Virginia mortgage rates and industry news

Huge oil costs, declining home values, rising unemployment and a huge Wall Street Sell off.  What does it all mean?

I. Inflation vs. Growth: Opposing Trends

In today's bond markets there are two forces keeping yields in check. They are the outlooks for inflation and economic growth. On the one hand, we have rising prices – mostly food and oil – causing some bond investors to expect higher rates. On the other hand, we have continuing negative housing data, negative employment data, and increasing concern that the financial system is still "far from normal," all of which would suggest the Fed may need to lower rates again. These opposing economic conditions have kept us in a pretty tight trading range, with much less market volatility than we saw in the first quarter of this year. But a market that seems calm because there is widespread consensus of opinion is a very different animal from a market that appears calm because there are conflicting, but equally powerful, opinions pulling against each other.

Although they are down somewhat over the last couple of days, oil prices have been setting new highs, and several high-profile inflation gauges indicate these costs may be starting to show up in the prices manufacturers and consumers pay for various goods. Other signals, such as the anticipated spread between LIBOR and risk- free rates and the increasing cost to buy credit protection on some of the major banks suggest that there's more bad news and further credit tightening to come from lenders. In addition, employment indicators remain weak and economic growth indicators are unimpressive. The interesting bit is that neither the inflation story nor the economic weakness story is clearly more compelling than the other. Both arguments have strengths and weaknesses and the result has been a deceptively calm move to slightly higher rates.

Sooner or later the data will point the market in a clear direction. When it does, we can expect an impressive move in rates and change in the shape of the yield curve. The market's reaction to current employment data shows the potential for this. The employment data is generally weak, and although rates were initially volatile in both directions, Treasury yields are now falling with greater momentum (but mortgage spreads are wider as market volatility increases).

If we consider the genesis of today's inflation, much of it relates to technical aspects of activity among commodity traders rather than fundamental changes in supply and demand. Commodities like oil and corn - driven by speculative trading and distorting price subsidies - have become the latest markets in which prices have become too quickly disconnected from what I'll call the "usefulness" value to end consumers. We all know how suddenly these sorts of bubbles can burst, and if commodity prices crack, inflation could become much less menacing, and the economic story could gain the upper-hand. Alternatively, the broader economy could prove more resilient than expected to a combined housing recession and banking crisis, leaving the inflation story and higher rates the victors. The potential for a big move in rates – in either direction – is mounting.

II. Pricing

The credit and liquidity turmoil of the past few months will definitely leave a lasting mark on our industry and affect how it operates for some time to come. The housing finance machine that developed leading up to 2006 worked extremely well. While credit risk was a non-event, there was very little friction between the major components of the machine including originators, GSEs, Wall Street, mortgage insurance companies and other investors. Finding investors was easy, pricing was simple and there were few differences in risk appetite among investors.

Now, and for the foreseeable future, the rules will be very different. Wall Street is struggling to survive and reinvent its role in mortgage finance, it's "every man for himself" among the mortgage insurance companies, and each and every investor in mortgage risk is taking its own approach to product eligibility and pricing.

Thinking of purchasing or refinancing?  Interest Rates are still historically low and home prices have never been better!  Please let us know how we can assist you in any way! 

***The market data and comments posted are from one of our trusted lending partners