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For months, investors dealt with a bad case of the jitters. The cause of their anxiety: interest rates, of course. Unlike last year, when it seemed like there’d be no end to the Federal Reserve’s rate snipping, investors displayed grave concerns about the Fed’s new course of action. In May, Chairman Alan Greenspan hinted that the Fed would likely hike rates. His words produced convulsions in the stock and bond markets. Between June 8 and June 11, the Dow Jones industrial average fell a whopping 418.87 points. By the end of the same week, bond prices had plummeted, as the yield on the 30-year Treasury bond traded at 6.155%, the highest level recorded since November 1997.
On June 30, as anticipated, the Fed raised its target on the federal funds rate-what banks charge each other overnight-a quarter point to 5% at the end of its two-day Federal Open Market Committee meeting. Also, the central bank announced it had changed its bias to “neutral” from “tightening”-meaning rates may not rise again immediately. The news lifted stocks, with the Nasdaq composite and the Standard & Poor’s 500 indices soaring to record highs. Also, bond prices rose, sending yields below 6%.
So what effect has all the hubbub had on mortgage rates? As you can see by our be indicators, the 30-year fixed-rate mortgage has bounced up and down as much as the indices for the long bond, the Dow, the S&P 500 and the Nasdaq composite. And on July 8, the average fixed-rate 30-year mortgage was at 7.65%, near a two-year high, versus 6.76% in September 1998, the first plot point on our mortgage graph.
Does that mean that house building, home buying and mortgage refinancings are expected to cool anytime soon? Not by a long shot. According to The State of the Nation’s Housing, the recently released 12th annual report by Harvard’s Joint Center for Housing Studies, home ownership hit a record 66.3% in 1998 due to mortgage and unemployment rates being at 30-year lows. The report also indicated that more minorities were acquiring property at a substantial clip, comprising 30% of first-time home buyers compared with 19% in 1985.
Harry Dent Jr., a demographer who has used his analysis to forecast market trends, says that “baby boomers will continue to drive the stock market until at least 2008. At the same time, they will have a positive impact on home sales. We’ll definitely see a rise in the purchase of second homes and vacation homes.”
What does all this mean? It’s still a great time for home owners to trade up or refinance their homes and first-timers to shed their status as renters. And if you heard money manager Ron Muhlenkamp at the Money Show in Las Vegas, the housing market is a lucrative sector for investors as well. “As a value manager, home builders present a prime opportunity,” says Muhlenkamp, who runs a value fund that bears his name. “For the near term, retirees as well as young people will continue to drive
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