Dollar Drops - Why and What Does it Mean?

Last Week in Review: The US Dollar has dropped. Find out why and what it could mean to home loan rates! Forecast for the Week: A full load of economic reports hits the markets. Read what they are and why they matter. View: How much can you deduct for driving? Discover what’s changed...and how you can benefit!

Last Week in Review

"Bet your bottom Dollar?" These days the more appropriate question is: Where is the bottom of the Dollar? That’s because the US Dollar is starting 2011 in very poor fashion, with its value dropping relative to other currencies. Let’s take a look at why... and what this could mean for home loan rates! 1. Some of the Dollar’s drop is attributed to the recent strength in the Euro, which has gotten a boost from some positive stories of late, like Spain and Portugal's ability to sell debt in the Bond market without crisis. But the question is...have Europe's problems gone away? No - there will be more problems ahead for the region and as they emerge, we should see a reversal in the Euro's strength along with improvement in the US Dollar. 2. Another reason for the Dollar's weakness is the Fed’s Quantitative Easing (known as QE2). Remember, while it would never be officially stated, one of the implicit aims of QE2 is to devalue the US Dollar in order to boost our exports and thus GDP. At this point, the weakening US Dollar hasn't had a big negative effect on the US Bond market, but should the Dollar materially weaken, it could make US denominated assets like US Bonds less valuable and desirable amongst global investors...and it has been these foreign investors, like China, who have supported the US Bond market for years by purchasing our debt. Remember, home loan rates are tied to Mortgage Backed Securities, which are a type of Bond. So negative news for Bonds would also be bad news for home loan rates. In housing news last week, Existing Home Sales for December were reported much better than expected. The jump in sales is likely attributed in part to the recent trend of rising home loan rates, which has prompted many homebuyers to take advantage of the still low home loan rates. Building Permits - which signal future construction - also came in better than expected last week, surging 17% in December. Relatively speaking, 2011 looks to be a good year for the housing industry. There will still be some areas that suffer price declines and those will be where foreclosure backlogs overhang and where unemployment rates are even higher than the national average. But housing has bottomed out in many areas and should see more of a pick up in the second half of 2011. And although home loan rates will likely rise slightly as the year progresses, they are still near all-time lows right now. That means homebuyers still have a tremendous opportunity in front of them. If you or someone you know is considering purchasing a home, the combination of low home loan rates and affordable home prices make this an ideal time. Call or email today to discuss how you can benefit from the current situation.

Forecast for the Week

This week includes a full load of economic reports ranging from housing and the economy - but the big event will be the Fed Meeting. We’ll start the week with a read on consumer attitudes with the Consumer Confidence report on Tuesday. That report will be followed by the Consumer Sentiment Index on Friday. We’ll also see additional housing news this week, with a report on New Home Sales in December due out Wednesday and the Pending Home Sales report for December due out Thursday. The Federal Reserve will also hold its FOMC meeting this Tuesday and Wednesday, with the Fed’s Policy Statement due for release Wednesday afternoon. There’s no chance for an interest rate hike at this meeting - but what the Fed says about the economy, inflation, and its Quantitative Easing program could have an impact on rates. Thursday’s weekly Initial and Continuing Jobless Claims Report will be important, as always. Last week Initial Jobless Claims came in below expectations and the 4-week moving average fell from the previous week. Those readings tell us the trend in the labor market is continuing to improve...albeit at a slower pace than historically seen at this stage within an economic recovery. We’ll also get a read on the economic recovery with Durable Good Orders on Thursday. This report gives us an update on consumer and business buying behavior on big-ticket items that are designed to last for an extended period of time, like furniture, televisions, appliances, vehicles, copy machines, and so on. It’s an interesting report, as people tend to hold back on these types of purchases when they are feeling a need to be extra conservative with their finances or feel insecure about their employment. The GDP report will be followed on Friday with reports on Gross Domestic Product (GDP) - which is the broadest measure of economic activity - and the Employment Cost Index (ECI). The ECI is one way to evaluate wage trends and the risk of wage inflation, as well as possible price pressures. This is important to the housing industry because if wage inflation threatens, it is possible home loan rates will rise through Bond prices dropping. Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. As you can see in the chart below, Bonds and home loan rates continued their negative trend to end the week worse than where they started. Chart: Fannie Mae 4.0% Mortgage Bond (Friday Jan 21, 2011)

The Mortgage Market Guide View...

Mileage Rates for 2011 If you drive a car, truck or van for work, you’ll want to make sure you know the standard mileage rates that the Internal Revenue Service (IRS) has set for 2011. These mileage rates are used to calculate deductible costs for driving an automobile for business, charitable, medical and moving purposes. New for 2011 As of January 1, 2011, the standard mileage rates are as follows: Businesses = 51 cents per mile driven Medical or moving = 19 cents per mile driven Charitable organizations = 14 cents per mile driven You’ll notice that the 2011 rates for medical, moving, and business driving went up slightly, while miles driven for charitable organizations remained the same. For-Hire Now Qualifies! Beginning in 2011, taxpayers are allowed to use the business standard mileage rate for vehicles used for hire, such as taxicabs. Make Sure You Qualify Before you calculate your deduction, make sure you qualify. The IRS reminds taxpayers that they cannot use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously. However, the IRS is accepting public comments on this policy. Additional Option Although the IRS provides the standard mileage rate for ease and convenience, you're not required to use it. If you prefer, you can calculate the actual costs of using your vehicle instead of using the standard mileage rates. Remember, if you have questions are concerns, talk to a tax consultant or accountant to discuss your options and unique situation. -------------------------- Economic Calendar for the Week of January 24-28, 2011 Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise. Economic Calendar for the Week of January 24 - January 28 Date ET Economic Report For Estimate Actual Prior Impact Tue. January 25 10:00 Consumer Confidence Jan NA   52.5 Moderate Wed. January 26 10:00 New Home Sales Dec 300K   290K Moderate Wed. January 26 02:15 FOMC Meeting Jan unch   0.25% HIGH Thu. January 27 10:00 Pending Home Sales Dec NA   3.5% Moderate Thu. January 27 08:30 Durable Goods Orders Dec 1.9%   -1.3% Moderate Thu. January 27 08:30 Jobless Claims (Initial) 1/22 NA

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