May 15 2006

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For the week of May 15, 2006 --- Vol. 4, Issue 20

Last Week in Review

PLAY IT AGAIN, BEN...That's right, for the sixteenth time in a row - in less than two years - the Fed "played it again"...another rate hike. As expected, the Federal Reserve went ahead and hiked rates to the tune of another .25%, to bring the Fed Funds Rate to its highest level in five years at 5.0%. Why is the Fed hiking rates? To keep the economy from growing too quickly, which can result in inflation and drive prices higher on the goods and services we purchase and use every day. And equally important to the rate hike itself was the Fed's Policy Statement, which is always analyzed very carefully, as it often gives clues as to the likelihood of future rate hikes. The Fed statement indicated that although inflation appears to be controlled at the present time, further rate hikes may be needed. However, they stressed that the economic news over the coming weeks would be the determining factor in future rate hikes. The Bond market didn't like the air of uncertainty surrounding the Policy Statement, and home loan rates worsened by .125% over the course of the week. So what does all this mean to you, your friends, family, coworkers and clients? And how can I help? Here's the scoop. The Fed Funds Rate impacts many things, such as credit card rates and auto loan rates...and it directly affects the Prime Rate, which most Home Equity Lines of Credit are based on. It is also closely tied to the index of many Adjustable Rate home loans. A large number of Americans have either a Home Equity Line of Credit or an Adjustable Rate home loan...or may even have both. With the Fed rate hike, those rates and indices just jumped again, which may be putting pressure on making monthly payments, or causing concern as to where that rate might be going in the future. So, there's no time like the present to take a look at your own financing situation, and encourage your clients, friends and loved ones to do the same...it might be time to consider a different strategy that is a better fit for present market conditions, and I'd be happy to help look at options. SPEAKING OF OPTIONS...DID YOU KNOW THAT FLYING FIRST CLASS MIGHT BE AN OPTION FOR YOU, MUCH MORE OFTEN THAN YOU'D THINK? READ THIS WEEK'S MORTGAGE MARKET VIEW, WHICH REVEALS THE PREVIOUSLY WELL KEPT SECRET WHICH COULD HAVE YOU FLYING IN THE LAP OF LUXURY ONE DAY SOON.

Forecast for the Week

After last week's damage...where might home loan rates go from here? It all depends on how this week's news on inflation shakes out. Inflation is the arch-enemy of Mortgage Bonds and home loan rates, since inflation erodes the fixed amount of return a Bond holder receives. And this week, we get a double dose of inflation data, on both the wholesale and retail levels. Tuesday's Producer Price Index (PPI) and Wednesday's Consumer Price Index (CPI) reports will have extra significance, as the markets try to anticipate the Fed's next move, due at the end of June. Will they continue on their series of rate hikes, designed to keep inflation at bay...or will they exercise some patience and pause, while waiting for the economy to fully absorb the hikes made over the past two years? Bernanke is in the hot seat, and knows that the Fed has always gone too far in hiking rates...but also knows that he is responsible for keeping inflation under control. It's a tough tightrope to walk, and the Fed's decision will likely be a result of the economic data that hits the wires between now and then. Stay tuned this week as the headlines hit - if they show signs of heated inflation, home loan rates will likely worsen. If inflation appears to be controlled, the markets will breathe a sigh of relief, and home loan rates may see some modest improvement. Chart: Fannie Mae 6.0% Mortgage Bond (Friday May 12, 2006)

The Mortgage Market View...

Ever boarded a plane, walked through the First Class section and wished that you could be one of those passengers seated in a large comfy chair, drink in hand, and plenty of leg room to stretch out? Sure, we've all been there, but maybe felt that the price for a First Class ticket was too expensive. Instead, we just continue to tolerate the headaches of the economy class, complete with getting smacked in the head by passengers trying to cram their bags into the overhead compartment, climbing over other passengers to wedge yourself into your cramped seat, and having your knees crushed when the guy in front of you reclines his chair. But now...there's a way you might be able to put yourself into a First Class seat...without the hefty price tag. Here's how it's done. The next time you hit the web to find the lowest coach fare, search out one with a special code like "Q-up", "Y-up", or "Z". These fares are just starting to create a buzz, and although they may cost a little more than bargain tickets, you greatly improve your chances of being upgraded to that cozy First Class seat, especially if you are a frequent flier. And even better...you do not have to use up your frequent flier miles to get upgraded to that seat in First Class; you actually earn air miles when you purchase a Q-up, Y-up or Z coach fare. So why would an airline offer a seat in First Class with a coach fare rate? Airlines have introduced these fares as a way to generate additional revenue. According to the Air Transport Association, the airline industry has lost more than $42 billion since the start of 2001, and has had to drastically cut expenses and place restrictions on upgrades to generate revenue. Typically, most of the passengers sitting in First Class seats are not paying the First Class price; they have merely cashed in frequent-flier miles to secure that comfy seat. For example, many passengers purchase the cheapest ticket available, and then use air miles to upgrade to First Class. But the airlines make little revenue when passengers upgrade using miles, and have been forced to restrict this practice and find a way to fill First Class with individuals that are actually paying for the seat. Consequently, airlines offer an undisclosed amount of seats at a Y-up, Q-up or Z coach rate to generate more revenue. And finding the Y-up, Q-up and Z fares online is fairly easy. With a few clicks of the mouse, you can visit any of the popular travel websites like Expedia, FareCompare, Orbitz, or Travelocity and search out these fares. In fact, FareCompare has a link for Y-up and Q-up fares right on their main page. Simply enter the departing city and a list of all destination cities will appear with the cost. These fares have been a well kept secret for quite some time, but now are creating quite a stir. The next time you visit your favorite travel website to compare fares, be sure to look into the Q-up, Y-up or Z fare and try to score a bit more legroom for that cross country flight!

The Week's Economic Indicator Calendar

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise. Economic Calendar for the Week of May 15 – May 19 Date ET Economic Report For Estimate Actual Prior Impact

The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is not without errors.

As your trusted advisor, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you.