Jeff Underwood Personal Finance Expert and Mortgage Professional

Wednesday, the Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent.

The vote was 7-3 — the second straight meeting at which the FOMC adjourned with as many 3 dissenters. Prior to that last meeting, there hadn’t been 3 FOMC dissenters since 1992.

In its press release, the Federal Reserve presented a dour outlook for the U.S. economy, noting that since its last meeting in August:

1. Economic growth “remains slow”
2. Unemployment rates “remain elevated”
3. The housing sector “remains depressed”

The Fed also said that there are “significant downside risks” to the economic outlook, tied to strains in the global financial markets.

The news wasn’t all bad, however.

The Fed noted that business investment in equipment and software continues to expand, and that inflationary pressures on the economy appear to have stabilized. The Fed then re-iterated its plan to leave the Fed Funds Rate in its current range near 0.000 percent “at least until mid-2013″. This means that Prime Rate — the rate to which credit card rates and lines of credits are often tied — should remain unchanged at 3.250 for at least another 2 years.

Furthermore, as expected, the Federal Reserve launched a market stimulus plan aimed at lowering long-term interest rates. The Fed will sell $400 billion in Treasury securities with a maturity of 3 years or less, and use the proceeds to buy the same with maturity between 6 and 30 years.

Mortgage market reaction to the FOMC statement has been positive this afternoon. Mortgage rates in Arizona are improving, but note that Wall Street sentiment can shift quickly — especially in a market that’s as uncertain as this one.

If today’s mortgage rates and payments fit your household budget, consider locking in a rate. Rates can change swiftly.

The FOMC’s next meeting is a 2-day affair, scheduled for November 1-2, 2011.

The Federal Open Market Committee adjourns from a two-day, scheduled meeting today, the sixth of 8 scheduled meetings this year, and the seventh Fed meeting overall.

The FOMC is a designated, 12-person committee within the Federal Reserve, led by Fed Chairman Ben Bernanke. The FOMC is the voting members for the country’s monetary policy. Among its other responsibilities, the FOMC sets the Fed Funds Rate, the overnight rate at which banks borrow money from each other.

Note that the “Fed Funds Rate” is different from “mortgage rates”. Mortgage rates are not set by the Fed. Rather, they are based on the price of mortgage-backed bonds, a security traded among investors.

As the chart at top illustrates, the Fed Funds Rate and conforming mortgage rates in Gilbert have little correlation. Since 1990, the two benchmark rates have been separated by as much as 5.29 percent, and have been as close as 0.52 percent.

Today, the separation between the Fed Funds Rate and the national average for a standard, 30-year fixed rate mortgage is roughly 4 percent. This spread will change, however, beginning 2:15 PM ET Wednesday. That’s when the FOMC adjourns from its meeting and releases its public statement to the markets.

There is no doubt that the Fed will leave the Fed Funds Rate in its current target range of 0.000-0.250%; Fed Chairman Bernanke plans to leave the benchmark rate as-is until at least mid-2013. However, the Fed is expected to add new support for markets.

Unfortunately, there are few clues about how the Fed will support markets, and there is no consensus opinion regarding the size of the said support. As a result, mortgage rates should be bouncy today. First, they’ll be volatile ahead of the Fed’s statement. Then, they’ll be volatile post-Fed statement.

Even if the Fed does nothing, mortgage rates will change. This is because Wall Street is prepping for an announcement and — no matter what the Fed says or does — investors will want to react accordingly.

When mortgage markets are volatile, the safest move is to lock your mortgage rate in. There too much risk to float.

The Fed publishes meeting minutes 8 times annually – three weeks after each scheduled Federal Open Market Committee get-together. The Fed Minutes summarizes the FOMC meeting.

The Federal Reserve released the minutes from its August 9, 2011 Federal Open Market Committee meeting Tuesday.

The Fed Minutes contained no surprises and, as a result, mortgage rates across Arizona and nationwide have idled.

Although it gets less press attention, the Fed Minutes is every bit as important as the more highly-publicized, post-meeting statement from the FOMC. With its detailed record of conversation, the Fed Minutes highlights the discussions and debates that shape our nation’s monetary policy.

For example, here is some of what was said at the Fed’s August 2011 meeting :

• On growth : Economic growth had been slower than the committee expected
• On housing : The market “remains depressed”. Underwriting standards are “tight”.
• On rates : The Fed Funds Rate will remain low until mid-2013

In addition, the Fed talked about whether a third round of asset purchases should be announced. Ultimately, that plan was rejected by consensus.

The FOMC’s next meeting is a 2-day meeting, scheduled for September 20-21. The meeting was originally scheduled for just one day, but Fed Chairman Ben Bernanke chose to extend it to two. Wall Street believes that the extension was made so Fed members could discuss new forms of economic stimulus.

Depending on the form of said stimulus — if it should even occur — mortgage rates may rise or fall. We can’t know for certain unti the size and scope of the Fed’s plan is known.

For now, mortgage rates remain rock-bottom. There’s more room for rates to rise than to fall. If you’re shopping for a loan and the rate looks right, therefore, consider locking on it.

Also, join me at Facebook.com/TheUglyTruthAboutMoney.

Jeff Underwood, The Street Economist
The Ugly Truth About Money

The Ugly Truth About Money

CNNMoney recently released its Best Places To Live 2011 list.

The annual survey is based on data from Onboard Informatics. Using Quality of Life factors such as education, crime and “town spirit”, and focusing on towns with between 8,500 and 50,000 residents, the CNNMoney survey ranks the country’s best “small towns”.

To be eligible, towns must be have a median household income greater than 85 percent, and less than 200 percent of the state median income; must not be a categorized as a “retirement community”; and must be racially-diverse.

From a list of 3,570 eligible towns nationwide, Louisville, Colorado was ranked #1.

The complete Top 10 Best Places to Live as cited by CNNMoney, and their respective average home listing prices :

1. Louisville, Colorado ($383,569)
2. Milton, Massachusetts ($577,008)
3. Solon, Ohio ($291,162)
4. Leesburg, Virginia ($486,018)
5. Papillion, Nebraska ($218,520)
6. Hanover, New Hampshire ($643,500)
7. Liberty, Missouri ($177,678)
8. Middleton, Wisconsin ($347,770)
9. Mukilteo, Washington ($345,487)
10. Chanhassen, Minnesota ($418,607)

Rankings like these can be helpful to home buyers nationwide, but it’s important to remember that the Best Place To Live survey is subjective. You may find none of the above towns to be to your liking.

You may also find the lowest-ranked city to be your favorite.

In other words, before making a decision to buy, connect with a real estate agent who has local market knowledge. That’s the best, most reliable way to make sure you get the housing data that matters to you.

Also, join me at Facebook.com/TheUglyTruthAboutMoney.

Jeff Underwood, The Street Economist
The Ugly Truth About Money

The Ugly Truth About Money

Home resales slipped in July.

According to the National Association of REALTORS®, Existing Home Sales nationwide fell to 4.67 million units on a seasonally-adjusted annualized basis last month. It’s the fourth straight month below the 5 million mark, and the report’s lowest reading since November 2010.

An “existing home” is a home that’s been previously occupied or owned.

In addition, the Existing Home Sales report showed home supplies rising nationwide. At the current pace of sales, in other words, the complete, national “For Sale” inventory would be exhausted in 9.4 months. This, too, is the worst reading since November 2010.

On a units basis, however, the number of homes for sale actually fell in July. As compared to June, home resale inventory dropped 65,000 units to 3.65 million.

From these figures, we can infer that, despite low mortgage rates and lagging home values, buyer activity is slowing in Arizona and nationwide. This may be seasonal, or it may be a long-term trend.

Either way, there’s opportunity for today’s home buyers.

With mortgage rates at all-time lows, home affordability is peaking. More households can afford housing payments than during any time in history and with the fall season approaching, buyers in Chandler may find contracts negotiations to be more “friendly”.

This can mean lower sale prices and larger concessions from sellers — the hallmark of a Buyer’s Market.

It’s a good time to look at your options. Talk to your real estate agent and see what’s out there for you. Low home prices may persist, but low mortgage rates likely won’t.

Also, join me at Facebook.com/TheUglyTruthAboutMoney.

Jeff Underwood, The Street Economist
The Ugly Truth About Money

The Ugly Truth About Money

Last week, at its 5th scheduled meeting of the year, the Federal Open Market Committee voted to leave the Fed Funds Rate in its target range near zero percent.

The Fed Funds Rate has been near zero percent since December 2008 and, in its official statement, the FOMC pledged to leave the Fed Funds Rate untouched for at least another 2 years.

This doesn’t mean mortgage rates will be untouched for 2 years, though.

Mortgage rates and the Fed Funds Rate are two different interest rates; completely disconnected. If mortgage rates and the Fed Funds Rate moved in tandem, the chart at right would be a straight line.

Instead, it’s jagged.

To make the point more strongly, let’s use real-life examples from the past decade.

• June 2004, 529 basis points separated the Fed Funds Rate and the 30-year fixed mortgage rate
• June 2006, 168 basis points separated the Fed Funds Rate and the 30-year fixed mortgage rate

Today, the separation between the two benchmark rates is 407 basis points.

1 basis point is equal to 0.01%.

Between now and mid-2013, when the Fed may begin changing the Fed Funds Rate, the spread between rates will change based on economic expectation — not Fed action (or non-action). If the economy is expected to improve, mortgage rates in Chandler will rise and the spread will widen.

Should mortgage rates cross 6 percent before the Fed starts raising rates, it will create the widest interest rate spread in history, surpassing the 615 basis point difference set in August 1982.

At the time, the Fed Funds Rate was 10.12% and mortgage rates averaged 16.27%.

On the other hand, if the economy shows signs of a slowdown for late-2011 and beyond, mortgage rates are expected to drop.

Shopping for a mortgage can be tough — especially in a volatile environment like the current one. Mortgage rates move independent of the Fed Funds Rate. Make sure you’re watching the proper market indicators. It’s your best chance to lock the lowest rate possible.

Also, join me at Facebook.com/TheUglyTruthAboutMoney.

Jeff Underwood, The Street Economist
The Ugly Truth About Money

The Ugly Truth About Money

Tuesday, the Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent.

The vote was 7-3 — the first time in 5 meetings that the nation’s Central Bank was non-unanimous and the first time since 1992 that the FOMC adjourned with as many as three dissenters.

In its press release, the FOMC had little good to say about the U.S. economy, noting that since its last meeting in July:

1. Growth has been “considerably slower” than expected
2. Labor market conditions have deteriorated
3. Household spendng has “flattened”

The Fed also noted that the housing sector remains depressed.

On the positive side, the Fed said that business investment in equipment and software continues to expand, and that energy costs have dropped and no longer contribute to inflationary pressures on the economy.

In fact, the Fed worries that inflation may be running too low for the country’s good.

To that end, the Federal Reserve has pledged to keep the Fed Funds Rate in its current range near 0.000 percent “at least until mid-2013″. This is a departure from prior statements in which the Fed gave no such date.

Mortgage market reaction to the FOMC statement has been positive this afternoon. Mortgage rates in Arizona are improving, but note that sentiment can shift quickly — especially in a market as uncertain as this one.

If today’s mortgage rates look good in your household budget, consider locking in a rate.

The FOMC’s next scheduled meeting is September 20, 2011.

Also, join me at Facebook.com/TheUglyTruthAboutMoney.

Jeff Underwood, The Street Economist
The Ugly Truth About Money

The Ugly Truth About Money

The United States is projected to reach its legal $14.294 trillion debt limit today. The limit was set by Congress February 12, 2010. The U.S. Treasury may not issue new debt beyond the debt ceiling.

Since April 2011, Congress has debated ways to remain below the nation’s $14.292 trillion borrowing limit. The debate commenced with the passage of the 2011 U.S. Federal Budget which featured a $1.645 trillion deficit.

This multi-trillion dollar deficit ensured that the debt ceiling would be touched at some point during the current fiscal year.

That date was May 16. It took an intervention from the Treasury Secretary to temporarily extend the limits; an “extraordinary measure” meant to keep the U.S. government from defaulting on its debt.

With additional room to borrow, then, the U.S. Treasury’s new debt ceiling date was moved to August 2. Congress has been debating the federal budget since mid-May with the dual-goal of (1) Remaining below the federal debt limit, and (2) Creating a budgetary surplus for the future.

An agreement is expected today.

For home buyers and rate shoppers in Gilbert , this is an important development. The debt ceiling agreement will influence mortgage markets and, as a result, require amendments to home affordability calculations. As mortgage rates change, your purchasing power does, too.

Unfortunately, we don’t know in which direction mortgage rates will go.

Since the prospect of a deal was first hinted Friday, mortgage rates have been improving. Conforming, 30-year fixed rates are down nearly 0.250 percent, lowering a $150,000 mortgage payment by $22 per month.

The final deal terms of a deal, however, could lead rates higher.

As always, the safest play is to lock your mortgage rate if you are comfortable with its proposed payment. Yes, mortgage rates may move lower in the future but, then again, maybe they’ll move higher.

Also, join me at Facebook.com/TheUglyTruthAboutMoney.

Jeff Underwood, The Street Economist
The Ugly Truth About Money

The Ugly Truth About Money

The Federal Reserve released its June 2011 Federal Open Market Committee meeting minutes Tuesday. It contained no surprises and, as such, mortgage rates in Arizona have idled in the hours since.

The Fed Minutes is published 8 times annually, three weeks after each scheduled Federal Open Market Committee meeting. It’s the official log of the meeting’s conversations and debates.

The Fed Minutes is the lengthier companion piece to the FOMC’s more well-known, post-meeting press release. As compared to the brief-and-focused press release,by comparison, the Fed Minutes are long and detailed.

June’s press release was 458 words long. Its minutes totaled 6,889 words.

The June minutes reveal some interesting perspectives from within the Federal Reserve, too.

• On growth : Economic recovery had been slower than the committee expected
• On housing : The market remains depressed. Foreclosures are “holding back” construction.
• On rates : The Fed Funds Rate should remain low for an “extended” period

In addition, the Federal Reserve discussed whether a new round of economic stimulus was necessary. Committee members agreed that a poor outlook for employment in the medium-term would make this move more likely.

There was little that surprised Wall Street in the June Fed Minutes. This is why market reaction has been muted since its release.

The FOMC meets next August 9. If jobs data continues to weaken between now and then, expect the stimulus chatter to continue. It’s unclear, however, how this would impact mortgage rates.

For now, mortgage rates remain near their all-time lows, and they have much more room to rise than to fall. If you’re shopping for a loan, therefore, the timing is right for a lock.

Also, join me at Facebook.com/TheUglyTruthAboutMoney.

Jeff Underwood, The Street Economist
The Ugly Truth About Money

The Ugly Truth About Money

On paper, the market for newly-built, single-family homes looks healthy.

Last month, the number of new homes sold on an annualized, seasonally-adjusted basis tallied 319,000. The May reading is the second-highest of the year, and 6 percent above the current 12-month average.

These are strong numbers in isolation. However, after accounting for the dwindling supply of new homes for sale as well, the figures look even stronger.

In May, at the current pace of sales, the complete, national inventory of new homes for sale would have been sold in just 6.2 months.

That’s the quickest pace in a year and a 3-month improvement from a year ago.

To hear it from homebuilders, though, you’d think that sales were crashing.

Homebuilder confidence slipped to a 9-month low this month; builders report slowing foot traffic; and the prospects for the next 6 months appear weak. This is not the portrait painted by HUD’s May New Home Sales report.

Falling supplies and rising demand correlate to higher home prices. Yet, builders are pessimistic for their market. Therefore, despite the economics, psychology may help buyers experience more favorable negotiations, including complimentary upgrades and other builder concessions.

If you’re a buyer in today’s market, it’s a reason to consider the new home market. There may be good value once you know where to look.

Also, join me at Facebook.com/TheUglyTruthAboutMoney.

Jeff Underwood, The Street Economist
The Ugly Truth About Money

The Ugly Truth About Money