The Fed Open Market Committee met yesterday and released their report on the health of the economy. The FED meeting report is always looked at as something akin to stone tablets brought down from the mountain, the word from the highest authority. But unlike the stone tablets, the FED meeting reports aren’t clear or direct. Instead, their meaning is wrapped in code, vague and ambiguous so they don’t completely tip their hand as to what their monetary policy will be down the road. This means that financial analysts and FED watchers pour over the statements, looking for any change in wording to see if this signals a change in the FED’s direction. The FED’s mission is to maintain growth and stable employment while vigilantly defending against inflation. With short term rates set at 0-.25% (the rate available from the FED to the biggest banks) the threat of inflation is real. But with unemployment running over 9% (and much higher when underemployed and those who have stopped looking is factored in), and slack throughout the economy, the threat is still over the horizon.

The key wording in the report is that inflation is likely to be subdued for some time, and that they will maintain exceptionally low rates (short term rates, not necessarily mortgage rates) for an extended period of time. This means they aren’t likely to increase their base rates for months, and most likely not before the end of the year.

Here is the full FED statement:

Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

Peter Thompson

(630) 479-6424

The home buyer’s tax credit expires at the end of this week. If you don’t have a contract together by then (you have until the end of June to close), you are out of luck for the tax credit. Last November, when the previous tax credit expired, the housing market feel off the edge. At the time the consensus view was that the tax credit hadn’t so much brought new buyers into the market, but had motivated many home buyers who were already planning to buy, to buy earlier than they would have otherwise. Without the tax credit the market floundered, and a month after the tax credit expired it was started up again. That isn’t likely to happen this time. It’s not that the credit hasn’t increased business, it has worked well this time. Home sales last month were the highest in years, and this month will have sizzling numbers, too. But the extra sales have come at a high cost, especially if most of these buyers would have bought any way. For another thing, no one is pushing hard for a new extension. The National Association of Realtors (NAR) was the big force before, and they are silent on the issue now. The congressional sponsors of the bill before have said they won’t try and get it extended. And though the real estate market is still soft, the worry over adding new debt (the government is borrowing to pay for the tax credits they send out) is trumping any additional rebate money now. Many economists have said that the tax credit, while a great deal for the consumer, is inefficient and an expensive way to increase home sales. So in all likelihood, the tax credit will be gone for good after this week.

So the question now, is what happens next? A big portion of the buyers now in the market  are first time home buyers, and though they are looking at all the benefits of buying now (historically low rates, low down payment FHA loans are available and home prices are priced at a big discount over previous years) the tax credit is mentioned as a major incentive. But I don’t think we are going to see the big drop off we did before. There will be a drop off, many of the current buyers moved quicker than they otherwise would have to take advantage of the rebate, but there are some big reasons to expect that home buyers will continue to buy.

Here are some reasons why it is different this time, and why I expect home buyers to continue to buy after the tax credit deadline:

It is the Spring market – Real estate sales are seasonal. Traditionally the market is most active in the Spring and Fall, and drops off to nearly nothing after Thanksgiving. When the last tax credit expired in November, it happened at a time when the market normally chilled. Now is the time when it is usually just starting to heat up. A lot of buyers have moved the timeline ahead this year, but there are a whole lot of others who for one reason or another are just getting started.

The home buyer’s tax credit didn’t seem as urgent this time – There are still a lot of people who could be eligible for the tax credit, who weren’t aware of it, or the deadlines, and a lot of others who figured there was no urgency since it was extended once and it could be extended again. Many of these people will buy a house eventually, but they aren’t motivated enough by the tax credit to rush forward now and buy something that isn’t exactly right for them.

Buyers are looking for bargains – Home buyers are mostly focused on getting a home for a below market price, and this market is dominated by short sales and foreclosures. As a rule, these transactions are more complicated, so it takes longer to get the selling bank’s approval. If your real motivation is to buy a home at a discount price, a relatively small tax credit won’t make a big difference. I know of a lot of buyers who have contracts with sellers now, but are waiting for bank approval, some have been in this waiting game for months. Some of these buyers will get bank approval and be able to close by the June deadline. Others won’t and some will move on to other properties. One thing that could make a big difference is what happens with the rollout of the new HAFFA short sale program. This is the new government program designed to give incentives to both distressed owners and loan servicers to agree to a short sale, and if it is effective it could mean that there will be more short sales and they will happen quicker. I’ll have more on the details of this program soon.

The housing market appears to be bottoming – Fear has kept a lot of potential home buyers on the sidelines. Home prices have dropped a lot over the last few years, but there are buyers waiting on the sidelines who want to buy, but don’t want to come in too early. A recent report showed that homeownership rates were historically low in the 24-35 age range, the age group that is most likely to be first time home buyers. Some of these people are qualified to buy but don’t see owning a home as a good investment now. Others are waiting for the right time to get in. With the end of the tax credit, some home sellers are sure to get a little more motivated. At the right price, there are buyers.

We will see what happens over the next few months, but I don’t expect the sharp decrease in home sales we saw after the end of the last tax credit. It is still a buyers market, and with the conditions right, home buyers will continue to buy.

Thinking of buying but not sure where to start?

First Time Home Buyer Webinar this is a recording of a webinar I did recently which goes over the entire home buying and mortgage process in just under an hour.

Free Home Buyers Guide – From A to Z, everything you need to know about buying a home and getting approved for a loan.

Peter Thompson  630-479-6424

If it weren’t for deadlines nothing would get done. I’m a procrastinator, and I know that I’m not alone. Waiting until the last minute is the American way of life. My kids put off work on major school projects until right before they are due, then complain about how much work they have, and how little time there is to do it. I was the same way when I was in school, and though I try to be more proactive now, I’m often guilty of the same behavior. Today is tax day, and you can bet that the local news will have a segment filmed at the post office with cars lined up bumper to bumper waiting to get in so they can get the April 15^th postmark. I know it will be on because they do this every year. I’m happy to say that I won’t be in that line, but I empathize with those who are. We are a nation of procrastinators.

Another big deadline is coming up at the end of the month. The home buyer’s tax credit expires at the end of April. You don’t have to close on your home in April (you have until June 30^th to get your financing together and close), but you have to a contract to purchase together or you are out of luck. If you aren’t ready to buy there is no reason to rush, but if you are planning on buying but have been dragging your heels, it is time to get your but in gear. Moving fast could mean an extra $8,000 in your pocket (up to $8,000 for first time home buyers, up to $6,500 for move up buyers.

There is still time to get a contract, but if you are starting from scratch, this isn’t going to be easy. If you are just starting out you will need to –

• Talk with a loan officer and get pre-approved for a mortgage.
• Find a good realtor who has time to work with you.
• Narrow down your search to the area and property type that works best for you.
• Find the right property.
• Negotiate a contract that works for both you and the seller.

Can all this be done in 2 weeks? Yes, it happens all the time. Buyers who are relocating and transferring into an area can get all this done in a weekend, if they need to. But it isn’t easy and it’s likely to be stressful. But it can still be rewarding, and procrastinating means more excitement when you get the big job done, with minutes to spare.

Here are some details of the home buyer’s tax credit:

1. The credit is for 10% of the purchase price up to a maximum of $8,000 for first time home buyers and up to $6,500 for qualified move up buyers. This means that if you are a first time home buyer and your purchase is $80,000 or more, the credit will be $8,000.
2. The credit is good for properties that are under contract by April 30^th and you have until the end of June to get the financing together and close.
3. It is now available for first time home buyers (a first time home buyer is anyone who hasn’t owned a home in the last 3 years) and move up buyers who have lived in their home for 5 consecutive years out of the last 8.
4. The home has to be for your primary residence. Second homes and investment properties don’t qualify.
5. This is a true tax credit. As long as you stay in the home at least 3 years, the credit is yours to keep. If you sell before 3 years is up, you may need to pay the credit back.
6. If your tax liability is less than the $8,000 credit ($6,500 for move up buyers), you will get the difference as a check back to you. If you have already filed your taxes, you can file an amended tax return in order to take the tax credit in the current year and get the money back quicker.
7. Income caps apply. They have increased the income caps so more home buyers will now qualify. A single buyer qualifies as long as they earn up to $125,000 per year, and couples are maxed out at $225,000 per year. Higher earning borrowers may get a partial credit, but the amount decreases as their income rises.

If you have any questions, let me know.

Thinking of buying but not sure where to start?

First Time Home Buyer Webinar this is a recording of a webinar I did recently which goes over the entire home buying and mortgage process in just under an hour.

Free Home Buyers Guide – From A to Z, everything you need to know about buying a home and getting approved for a loan.

Peter Thompson 630-479-6424

Is this the turning point we’ve all been waiting for? Is the economy finally starting to gain traction, and is this the start of a real recovery? Are the low interest rates we’ve gotten used to, really gone for good? This week seems like a turning point, but we won’t know if it is for months, at least. This could just be a head fake before we slip back into a downward trend. Or it could be the start of a slow, but meaningful recovery. Even if this is the real thing, we aren’t going to be on the fast track any time soon. Unemployment is still too high and the housing market is still on life support, so even though we are much improved from where we were a year ago, there is still a long way to go. But this does look like a turning point, and there is a lot going on relating to mortgage markets. Any type of recovery is good news, but it may be unwelcome for those who are still waiting to pull the trigger on a home purchase or mortgage refinance.

On Wednesday the Fed officially exited the mortgage backed securities market. Since December of 2008, when the financial markets were still on the verge of collapse and the housing market was as fragile as it has ever been, the Fed has been the back stop for the mortgage market. By buying up the extra supply of mortgage bonds (which are the basis for mortgage interest rates) they stabilized the market and kept home mortgage rates low. Over this time, the Fed spent $1.25 trillion to buy these mortgage bonds, and without this support the housing market would be in a whole lot worse shape than it is now. But this support has come at a price. First, of all, we will have to pay for this eventually, and the money spent on buying these bonds has come from a combination of taking on new debt and quantitative easing, which is another way of saying that the Fed printed up new money to pay for these bonds. Both of these actions can potentially lead to inflation (deflation was the bigger worry at the time, and is still a concern) and if inflation takes hold, this could be a bigger problem down the road. The other problem is that the mortgage backed securities markets grew used to having the Fed as their best buyer. This took a lot of volatility out of the market, and made the market more reliably predictable. It has gone back and forth in a set range for months. Now, even though everyone knew the Fed was exiting at the end of April, and they have been buying less and less over time, the market jumped higher as soon as they left. We will see over the next few weeks if this was just a nervous tick of a move, or the start of an upward trend. It makes sense that owning these bonds is riskier now without the Fed support, and interest rates have to go higher to make up for the increased risk. At the same time, the housing market still needs the support, and high mortgage rates could kill off any housing recovery. If rates swing too high, expect that the Fed will step in somehow, to keep rates affordable.

The other big news this week was the release of the unemployment report on Friday. This is always the most watched indicator, and a big sign of where the economy is heading. This report was different than others, though, because this report showed the economy adding jobs for the first time, in ages, and was the best report since March of 2007 (which is now looked at as when the recession actually began). The report showed 162,000 new jobs created, and the January and February reports were revised upward to show an additional 62,000 new jobs crested. The report wasn’t entirely rosy, though. The unemployment rate still stands at 9.7%, and those who are considered long term unemployed, who have been seeking a job for 27 weeks or longer, grew by another 4440,000 and is at a distressingly high level. Also, 44,000 of the new jobs were census workers, temporary government jobs. But temporary workers spend money, too, and there was strength in nearly all areas of the jobs report. The rate of unemployment is sure to stay high for a long time, but this does look like this is a real move in the right direction.

Mortgage rates popped about a quarter point higher last week, the biggest increase in months. Rates are still low, but the big question now is if this move higher is the start of an extended move or just a blip in the market. Experts have been warning for months that mortgage rates would have to go higher once the Fed withdrew its support, so I do think we have seen the last of the lowest rates. But the economy is still fragile, and everyone has a vested interest in keeping mortgage rates low. So I expect there will be sharper swings, both up and down, but I don’t think rates will go a whole lot higher for an extended period of time. We will see how this develops over the coming weeks.

Thinking of buying but not sure where to start?

First Time Home Buyer Webinar this is a recording of a webinar I did recently which goes over the entire home buying and mortgage process in just under an hour.

Free Home Buyers Guide – From A to Z, everything you need to know about buying a home and getting approved for a loan.

Peter Thompson 630-479-6424