Recession Talk Hits the Wires

In This Issue

Last Week in Review: There was more news that our economy may be slowing,  but what does that mean for home loan rates? Forecast for the Week: The economic calendar heats up, with news on retail  sales, manufacturing, inflation and more. View: Maintaining a budget is especially important in today’s economic  environment. Share these easy-to-follow tips with your clients, colleagues, and  family members.

Last Week in Review

Slow and steady wins the race. That may be true for certain Olympic events,  but when it comes to our economy slowing seems to be the operative word of late.  Read on for details and what they mean for home loan rates.  Last week there was more  evidence of a slowing U.S.  economy, as the National  Federation of Independent  Businesses stated that its  small business optimism index  saw its largest one-month drop  in two years, falling 3 points  to 91.4. The 91.4 number is  the lowest level since October.  Consumer Sentiment for July  also came in at its lowest level  this year.  Recession talk has grown in  recent days, and some very  well respected economists and  thinkers believe we are either   in a recession already or about  to enter one. It is very tough to  argue with this notion as the labor market and manufacturing numbers have rolled   over in recent months, with those trends likely to continue lower in the face of so  much uncertainty here and abroad. In addition, corporate earnings are starting  to come out and companies are reporting numbers below already lowered guidance  and citing uncertainty into the future.  So what does all of this mean for home loan rates? Recessions are deflationary  (i.e. consumer prices moving lower) and deflation is good for Bonds as the fixed  interest payment to the end investor goes further if consumer prices are moving  lower. This means deflation is also good for home loan rates, as rates are tied to  Mortgage Bonds.  If the economic data continues to be weak, the Fed will likely do another round  of Bond buying, known as Quantitative Easing or QE3 – and in fact, the Fed  Minutes for the June Meeting showed that a couple members had an appetite for  more easing, but there was no consensus. Remember that additional hints of  QE3 could initially push Stock prices higher, shifting cash out of the Bond trade and  hurting home loan rates in the process. I will continue to monitor this situation closely. The bottom line is that now continues to be a great time to purchase or refinance  a home, as home loan rates continue to reach historic lows. Let me know if I  can answer any questions at all for you or your clients.

Forecast for the Week

Chart: Fannie Mae 3.5% Mortgage Bond (Friday Jul 13, 2012)   The economic calendar heats up this week. Couple that with the heart of earnings season and you have a recipe that could easily move markets. Right out of the gate, Retail Sales will be reported on Monday. Consumers have been cutting back lately on fears that a global slowdown could lead to a recession here in the U.S. Manufacturing data from the Empire State Index out of New York and Philadelphia Fed Index will be reported on Monday and Thursday, respectively. On Tuesday, the Consumer Price Index (CPI) will be released. It is safe to say that inflation at the consumer level isn't a problem, yet. On Wednesday, Housing Starts and Building Permits will be delivered. The housing sector has seen a light at the end of the tunnel but the pain remains. Existing Home Sales are set to be released on Thursday. Also on Thursday, weekly Initial Jobless Claims will be announced. This comes after last week’s reading of 350,000, the lowest reading in four years. In addition to those reports, earnings season is well underway. That means investors will react to the data within minutes of the release. Of course, if the numbers are weak, Stocks will most likely tumble and this could support Bonds and home loan rates. Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. The chart below shows Mortgage Backed Securities (MBS), which are the type of Bond that home loan rates are based on. When you see these Bond prices moving higher, it means home loan rates are improving — and when they are moving lower, home loan rates are getting worse. To go one step further — a red “candle” means that MBS worsened during the day, while a green “candle” means MBS improved during the day. Depending on how dramatic the changes were on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning. As you can see in the chart below, Bonds and home loan rates continue to reach record best levels...though they did pull back from their very best levels in the latter part of last week. I will continue to monitor all the news closely to see how home loan rates are impacted.

The Mortgage Market Guide View...

3 Steps to Staying on Budget In today’s economic environment, many people are paying more attention to their monthly budgets than they have in a long time. One of the best ways to reign in your budget is to get a handle on your spending habits. Share the following tips with your clients, colleagues, and family members so they can whittle down unnecessary expenses. These tips can also be applied to evaluating your business costs and expenses.  1. Take inventory. Many people can name their major expenses, but don’t remember all the little expenses that drain their wallets. To help you get a true picture of your spending, try writing down everything you spend money on during the course of a month. That means writing down not only your major expenses, but also those quick trips to the gas station, grocery store, coffee shop, movie theater, fast food restaurants, and so on. Also, if you pay for insurance or another bill on a quarterly basis, write down what the monthly expense equals. 2. Mark down your needs. Once you have all your expenses listed, it’s time to analyze them. The best place to start is by grouping your expenses using highlighters. For example, you may want to use one color to highlight “must haves” like your automobile, life insurance, utility payments and so on. Next, use a different color to highlight items that may be important occasionally, but aren’t required—such as, new clothes for work. Finally, use a different color to highlight unnecessary expenses that are nice, but could easily be cut out, such as mochas from the local coffee house. Now, you can make some purposeful decisions about what you can cut—starting with the easy items and working your way up to the important but not necessary. Don’t forget, it’s not always “either-or.” For instance, you don’t have to cut out mochas altogether; instead, you can cut down to one per week as a special treat after a busy or productive week.  3. Give yourself an allowance. Sticking to your budget is easier if you have no other option. If you have a real spending problem, you may want to give yourself an allowance to live on. For example, try taking out $50 or $70 in cash for each week and putting your credit cards and checkbook in a safe place. That way, when you spend money, you’ll actually see it leave your wallet… which means you’ll see the impact more dramatically. This forces you to make some tough decisions. After all, if you go to lunch on Wednesday, you may not be able to go to dinner on Friday night. It’ll be tough at first. But soon, it will be second nature.  Economic Calendar for the Week of July 16 - July 20 Date ET Economic Report For Estimate Actual Prior Impact Mon. July 16 08:30 Retail Sales Jun NA -0.2% HIGH Mon. July 16 08:30 Retail Sales ex-auto Jun NA -0.4% HIGH Mon. July 16 08:30 Empire State Index Jul NA 2.3 Moderate Tue. July 17 09:15 Capacity Utilization Jun NA 79.0% Moderate Tue. July 17 09:15 Industrial Production Jun NA -0.1% Moderate Tue. July 17 08:30 Core Consumer Price Index (CPI) Jun NA 0.2% HIGH Tue. July 17 08:30 Consumer Price Index (CPI) Jun NA -0.3% HIGH Wed. July 18 08:30 Housing Starts Jun NA 708K Moderate Wed. July 18 08:30 Building Permits Jun NA 780K Moderate Wed. July 18 08:30 Beige Book NA NA Moderate Thu. July 19 08:30 Jobless Claims (Initial) 7/14 NA 350K Moderate Thu. July 19 10:00 Existing Home Sales Jun 4.65M 4.55M Moderate Thu. July 19 10:00 Philadelphia Fed Index Jul -10.0 -16.6 HIGH

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