October 23 2006

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For the week of Oct 23, 2006 --- Vol. 4, Issue 43

Last Week in Review

IT'S GOING...IT'S GOING...IT'S GONE! You got it, the Dow cracked another historic high, closing above 12,000 last week...and believe it or not, did so on the anniversary of "Black Monday" in 1987, when the Dow plunged by 508 points and suffered it's second largest loss in history. The strong stock gains sure seem to indicate that investors continue to feel good about the US economy...which perhaps has achieved that rare feat of a "soft landing", slowing down without actually stalling out. The economic reports of last week were mixed, but underscored a continuous message - that the US economy is still cooking along with some strength, and certainly exceeding most analysts' expectations. And most all the recent reports cover the bases in bearing this out - housing numbers remain better than expected, employment is still reasonably strong, the stock market is roaring away...and as a result, inflation continues to be hotter than anticipated. Bonds and home loan rates were fairly stable this week - but are very sensitive to the fact that inflation is remaining stubbornly present in the economy. This is why Bond pricing and home loan rates have worsened slightly in recent days. While there are no clear-cut signals - the stream of upbeat reports indicate that the economy has not slowed down as much as the Fed had expected, meaning that the Fed actually might have to consider increasing rates a little bit more to combat the inflation that still remains in the economy. Read on to learn what's on deck for the coming week, and how it might impact home loan rates ahead... THE SCORES ARE IN...AND THEY ARE STARTLING. DON'T MISS THIS WEEK'S MORTGAGE MARKET VIEW ON THE MOST RECENT TAX STATS, SHOWING WHO'S ON FIRST AND PAYING SOME BIG LEAGUE TAX DOLLARS RELATIVE TO INCOME.

Forecast for the Week

So the big showdown is coming up this week - and it's sure to be exciting. Will Richmond Fed President Lacker and his team of "dissenters" play a little hardball, and try to persuade the rest of the Fed members that another rate hike is in order? Or will the Fed sit back and again vote to remain in a "paused" mode? Lacker and other Fed members seem to feel that all the news of late still hints of inflation, and controlling inflation in our economy is the Federal Reserve's main charge. Last week's reports still hinted at a rate of inflation that is about 2.9%...higher than the Fed's desired ballpark range of 1 - 2%. The action in Bond pricing and home loan rates may be lively this week when the Fed makes their announcement on Wednesday. If the Fed decides to remain in a paused mode - the Bond market and home loan rates may move in a positive manner if the accompanying Policy Statement indicates that the Fed does indeed feel inflation is controlled. However, if the statement does hint at concerns of inflation and the real possibility of rate hikes ahead - Bonds and home loan rates will likely worsen, with confirmation that inflation is indeed not on the way out quite yet. By the same token, a rate hike would be a surprise after two consecutive decisions to pause...and while normally a move to control inflation helps Bonds and home loan rates to improve, a surprise hike might just confirm those inflationary fears, and cause Bond pricing and home loan rates to worsen. At this point - it's anyone's ball game...but depending on the Fed's decision, the action for home loan rates may be intense. Chart: Fannie Mae 6.0% Mortgage Bond (Friday Oct 20, 2006)

The Mortgage Market View...

SOME RATHER "TAXING" STATISTICS... The IRS just completed their analysis of 2004 tax returns, the most recent available - and the findings are very interesting, recently reported in the Kiplinger Tax Letter dated October 6, 2006. Relatively speaking, people that earn high incomes are shouldering a very large percentage of the overall taxes paid - in fact, the latest numbers show they are bearing the second highest burden since the 1986 Tax Reform Act passed. Here are the "taxing" stats, which also make some interesting talking points...where do YOU fit in? The top 1% of filers paid 36.9% of all income taxes, up from 34.3% the year before, but represented just 19% of total Adjusted Gross Income (AGI). An AGI of at least $328,000 was needed to be classified in the top 1%. The top 5% of tax filers paid 57% of total income tax received by the IRS, and made 33% of total AGI. These filers all had incomes of $137,000 or more. And the top 10% of all filers - those with AGI's of at least $99,100 - bore 68% of the income tax burden, but only represented about 44% of total Adjusted Gross Income. The bottom 50% of filers paid just 3.3% of total income tax, down from 3.5% the prior year. This was the lowest figure in recent years. The lowest-income earners actually had a NEGATIVE income tax rate, due to the Earned Income Credit refunding income and payroll taxes.

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 October 23 � October 27 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.