Fiscal Literacy

How To Shop For Mortgages In A "Vacation Week"

Mortgage markets are like any other market — in order for goods to change hands, a buyer and a seller must first reach an agreement to “trade” at a specific price point.

In general, the more buyers and sellers there are for a particular item, the easier it is to find that “fair value” and make the deal.

An abundant number of buyers and sellers often creates a liquid market in which assets — in this case, mortgage bonds — can be sold rapidly with minimal loss.

This week, though — with so many traders on vacation — the “liquid market” has gone illiquid. The treasury market posted just 41 percent of its normal, daily volume Monday, leading to erratic pricing in the mortgage bond market which, in turn, caused mortgage rates to follow.

For example, mortgage rates started the day lower yesterday before sprinting higher over a 30-minute, early-afternoon span. Markets were largely unprovoked by economic data, geopolitical developments, or technical factors. It just, kind of, “happened” and the move left mortgage rate shoppers in the dust.

That could happen a lot this week. So, if you’re in the market for a mortgage, be ready to lock quickly. With low liquidity, rates rarely sit still for long.

(Image courtesy: Purdue BCM)

Fiscal Literacy

The Big Scary ‘D’ Word

I am not referring to Democrats, Detroit or the Depression. The big scary ‘D’ word of the week has been DEFLATION. What is deflation? According to Dictionary.com Unabridged (v1.1) the word deflation is defined as:

1. the act of deflating or the state of being deflated.
2. Economics. a fall in the general price level or a contraction of credit and available money.

Everyone loves a good deal. I know that I have personally enjoyed the falling gas prices (< $2.00 per gallon) of late. With automobile prices being slashed, automobiles that I would have not considered in the past are viable options now. Even home prices have made once affluent areas more affordable to the average buyer.

You maybe asking yourself, what’s the problem with falling prices? A reduction in prices is a normal part of business and should be welcomed. The real issue with DEFLATION is the contraction of credit and available money. This goes beyond the headlines of bank lending.

You see, when prices begin to spiral downward the cash flow for a business becomes very restricted. This leads to cost savings measure which generally are linked to employment. With record-levels of unemployment, there is even less money circulating through an American economy that is heavily tied to consumer spending.

For those that survive the layoffs and pink slips, the fear factor (VIX) kicks in and also caps spending. This ultimately creates a vicious cycle of deflating prices that could lead to a depression. Deflation can be debilitating on the macro & micro economies of the world as non-rational decision making becomes the norm & fear drives purchasing decisions.

Be scared…be very scared!