WeeklyBasis 07/28/08: Rates May Drop & Housing Stimulus Overview

Fixed and ARM rates are Rates are higher by .375% since this time last month as inflation has won the battle recently over economic weakness. June’s year-over-year Producer Price Index (including food and gas) increased 9.2%, the biggest YOY increase since June 1981. And June’s YOY Consumer Price Index (including food and gas), it was up 5% from a year ago, the biggest YOY increase since 1991.

The 5% Overall CPI relative to the 2% Fed Funds Rate means inflation-adjusted rates are -3%. Even using June’s YOY Core CPI of 2.4% (which excludes food and gas), inflation-adjusted rates are still negative. This inflationary concern is the market sentiment leading up to next Tuesday’s Fed meeting, and their messaging may change accordingly, although it’s unlikely they’ll raise rates just yet.

They will want to see if and how the new housing legislation will help the economy in the coming months (see below). Markets and the Fed will also have this week’s data to work with: Consumer Confidence and S&P Case Shiller Home Price report Tuesday, Q2 GDP Thursday, and the BLS July Jobs Growth and Unemployment report Friday. Last month’s Case Shiller report showed home prices in 20 cities were down 15.3% April 2007 to April 2008. As for jobs, the economy shed jobs every month this year for a total of 438,000 lost jobs through June. If these trends continue this week, rates will drop.

Anyone planning on using $729,750 conforming loans for purchases should know that this limit will be reduced to $625,500 as of 1/1/09. Please also see The Basis Point story on the new housing bill…covers what consumers need to know about offer-writing strategy if they’re targeting the $729,750 conforming cap, FHA refi options for distressed owners, and the new covered bond program that will help revitalize the jumbo market.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.625% (6.765% APR)
15 Year: 6.0% (6.14% APR)
5/1 ARM: 6.5% (6.62% APR)

Super-Conforming ($417,001 to $729,750 cap by county) – NO POINTS
30 Year: 6.75% (6.89%)

Jumbo ($729,751 – $1,500,000) – NO POINTS
30 Year: 7.0% (7.025% APR)
7/1 ARM: 6.375% (6.525% APR)
5/1 ARM: 6.5% (6.64% APR)