery bill is going up and your dollars buy less, that is inflation, according to investopedia.com

According to inflationdata.com, in 2011 inflation was trending well over 3 percent while mortgage interest rates were the lowest in history at about 4.3 percent (30-year fixed.)

If you buy a home this year, and inflation continues to increase, you’ll soon be paying off your home with cheaper dollars. Your food will cost more; your luxuries will cost more; rent will cost more. But your mortgage is going to stay the same.

Meanwhile, inflation will also have some effect on home prices, forcing prices up. Right now, in most parts of the country, home prices are low because there are a lot of houses on the market and fewer buyers than five years ago. That means, right now you can get a lot of house for fewer dollars. In coming years, however, as the supply of houses for sale decreases, the pressure of inflation plus a reduced supply of houses, will force home prices up. In 10 years, your home purchase today will be a bargain and you will be living in a home you love while paying prices locked in the past!

This Week’s Market Commentary

This week brings us the release of only three pieces of economic data for the bond market to digest along with two potentially influential Treasury auctions. The financial markets will be closed tomorrow in observance of the President’s Day holiday, so don’t expect to see new mortgage pricing until Tuesday morning. Due to the holiday, we will not be updating our report tomorrow.

The National Association of Realtors will post January’s Existing Home Sales report late Wednesday morning. It tracks home resales throughout the country, giving us a measurement of housing sector strength. It is expected to show a small increase in sales of existing homes, meaning the housing sector remained strengthened during the month. Ideally, the bond market would like to see a sizable decline in sales because weak housing is one of the hurdles that the economy must overcome to recover from the recession. The longer it takes for the housing market to recover, the longer it will take the economy to do the same.

In addition to this week’s economic reports, there are two relatively important Treasury auctions that may also influence bond trading enough to affect mortgage rates. There will be an auction of 5-year Notes Wednesday and 7-year Notes on Thursday. Neither of these sales will directly impact mortgage pricing, but they can influence general bond market sentiment. If the sales go poorly, we could see broader selling in the bond market that leads to upward revisions to mortgage rates. However, strong sales usually make bonds more attractive to investors and bring more funds into bonds. The buying of bonds that follows usually translates into lower mortgage rates.

Friday has two reports, the first being the University of Michigan’s revision to their Index of Consumer Sentiment for February. Current forecasts show this index rising a little from its preliminary estimate of 72.5. This index is fairly important because it helps us measure consumer confidence that translates into consumer willingness to spend, but is not considered to be a major market mover. This means it will probably not have a significant impact on mortgage rates.

The last piece of data scheduled for release this week is January’s New Home Sales report at 10:00 AM ET Friday morning. This is the least important report of the week, and is the sister report to Wednesday’s Existing Home Sales. They measure housing sector strength and mortgage credit demand, but usually do not have a significant impact on bond trading or mortgage rates unless they show significant surprises. This report is also expected to show an increase in sales.

Overall, this week is lighter than last week in terms of economic releases. Therefore, it would not be surprising to see a fairly calm week in mortgage rates, or at least less movement than last week. However, news from overseas and stock movement could also heavily influence trading and mortgage rates. I think we will see the most movement either Wednesday or Friday, buy any day could turn active if stocks rally or sink. Despite the relatively light calendar this week, it would be prudent to maintain contact with your mortgage professional if still floating an interest rate.

This Week’s Market Commentary

There are six economic reports worth watching this week that are likely to affect mortgage rates in addition to the minutes from the last FOMC meeting. Some of the economic reports are very important to the financial and mortgage markets, meaning it will probably be another active week for mortgage rates.

There is no relevant economic data scheduled for tomorrow, so look for the stock markets to be the biggest influence on bond trading and mortgage rates. The Greek Parliament is debating the requirements for their bailout today, so any decision there will likely help drive trading and mortgage prices tomorrow morning.

The week’s first release is one of the highly important ones when the Commerce Department posts January’s Retail Sales data. This report is very important to the financial markets because it measures consumer spending. Since consumer spending makes up over two-thirds of the U.S. economy, any related data is watched quite closely. If Tuesday’s report reveals weaker than expected sales, the bond market should thrive and mortgage rates will fall since it would be a sign that the economy is not as strong as many had thought. However, a stronger reading than the 0.8% increase that is expected could lead to higher mortgage rates.

January’s Industrial Production data will be released mid-morning Wednesday. It gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities and can have a moderate impact on the financial markets. Analysts are expecting to see a 0.6% increase in production from December to January. A smaller than expected rise in output would be good news and should push bond prices higher, lowering mortgage rates Wednesday.

Wednesday also brings us the release of the FOMC minutes. Traders will be looking for any indication of the Fed’s next move regarding monetary policy. They will be released at 2:00 PM ET, therefore, any reaction will come during afternoon trading. These minutes may indicate if there is a consensus amongst Fed members or if there is disagreement about their actions or inactions. This release may lead to afternoon volatility Wednesday, or it may be a non-factor. However, the minutes do carry the potential to influence mortgage rates so they should be watched.

January’s Housing Starts will be posted early Thursday morning, giving us an indication of housing sector strength and mortgage credit demand. It usually does not affect rates unless the results vary greatly from forecasts. Current forecasts are calling for an increase in starts of new housing.

The Labor Department will post their Producer Price Index (PPI) for January early Thursday morning also. It measures inflationary pressures at the producer level of the economy and is considered to be one the two key measures of inflation we see each month. There are two portions of the report that analysts watch- the overall reading and the core data reading. The core data is more important to market participants because it excludes more volatile food and energy prices. It is expected to show an increase of 0.3% in the overall reading and a 0.1% rise in the core data. Good news for bonds would be a decline in both readings, particularly the core data as it would ease concerns about inflation that make long-term securities less attractive to investors.

The sister report to Thursday’s PPI will be posted early Friday morning when January’s Consumer Price Index (CPI) is released. The difference between the two is that the CPI measures inflationary pressures at the more important consumer level of the economy. With exception to maybe the Employment report, the CPI is the single most important report that we see each month. Its results can have a huge impact on the financial markets, especially on long-term securities such as mortgage-related bonds. It is expected to show a 0.3% increase in the overall index and a 0.2% rise in the more important core data. If we see weaker than expected readings, bond prices should rise and mortgage rates would likely fall.

Also Friday morning will be the release of the Leading Economic Indicators (LEI) for January. This Conference Board report attempts to predict economic activity over the next three to six months. It is expected to show a 0.5% increase, meaning that economic activity may rise in the near future. A smaller than expected rise would be good news for the bond market and mortgage rates, but the CPI draws much more attention than the LEI. Therefore, for this report to influence mortgage pricing, it will have to show a sizable variance from forecasts and the CPI will have to match estimates.

Overall, the most important day of the week will likely be Tuesday or Friday with the Retail Sales and CPI reports released. There is nothing of concern scheduled for tomorrow, so we can label it as the best candidate for the calmest day unless current events in Greece have an impact on the markets. In other words, be prepared for an active week in the markets and mortgage rates.

This Week’s Market Commentary

There are only two pieces of monthly economic data scheduled for release this week. Neither of them is considered to be highly important, so we don’t have much to pin our hopes on or to be concerned with this week.

There are two Treasury auctions on the calendar that may influence mortgage rates the middle part of the week and the second part of Fed Chairman Bernanke’s testimony to Congress, but no important economic data.

Nothing of concern is due tomorrow, so look for the stock markets and news from Europe- particularly Greece, to drive the markets tomorrow. Fed Chairman Bernanke will speak to the Senate Budget Committee at 10:00 AM Tuesday. I don’t expect him to say anything different than he said last week to the House Budget Committee, but the Q&A portion of his appearance could lead to something new. It is worth watching, but it will probably not lead to a noticeable change in the markets or mortgage rates.

The two important Treasury auctions come Wednesday and Thursday when 10-year Notes and 30-year Bonds are sold. The 10-year sale is the more important one as it will give us a better indication of demand of mortgage-related securities. If the sales are met with a strong demand from investors, we should see the bond market move higher during afternoon trading the days of the auctions. But a lackluster interest from buyers, particularly international investors, would indicate a waning appetite for longer-term U.S. securities and lead to broader bond selling. The selling in bonds would likely result in upward afternoon revisions to mortgage rates.

With little monthly and no quarterly economic reports being posted, Thursday’s weekly release of unemployment figures may end up moving the markets and mortgage rates more than it traditionally does. The Labor Department is expected to announce that 370,000 new claims for unemployment benefits were filed last week, rising slightly from the previous week’s total. The higher the number of new claims for benefits, the better the news for the bond market and mortgage pricing as it would indicate weakness in the employment sector.

The first monthly report comes early Friday morning when December’s Goods and Services Trade Balance data will be posted. This report measures the U.S. trade deficit and can affect the value of the U.S. dollar versus other currencies, but it usually does not cause enough movement in bond prices to affect mortgage rates. It is expected to show a $48.2 billion trade deficit.

February’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment will be released late Friday morning. This index measures consumer willingness to spend and usually has a moderate impact on the financial markets. If it shows an increase in consumer confidence, the stock markets may move higher and bond prices could fall. It is currently expected to come in at 74.0, down from January’s final reading of 75.0. That would indicate consumers were less optimistic about their own financial situations than last month and are less likely to make large purchases in the near future. Since consumer spending makes up over two-thirds of the U.S. economy, this would be considered good news for bonds and mortgage pricing.

Overall, despite being a fairly light week in terms of economic releases and relate events, it is still relatively crucial for the mortgage market. We saw the yield on the benchmark 10-year Treasury Note spike higher Friday as a result of the stronger than expected employment data. Stocks rallied as a result of that data, extending the 2012 stock rally that has pushed the Dow up over 5% and the Nasdaq up 11% year-to-date. Both indexes are at their highest levels since May 2008 and December 2000 respectively. This has me believing we are due to see a pullback in stocks fairly soon. If/when this happens, we should see funds shift back into bonds for safety, leading to lower mortgage rates. Keep in mind that this is more or less just speculation, but I am expecting to move to a less conservative approach regarding short-term mortgage rates in the near future.There are only two pieces of monthly economic data scheduled for release this week. Neither of them is considered to be highly important, so we don’t have much to pin our hopes on or to be concerned with this week.

Jobs Growth Raises Questions About GDP Forecasts, Fed

January's surprisingly strong jobs report, showing gains across a range of industries, is an encouraging sign that the employment picture may finally be picking up, and that first quarter growth forecasts may, in fact, be too low.

It also raises questions about the timing of the Federal Reserve's pledge to keep interest rates low, and whether another round of quantitative easing is even necessary.

There were 234,000 nonfarm payrolls added in January, nearly 100,000 more than expected, and the unemployment rate continued to creep down to 8.3 percent from 8.5 percent. That follows the creation of a revised 203,000 payrolls in December and 157,000 in November.

"It feels like we're now closer to growth of 200,000 a month. This would suggest that unemployment through the end of the year should continue to decline," said Mark Zandi, chief economist at Moody's Economy.com. "It's not as strong as the numbers say, but I think it's real in terms of business engagement."

The strong report Friday fueled a stock market rally, a move up in the dollar, and a jump in Treasury yields, pushing the 10-year yield back toward 2 percent. The Dow, up more than 100 points, was at a 3-1/2 year high.

The jobs report, coupled with other data, also spurred speculation that first quarter GDP growth estimates of 2 percent may prove too low.

"It's jobs growth across the board. Then when you see things like today's ISM, it's confirmation of what we saw this month," said Credit Suisse economist Jonathan Basile. "When you put the two ISM reports together, you say GDP forecasts are probably too low."

Traders also questioned whether the Fed will wait until late 2014 to raise its target rate, as it has forecast. They also wonder whether the central bank will pursue another round of quantitative easing, which would be aimed at the mortgage market.

Common First Time Homebuyer Mistakes

Many first-time homebuyers make simple and common mistakes that are easily avoidable.

They face multiple challenges anyway, such as finding the right home, the right agent, getting approved for a mortgage, and staying within their budget. By avoiding these common mistakes, the process of buying a home can be much less stressful.

1. Overlooking extra costs of homeownership

While some see themselves as ready for homeownership once they can afford a mortgage payment, it is important to remember the other fees that come along with owning a home. Property taxes, home owners association fees, maintenance, higher water and electrical bills, and property insurance are among the extra costs of owning a home, and should be calculated into your budget.

2. Not getting preapproved

It is very important to get preapproved for a loan before you go out searching for the perfect place. That way, you will be making financially sound decisions versus unrealistic emotional ones as to what you can afford.

3. Spending your entire savings on your down payment

This is one of the most common mistakes first time homebuyers make. Homebuyers who put 20 percent or more down don’t have to pay for mortgage insurance when getting a conventional mortgage, which often translates into substantial savings on the monthly payment. However, it is smarter to keep your rainy day savings intact instead.