Markets React to QE3

In This Issue

Last Week in Review: QE3 is in full swing. How did home loan rates respond? Forecast for the Week: A full week of economic data is ahead, with news on the housing market, inflation, consumer confidence and more. View: September is National Preparedness Month. Be sure to pass on this important disaster tip to your clients and colleagues.

Last Week in Review

Actions speak louder than words. And last week, we saw a whole lot of action in the volatile financial markets thanks in large part to the Fed’s announcement of another round of Bond buying (known as Quantitative Easing or QE3). Here's what you need to know...and what happened to home loan rates.  If you've been wondering what Quantitative Easing actually is, it's the concept of the Fed becoming a buyer of Treasuries and Bonds to try and stimulate the economy. The Fed announced QE3 because our economy is still struggling (especially our housing and labor markets) and inflation has appeared tame. Evidence that our economy is still struggling was especially noticeable in the manufacturing sector last week. The New York State Manufacturing Index registered -10.41 in September (its lowest level since April 2009), while the Philly Fed Index showed that manufacturing in that region contracted for a fifth straight month in a row. The news wasn’t good on the labor front either, as last week’s stubbornly high Initial Jobless Claims reading of 382,000 was above expectations. However, there was some positive news on the housing front last week, as Existing Home Sales for August rose to a two-year high.  So what does all of this mean for home loan rates? Remember that negative economic news normally causes investors to move their money out of risky investments like Stocks and into safer investments like Bonds, including Mortgage Bonds (which home loan rates are based on). That’s why home loan rates often improve when our economy is struggling. Investors also tend to move their money into safe investments like our Bonds during times of global uncertainty, such as last week’s turmoil in the Middle East. These two factors, combined with the Fed’s QE3 Mortgage Bond purchases, all benefitted Bonds and home loan rates last week. It’s important to keep in mind that one of the goals and consequences of QE3 could be inflation. And inflation is the arch enemy of Bonds and home loan rates, as it reduces the value of fixed investments like Bonds. This will be an important development to watch for in the coming weeks and months.  The bottom line is that now is a great time to consider a home purchase or refinance, as home loan rates remain near 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 3.0% Mortgage Bond (Friday Sep 21, 2012) Temperatures may be cooling in much of the country, but this week’s economic calendar is heating up. Housing data from the S&P Case/Shiller Home Price Index, New Home Sales, and Pending Home Sales will be released on Tuesday, Wednesday, and Thursday respectively. The reports come after last week's positive housing numbers. We’ll get a sense of how the consumer is feeling with the Consumer Confidence Report on Tuesday and Consumer Sentiment on Friday. Durable Orders and the third and final reading on 2Q Gross Domestic Product will be released on Thursday. Also on Thursday, weekly Initial Jobless Claims will be released. Rounding out the week, manufacturing figures from the Chicago PMI will be reported on Friday along with Personal Income and Spending. The Core Personal Consumption Expenditure (PCE), the Fed's best gauge on inflation, will also be reported on Friday. In addition to these reports, all eyes will continue to watch how the markets and home loan rates respond to QE3. 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 have responded favorably to QE3. I’ll be watching closely to see if this continues.

The Mortgage Market Guide View...

Are You Prepared? September is National Preparedness Month. Hopefully, neither you nor your clients will ever be faced with an emergency situation. But if it does happen, the following information can help you or a client stay safe.  The first thing to know is that one of the most important elements to have on hand is an emergency kit. Unfortunately, determining the right items to include in that kit can be a confusing process.  To help, FEMA has developed a user-friendly website that allows you to download and print all of the items that you will need to gather for an Emergency Kit. Visit the special Emergency Kit webpage for a quick list of the basic emergency items you need to have on hand, as well as additional items you should consider adding to your kit.  Take a few minutes to visit the site, and forward the information on to your clients and colleagues. Economic Calendar for the Week of September 24 - September 28 Date ET Economic Report For Estimate Actual Prior Impact Tue. September 25 10:00 Consumer Confidence Sept 63.0 60.6 Moderate Tue. September 25 09:00 S&P/Case-Shiller Home Price Index Jul 0.8% 0.5% Moderate Wed. September 26 10:00 New Home Sales Aug 380K 372K Moderate Thu. September 27 08:30 Jobless Claims (Initial) 9/22 380K 382K Moderate Thu. September 27 08:30 Gross Domestic Product (GDP) Q2 1.7% 1.7% Moderate Thu. September 27 08:30 GDP Chain Deflator Q2 1.6% 1.6% Moderate Thu. September 27 10:00 Pending Home Sales Aug 1.0% 2.4% Moderate Thu. September 27 08:30 Durable Goods Orders Aug -5.1% 4.1% Moderate Fri. September 28 10:00 Consumer Sentiment Index (UoM) Sept 79.0 79.2 Moderate Fri. September 28 09:45 Chicago PMI Sept 52.8 53.0 HIGH Fri. September 28 08:30 Personal Consumption Expenditures and Core PCE YOY NA 1.6% HIGH Fri. September 28 08:30 Personal Consumption Expenditures and Core PCE Aug 0.1% 0.0% HIGH Fri. September 28 08:30 Personal Income Aug 0.2% 0.3% Moderate Fri. September 28 08:30 Personal Spending Aug 0.5% 0.4% Moderate

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