The housing market received a serving of good news last week, as New Home Sales reportedly rose 17.5% in December to come in better than expectations. Overall, the report demonstrated that housing continues to recover – albeit slowly. Despite that good news though, the markets were keyed in on another important event last week-- the release of the Fed’s Interest Rate Decision and Monetary Policy Statement.
As expected, the Fed made no change to the Fed Funds Rate and even the Policy Statement was pretty much the same. But that didn’t stop the markets from getting a little fired up about the release.
It’s important to understand that the Fed has to be very careful with how bullish their economic comments are, as they don't want to see long-term rates move higher. The Fed's comments couldn’t be categorized as bullish as they said "employers remain reluctant to add to payrolls" and "the housing sector remains depressed."
So why did bonds initially improve nicely on the news and then crumble later in the day? The answer is: not everyone in the trading pits is buying what the Fed is saying. Instead, some people believe the Fed is talking down the true underlying strength of the economy, so that it can justify injecting the full $600 billion of quantitative easing into the economy.
Last week, President Obama delivered his State of the Union Address to members of Congress. Although the President’s call for a freeze on discretionary spending for five years may appear to be bond bullish in that any reduction in the deficit would be good for bonds, the reality is that so much more has to be done to really get our long-term debt in check. And some of last week’s weakness in bonds was likely attributed to the feeling that the speech came and went without any real sense that the deficit is going to be reduced in a meaningful way, especially in the near term. The bond market probably would have liked the word "cut" in spending rather than "freeze," since a “freeze” suggests only a temporary halt in spending at current levels.
In the end, the news last week demonstrated that economic conditions are improving, but they are doing so gradually. As a result, the market remains volatile, as bonds and home loan rates move up and down depending on what reports or speeches hit the news wires. The good news is that despite the volatility, home loan rates remain extremely low for now.
Posted via email from WESTCHESTER COUNTY DISTRESSED PROPERTY INFORMATION
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