Saturday, August 20, 2011

What does the Debt Ceiling have to do with buying a home?

I asked Marla Sarkozy, a Direct Lender with Blue Oak Mortgage, (A Stearns Lending Company) to help make sense of the Debt Ceiling impact on home buying. This is what she had to say:

After months of political grumbling back and forth, the Debt Ceiling was finally raised and the country took a step - albeit a small one - towards lowering our enormous budget deficit.

With the political stalemate behind us, it's time to focus on how the Debt Ceiling deal will impact Bonds and home loan rates.

First, shortly after the deal was announced, Fitch Ratings and Moody's both reaffirmed the United States' AAA rating, citing that the Debt Ceiling agreement virtually removes any threat of default. That was Bond friendly news and helped Bonds and home loan rates improve. But the ratings agencies did leave the door open for a future downgrade depending on how the debt and budget negotiations continue in the future. So the Debt Ceiling may be raised, but the issue of debt and credit ratings is far from over.

Beyond that, the deficit reduction program agreed to in the deal should help strengthen the value of US debt, because there will be less spending. At the same time, less government spending will also weigh on Gross Domestic Product (GDP). And just last month, we saw how weak the GDP already is when the 2nd Quarter GDP came in well below expectations and at the slowest growth rate in 2 years. Additionally, the 1st Quarter GDP was revised sharply lower than it was previously reported. Remember, a weak GDP would make Stocks LESS attractive and Bonds MORE attractive - as Bonds generally perform better during sluggish economic times.

Bottom line… be careful what you wish for. When rates moved sharply higher this past winter, it was due largely to the Fed's second round of Quantitative Easing (QE2). When that ended, the prevailing wisdom was that the only way rates could come back down to levels anywhere near where they were on the eve of QE2 was if the economy "endured more pain." That sure is what we are seeing of late as growing economic uncertainty, persistently high unemployment and rising consumer pessimism is helping Bonds move higher and trade within an earshot of the best levels - ever!

Though Bonds and home loan rates look very attractive right now, we can't be complacent and think rates will stay low or go even lower still. As fast as prices have moved higher, things can change in a heartbeat if the economy starts to see some good news.

And, although there isn't much, there is some good news out there. For example, the most recent reports for Housing Starts and Building Permits were both reported better than expected. While this is only one number and one number doesn't make a trend, this is a good figure, and I will be watching closely for follow through in future readings.

Marla can be reached at:

Marla Sarkozy
Direct Lender, Blue Oak Mortgage (A Stearns Lending Company)
NMLS #256557
408 718 8842 cell
408 521-0157 efax

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