Stocks Fall Further

This week the stock market fell to the lowest level since 2003. Normally mortgage markets improve during a stock market decline, since Fannie Mae, Freddie Mac, and Ginnie Mae mortgage backed securities (the vehicles through which most mortgages made today are sold) are considered a relatively safe haven. This week, however, the prices paid for these securities moved lower as well. One reason is that some investment funds have been forced to reduce their leverage and sell nearly every asset class in their portfolios. Another factor is investor concern that the supply of debt will increase significantly as the government funds its rescue actions. Mortgage rates ended the week moderately higher. Investors viewed the $700 billion rescue plan passed last week as a necessary first step, but not an immediate solution to the credit crisis. Governments around the world took a variety of additional steps during the week to support the banking system. A historic coordinated interest rate cut from many central banks took place on Wednesday. The Federal Reserve lowered the Fed Funds rate by one half point to 1.50%, citing reduced inflationary pressures due to an economic slowdown and falling energy prices. The Fed Funds rate heavily influences short-term interest rates, but its impact on long-term mortgage rates varies based on inflation expectations. In this case, the Fed rate cut most likely helped move mortgage rates a little lower, but the factors described above had more influence. The decline in home prices was a major cause of the credit crisis, and stabilization in the housing market will be important to resolve the problems. Little noticed this week, August Pending Home Sales jumped 7% from July, far above the consensus for a small decline. They were 9% higher than one year ago and were at the highest level since June 2007. Pending Home Sales are a leading indicator for the housing market, meaning that the next Existing and New Home Sales reports may show increases. Investors will be closely watching future housing market data to see if the trend continues. For more information or for free mortgage advice please email me at corey@frontstreetmtg.com.