A JAB…FOLLOWED BY A LEFT HOOK…NOW AN UPPER CUT TO THE CHIN! A scene from Mark Burnett’s new hit reality show, “The Contender”? No – just the past week’s action in Bonds, as they got beaten and battered down to levels not seen since last summer, causing home loan rates to increase by about .25%.

What happened to put Bonds on the ropes? A combination of factors, including rising fears of inflation, a spike higher in crude oil prices, a plunging US Dollar, a soaring trade deficit and an increase in Bond supply coming into the market. The “knockout” occurred after Bond prices fell through multiple layers of technical support with a bearish chart pattern and are now left groping for a bottom. Chairman Greenspan and several Fed Governors didn’t help matters with comments last week that wafted an air of inflationary fears.

AND SPEAKING OF CHAIRMAN GREENSPAN, HERE’S A BIT OF TRIVIA. DID YOU KNOW MANY OF HIS MOST IMPORTANT SPEECHES WERE WRITTEN IN THE BATHTUB? DUE TO A BACK INJURY IN THE EARLY 70’S, MR. GREENSPAN OFTEN AWAKES AROUND 5:30AM AND SPENDS AN HOUR OR TWO IN THE TUB, READING AND WRITING. SOUND LIKE A NICE IDEA…BUT MISSING THAT NICE JACUZZI TUB IN YOUR OWN BATHROOM? FIND OUT HOW GREENSPAN’S OWN WORD ON THE MARKET CAN MAKE YOUR HOME IMPROVEMENT DREAMS COME TRUE…MORE COST-EFFECTIVELY THAN EVER…BY READING THIS WEEK’S MORTGAGE MARKET VIEW.

So we see that Bonds and home loan rates have gotten battered and bruised over the past several weeks – where will the damage stop? From a technical standpoint, Bonds appear to be headed towards the “canvas”…the next clear floor of support, which lies 60 basis points lower than present levels. Continuing down to this level would cause another increase in home loan rates, probably of at least .125%.

Knowing that negative or pessimistic economic news is good for Bonds and home loan rates…and positive or good economic reports tend to cause home loan rates to worsen, the news of the week will drive this weeks action. But based on the recent trend, home loan rates will likely edge higher this week, unless one of the economic releases comes in as a real “stinker” and helps Bonds reverse their current path.

“A HOUSE IS A HOME WHEN IT SHELTERS THE BODY AND COMFORTS THE SOUL” (Phillip Moffitt)…sure, but a house would really feel like a home with that new four season porch off the back, a deluxe Jacuzzi tub in the upper bathroom…oh, and the granite countertops and stainless steel appliances in the kitchen would sure make it extra nice and homey. And let’s get the roof redone and a new driveway while we’re at it too.

Sound familiar? It is the American dream to own your own home, but the amount of money that gets continuously poured into it never seems to end. For many years, American families have quenched the thirst for upgrades and home improvements by going to the “well” of the Home Equity Line of Credit, known as a HELOC. The low rates of recent years have made this option a very wise and affordable one. In most cases, the first $100,000 borrowed is tax deductible, making the decision look even smarter. Combine this with the ease of approval on this type of loan, and you have tens of thousands of families across the country with HELOC’s.

But times are changing, and going back to tap the HELOC “well” may prove to be once too often in the current rate environment.

Rates on the vast majority of HELOC’s are based upon the Prime Rate, and are typically 1 to 2% above it. How is Prime set? Prime is 3% above the Fed Funds rate, which is controlled by the Fed and currently at 2.5%. That means that Prime is at 5.5% and the average HELOC rate is at 6.5 to 7.5%. Rates on HELOC’s are still very good, but they are much higher than where they were just eight months ago when Prime was at 4%. Of more importance…the fact that the Fed has given us clues about where Prime is headed…higher.

Chairman Greenspan is in his final term and has made it clear that he wants a “neutral policy” on rates by the time he leaves office just nine months from now. What is a “neutral policy”? Take the rate of inflation – currently expected to be between 2% - 2.5% - add 1.5% to that and you have the rate that the Fed Funds should be at to have a neutral policy. This tells us the Fed Funds rate is headed towards 4% by year-end from its current 2.5% level. Therefore, Prime is on its way to 7% by year-end…and the rate on your HELOC statement should be a beefy 8 to 9%.

Is there a better way? Yes.

A wise alternative may be to lock into today’s lower rates on first mortgages before they begin their move higher, while they are still near historic lows. Consider combining your current first mortgage and HELOC to a low fixed rate. Adjustable rate loans or “hybrid” adjustable loans are another great option, where blending fixed and variable features make the rate even lower. The Fed has given us a rare look into the future…and there’s still time to make good financial decisions in advance of the anticipated Fed rate hikes ahead.

If you are interested in seeing if this strategy might make sense for you, please give me a call and let’s review it together.

After last week's relatively quiet week of economic news, various government agencies will ring the bell with a full slate of reports this week. Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise. Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

For the week of March 14 – March 18