Inflation Will Decide Whether Fed Hikes Rates

This article from the Wall Street Journal is a warning for home buyers to make a move now. As it appears the low interest rates may not remain low in 2007. Here is the article for your edification . . .

The Federal Reserve is expected to leave target interest rates unchanged at its meeting on Tuesday, fueling hopes that it will start cutting rates some time next year.

However, there's uncertainty over when rates would be cut and by how much. Fed Chairman Ben Bernanke, who's been open about his plans for interest rates, hasn't talked about the kinds of rate cuts that many investors are banking on.

Futures traders had been betting that the Fed would start cutting rates at its March meeting, but high employment rates have caused them to extend that prediction to May.

By June, futures trading indicates, the market thinks the Fed will have cut rates at least once, maybe twice. But Bernanke said in a speech two weeks ago that the question facing the Fed isn't whether to cut rates, it is whether to raise them to fight inflation. After all, "core" inflation, not counting volatile food and energy prices, remains higher than the 2 percent a year that the Fed is willing to tolerate.

If inflation keeps moderating over the next few months and pulls back toward the 2 percent level, then the interest rate cuts may happen. But if inflation proves sticky and stops pulling back, the Fed could be forced to cool it off by raising rates.

"Inflation is the key here," says Ethan Harris, chief U.S. economist at Lehman Brothers. "If you get serious inflation, if the Fed's fears materialize, then you will have the Fed hiking instead of cutting."

Source: The Wall Street Journal, E.S. Browning (12/11/2006)

Existing Home Sales to Trend Upward in 2007

This article is taken from the REALTOR (R) magazine online. It reveals some very interesting things as far as the 2007 home market. Read on . . .


Existing-home sales are expected to rise gradually in 2007 from current levels, with annual totals slightly lower than 2006, while new-home sales will continue to slide, according to the latest forecast by the NATIONAL ASSOCIATION OF REALTORS®.

David Lereah, NAR’s chief economist, says market conditions will vary around the country next year.

“Roughly three-quarters of the country will experience a sluggish expansion in 2007, while other areas should continue to contract for at least part of the year,” he says. “Most of the correction in home prices is behind us, but general gains in value next year will be modest by historical standards.”

For Buyers, a Window of Opportunity

“Buyers, especially first-time buyers, with the combined benefits of seller flexibility and an unexpected drop in mortgage interest rates, have a window of opportunity,” he adds. “These conditions will persist in many areas until early spring when inventory supplies are likely to become more balanced.”

Existing-home sales for 2006, finishing the third-best year on record, are projected at 6.47 million, a decline of 8.6 percent from 2005. For 2007, sales expected to rise steadily to an annual total of 6.40 million, which would be 1 percent lower than this year’s total.

“By the fourth quarter of 2007, existing-home sales will be 4.6 percent higher than the current quarter,” Lereah says.

Builders Slow New-Home Construction

New-home sales in 2006 are expected to fall 17.7 percent to 1.06 million, the fourth highest total on record, before sliding an additional 9.4 percent in 2007 to 957,000.

Much of the contraction in the new housing market results from cuts in builder construction to support pricing for current inventories. In addition, high construction costs in many areas are taking a bite out of potential profits.

Total housing starts for 2006 are likely to drop 12.3 percent to 1.82 million units, with another 15.1 percent decline in 2007 to 1.54 million.

Mortgage Rates Seen Rising to 6.7%

The 30-year fixed-rate mortgage is forecast to gradually increase to 6.7 percent by the fourth quarter of 2007. Last week, Freddie Mac reported the 30-year fixed rate dropped to 6.11 percent.

The national median existing-home price for all of 2006 is projected to rise 1.4 percent to $222,600, with another 1.0 percent gain next year to $224,700. The median new-home price should ease by 0.5 percent to $239,700 this year, and then rise by 0.8 percent in 2007 to $241,700.

“Keep in mind that overall home prices were still appreciating at double digit rates in the first quarter of this year — prices in this buyer’s market are temporarily a little below a year ago when we were in a strong seller’s market,” Lereah says. “This correction is one of the factors drawing buyers into the current market, but most sellers are still seeing very healthy long-term gains.”

Unemployment, Inflation Forecasts

The unemployment rate is expected to be 4.8 percent in 2007, after averaging an estimated 4.6 percent this year.

Inflation, as measured by the Consumer Price Index, is forecast to be 3.4 percent for 2006 and 2.3 percent in 2007, while growth in the U.S. gross domestic product is likely to be 3.3 percent for all of this year and 2.3 percent in 2007. Inflation-adjusted disposable personal income is projected to grow 2.6 percent for 2006 and 3.5 percent next year.

— REALTOR® Magazine Online

Interest Rates Drop Again!

For the third week in a row, 30 year fixed mortgage interests dropped. For qualified borrowers the lowest interest rate is 5.5%. The average interest for the Twin Cities area for all borrowers is 6.2%. This is lower than the national average of all borrower rates, which stands at 6.5%. If you are thinking of refinancing, or buying a new home, now is the time.