Las Vegas Undressed

Mini-Panic in Stocks - Good for Mortgage Rates?

The stock market came slightly unglued today, dropping 387 points to 13,270, as an announcement by BNP Paribas raised concerns about a widening problem in the U.S. Credit markets. The European Central Bank and the Federal Reserve added a combined $154 billion into temporary banking reserves. There is a concern about credit availablity and bad sub-prime mortgages. It seems as though there is growing evidence that the sub prime lending problems are starting to work there way into the general economy both here and abroard. The $130 billion injected by the ECB is the largest ever. “This is a mini-panic,” said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co., “All the things that had been denied up until this point are unraveling. On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer.” There is some talk that the Fed may cut rates at their next meeting. I would suggest that the Dow Jones Industrial average could easily find itself back to 11,000 if this “mini-panic” continues. On the technical side, a point and figure chart could confirm that zone, however, the Dow would need to fall below 13,100 and stay below that number.

On the Mortgage front this news is good for mortgage rates since there is flight to quality issue when the stock markets are in turmoil. The 10-Year Treasury note yield has an influence on where mortgage rates are heading. The chart below indicates (by the red trend line) that the yield is still in an uptrend. However, the recent failure to get above 4.9% would indicate that  we may see a trading range between 4.6% and 4.9%.

Remember that even if the Fed were to cut rates, it will have the greatest impact on short term rates. When the Fed started and continued to raise rates, 30 year fixed rate mortgages were pretty much unchanged. A rate cut could start to bring short term mortgage rates down and this can make home ownership more affordable. You may wish to view my last article that describes some of the influences on mortgage rates and the bond market. This can be done by clicking on Mortgage News on the blue bar at the top of the home page.