No Matter What Happens To The Fed Funds Rate Today, Markets Are Going To Turn Up The Volatility A Notch

The Federal Open Market Committee adjourns from its scheduled 2-day meeting today at 2:15 P.M. ET and the markets are eagerly awaiting the central bank's press release.

In it, Fed Chairman Ben Bernanke is expected to address the U.S. economy, the future of credit, and the new Fed Funds Rate.

It's this last point to which mortgage rate shoppers should pay attention -- when the Fed Funds Rate falls, mortgage rates tend to rise.

The inverse relationship between mortgage rates and the Fed Funds Rate is based on the idea that cuts to the Fed Funds Rate are designed to add gas to U.S. economic engine.

In theory, over time, Fed Funds Rate cuts work to improve Corporate America's balance sheets, thereby rewarding shareholders. Therefore, when the Fed Funds Rate falls, or is expected to fall, investors often rush to buy stocks before their prices get bid up. Part of that process, of course, includes selling the "safe" parts of their portfolio which are usually loaded with mortgage-backed bonds.

If you were looking for a reason why mortgage rates tanked Tuesday while the Dow Jones added 11%, now you have it.

The Fed Funds Rate stands at 1.500% and markets are split about how far the FOMC will cut it this afternoon:

• A "pause" is expected by 2 percent of traders
• A 0.250% rate cut is expected by 5 percent of traders
• A 0.500% rate cut is expected by 45 percent of traders
• A 0.750% rate cut is expected by 40 percent of traders
• A 1.000% rate cut is expected by 8 percent of traders

Without a consensus opinion among traders, no matter what the Fed does today, a lot of investors will be forced to rebalance their portfolios to account for their "bad bets". This will add to market volatility for sure.

Mortgage rates are calm this morning. The calm likely won't last. If you are floating your mortgage rate and want to avoid additional risk, consider locking your rate prior to the FOMC press release.

The Strength In New Home Sales Shows That Banks And Builders Have Figured Out The Market

Despite turmoil on Wall Street, the housing sector continues to deliver good news.

Last month, led by a 22 percent surge from the West Region, New Home Sales rose 2.7 percent over August.

A "new home" is a newly-built residence, never before lived in. New homes are usually built and sold by real estate development companies and their respective marketing firms.

The surge in New Home Sales volume is consistent with the other good news we've seen from the housing sector. It marks the 4th positive signal in the last two weeks.

• October 8: Homes under contract to sell surge 7.4 percent
• October 23: Foreclosed homes fall 12 percent in September
• October 24: The supply of "used homes" falls to an 8-month low
• October 27: The supply of new homes falls by 7 percent

However, it can't be ignored why housing is showing a statistical improvement. The main causes are two-fold:

1. Banks are getting better about selling foreclosed homes
2. Builders are keen to dump their excess inventory

Both of these factors drive down home sales prices nationwide which, in turn, draws value-seeking home buyers back to the market. In addition, because the number of active sellers dwarfs the number of active buyers, today's home seekers enjoy a tremendous amount of negotiation leverage, making real estate even more attractive.

But, as with everything in business, markets seek balance. As home supplies dwindle, buyers' ability to negotiate sales prices and closing costs will fall. It's Supply and Demand -- as supplies drop, relative demand rises, and prices rise with it.

In every American neighborhood, homes that are priced "right" are selling quickly. And now that banks and builders have figured out the formula, more homes are going under contract than at any time since 2007.

Much of the current economic climate is being blamed on housing. If the data is accurate, though, we can infer that the climate may not last much longer.

(Image courtesy: AP.org)

The Obvious Truth About Mortgage Rate Predictions

As the stock market dips then jumps then dips again, it's important to remember that markets are unpredictable and nobody knows what will happen tomorrow.

Unfortunately, that doesn't stop the analysts from trying.

An obvious example comes from May of this year. As the price of oil crossed $120 per barrel on its way to an all-time high of $147, a Goldman Sachs analyst was quoted as saying that $200 oil was "likely".

It seemed like a logical conclusion at the time.

Today, though, just five months after the prediction, the analyst's "likely" scenario looks downright laughable. Oil is off by more than 40 percent since that day. And there's hundreds of examples just like this, all around us.

Every day, economic experts and analysts are on television, telling us what's going to happen in the future:

• They tell us when housing prices will reach a bottom
• They tell us when stock markets will rebound for good
• They tell us what the economy will do over the next 12 months

But none of them operate with the proverbial crystal ball -- it's all on "gut".

Another example is from today's CNNMoney.com. In the wake of the government's banking response, a mortgage analyst predicts 7 percent interest rates over the next six months. This would represent a 1.5 percent increase from the recent lows.

The rate prediction may be accurate, or it may not. We won't know for another six months. But what we know today, though, is that mortgage rates are all over the place -- just like the stock market. One day up, another day down. And nobody knows what they'll do tomorrow.

Predicting the future has always been an inexact science, but that won't stop the experts from trying.

And, the experts are wrong as often as anybody else.

How Falling Gas Prices May Stave Off Recession

Given the stock market's recent performance, it's not surprising that gasoline's falling prices are garnering very little attention. That doesn't make it any less relevant, however.

Since peaking in July, gas prices are off by 20 percent.

Falling gas prices are an important positive for the U.S. economy because less money spent at the pump means that more money is saved per household for everyday items including food and other staples.

In addition, consumer spending makes up two-thirds of the economy.

Therefore, falling gas prices may lessen the impact of a forecasted recession. Because Americans are notoriously poor savers, the extra cash-on-hand is likely to get spent which will, in turn, push the economy forward through the upcoming holiday shopping season.

So, just as inflation can be bad for mortgage rates, so can recession. And while recession won't always cause mortgage rates to rise, right now, it's one of the factors driving rates higher. Falling gas prices may help keep that scenario at bay.

Looking Back And Looking Ahead : October 14, 2008

Throughout the feverish activity on Wall Street last week, mortgage bonds sold off with force, driving mortgage rates to their highest levels since July.

It was the fourth straight week in which mortgage rates worsened.

But, with the mortgage markets closed Monday, stock markets rallied to their largest one-day gain in history.

The Dow Jones' gains are expected to push mortgage rates down today, but not nearly enough to recover last week's losses. The market-wide carnage was mostly the result of a fear that has not been completely removed from investor psychology.

Until that fear is purged, therefore, expect mortgage rates to move on the dual basis economic data and market mentality. This will likely lead to rapid rate changes that will make shopping for a mortgage rate difficult.

This week, look for key inflation data including the Producer Price Index on Wednesday and the Consumer Price Index on Thursday.

Both measure the "cost of living" and reflect on price pressures in the economy. If costs are rising, it's considered inflationary and that tends to edge mortgage rates higher.

In addition, Retail Sales and Consumer Confidence data will be released this week, and carefully watched. If either (or both) show strength, markets may interpret the data to be inflationary as well, further adding upside pressure to mortgage rates.

(Image source: The Wall Street Journal)