September 11 2006

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For the week of Sep 11, 2006 --- Vol. 4, Issue 37

Last Week in Review

DON'T CROSS YOUR EYES, THEY'LL STICK LIKE THAT...DON'T RUN WITH SCISSORS, YOU'LL PUT SOMEONE'S EYE OUT...DON'T SWALLOW YOUR GUM, IT WILL STAY INSIDE YOU FOR SEVEN YEARS... Ahh yes, the wise yet sometimes confusing words most of us heard from our parents - but perhaps weren't sure how to react, wondering if they were really true. In just the same way, Bonds and home loan rates weren't quite sure how to react to some of the words they heard this week, wondering how much of what they heard was true. While the news week was slow, the Fed speakers were out in full force, dropping comments left and right about inflation and the economy. San Francisco Fed President Janet Yellen said that inflation was still outside her comfort zone, and that the Fed should be prepared to raise interest rates further if price pressures do not moderate soon. But then Cleveland Fed President Sandra Pianalto remarked that she believes inflation is moderating...and further believes that the economy still has not fully absorbed the rate hikes. She remarked that she voted for a pause in order to accumulate more information before deciding if further hikes are needed to keep inflation contained. So is inflation running rampant, or under control? Is the economy still picking up steam, or moderating? Will chewing gum swallowed actually stay inside your body for seven years? Bonds weren't sure how to react to the somewhat mixed messages of the week - and home loan rates remained relatively stable for the week overall. SPEAKING OF PARENTAL WISDOM, MANY OF US FIND OURSELVES IN A POSITION TO HELP OUR PARENTS MAKE WISE DECISIONS AS THEY GROW OLDER. WHILE THIS MAY NOT COVER RUNNING WITH SCISSORS, LIVING ARRANGEMENTS ARE OFTEN A TOPIC OF DISCUSSION, AND MAY INCLUDE THE POSSIBILITY OF LIVING WITH US. DON'T MISS THIS WEEK'S MORTGAGE MARKET VIEW, ON AN IMPORTANT TAX BREAK FOR THIS SITUATION.

Forecast for the Week

After last week's slow pace of economic releases, this week finally brings a few heavy hitters that could influence Bonds and home loan rates. The Retail Sales Report on Thursday is a good indicator of how the consumer is behaving in the economy - are we still feeling the love, out there spending as much as we were a few months back, or are we pulling back on our purchases, perhaps due to increased prices or higher costs to finance? Friday's Consumer Price Index will also be highly watched, as it will show if the prices consumers are paying for goods and services are climbing in an inflationary manner. Bonds and home loan rates react poorly to strongly positive economic news, as well as releases that include the scent of inflation - and vice versa, they improve on weak economic news or the lack of inflation - so the flavor of these next two upcoming reports will determine the direction of rates in the near term. And let's not forget - the Fed is still on tour, with several Fed Presidents and Governors doing the road show this coming week. Presumably, they'll be wearing clean underwear in case they are in a car accident...and just like last week, any surprising stray comments on inflation or the economy could be market movers as well. Chart: Fannie Mae 6.0% Mortgage Bond (Friday Sep 08, 2006)

The Mortgage Market View...

It's hard to imagine how we'd ever repay our parents for all they have done for us. And in the circle of life, we try to help our parents as they get older. In fact, according to a recent survey done by the National Alliance for Caregiving and the American Association of Retired Persons (AARP), nearly one in four households are now providing care to a relative aged 50 or older. And sometimes this care being provided may even include having them live in our home with us. But what if having a parent move in with you creates quarters that are too close for comfort...and you are forced to sell your home? Well, the IRS wants to help - and may even provide a tax break for taking an ailing parent into your home. Let's take a closer look. Under normal circumstances, if you sell your home prior to living in the property for two full years, you are normally subject to pay capital gains on the profit made. There is an exclusion that allows for $500,000 of tax free gain if you are married or half that if you are single - but you must have lived in the home for two of the past five years. However, according to the IRS, if you take an ailing parent into your home and therefore are forced to sell, you can still get a pro rated tax break, even if you have not been in the home for the full two years. For example, a couple gets married, buys a new home, and one year after they move into the home the wife's mother suffers an illness and has to move in with the couple. Unfortunately, the couple does not have enough room to properly accommodate the mother and is forced to sell the property and purchase a larger home. Being that the couple was pressured to sell the home due to unforeseen circumstances, they can claim a percentage of the $500,000 capital gains exclusion equal to the portion of the two-year period that they lived in the house. Let's break this down. In this situation the couple lived in the home for one year, and so would be eligible to receive a prorated $250,000 capital gains exclusion (50% of the normal $500,000 capital gains exclusion, due to living in the property 50% of the required two years). So, if the couple purchased the home for $300,000 and sold the home for $400,000 - making only $100,000 in profit, the couple would not have any tax liability at all. This situation is becoming more common and the life expectancy of our aging population is growing, so being familiar with this tax break could provide substantial savings for you or someone you may know. Feel free to forward this article on to your friends, family members, or colleagues. Additionally, it is always important to meet with a tax professional regarding situations like these - and if you or someone you know needs a referral, please contact me, and I will be happy to recommend a great tax pro to you.

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 September 11 – September 15 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.