With little economic news to influence trading and despite a late-Friday afternoon spike, mortgage rates edged lower last week.
Two weeks ago, when it lowered the Fed Funds Rate by a quarter-percent, the Federal Reserve noted two things:
In the days that followed, though, the U.S. dollar strengthened and crude oil prices fell.
This positive reinforcement of the Fed's outlook spurred the stock market at the expense of the bond market.
Mortgage rates rose during that period.
But, starting last Monday, the dollar started to soften and oil touched another all-time high. At $126 per barrel, crude oil is now close to double its May 12, 2007 price of $69.
High oil prices are inflationary and speak directly to the Federal Reserve's concerns: Too much inflation can derail a fragile, recovering economy.
The stock market gave up its prior gains last week and that is why we saw mortgage rates improve -- it was the unwinding of the economic optimism.
This week, optimism (or pessimism) about the economy will be swayed by a number of factors including Tuesday's Retail Sales report and Friday's Consumer Sentiment survey.
The most important data point to watch, though, will be Wednesday's Consumer Price Index report. We know we should watch it Ben Bernanke told us to watch it. Keeping inflation in check, remember, is one of the Fed's major focal points for the economy.
In addition, this week will feature 14 public speaking appearances by Federal Reserve members. Expect each speaker to speak plainly about the economy, its future and the Fed's current rate-cutting cycle.
When Fed speakers stump, markets listen closely so expect mortgage rates to be jumpy all week long.
(Image courtesy: The New York Times)
Posted on May 12, 2008
The monthly Case-Shiller Housing Price Index is a popular and often-quoted measurement of the housing market's health. The chart above is sourced from its report published yesterday.
In 18 of the 20 largest metropolitan areas, home values declined at a slower pace than in the previously measured month. The report also showed that national home prices are down 14.4 percent from March 2007.
Unfortunately, it's the more sensation "14.4" figure that newspapers chose to report this morning. If you never went further than the headline, you'd miss a key piece of analysis.
Comparing today's market to last year's market is a lot less valuable than comparing it to last month's market. That's a better way to analyze the market's health.
If we look beyond the headline and examine the data behind it, we see that housing may still be sagging in some areas, but it's not sagging nearly as much as it used to.
(Image courtesy: Standard and Poor's)
The market optimism that had pushed mortgage rates lower since late-March reversed last week on ever-rising oil prices and a bleak outlook from the Federal Reserve.
When gas prices reached $3.93 Friday, it re-igniting inflation concerns and inflation is the enemy of mortgage rates.
As expected, mortgage rates spiked into Friday's market close.
Markets were closed for Memorial Day but re-open this morning with traders feeling apprehensive about mortgage market investments. There are many reasons to park money elsewhere, after all.
All three of these reasons reduce demand for mortgage bonds and -- because mortgage rates move in the opposite direction of mortgage bond prices -- mortgage rates rise.
This week, a few inflation-related data points will cross the wires including the Fed's preferred inflation gauge -- PCE.
PCE stands for Personal Consumption Expenditures and it measures the cost of living for ordinary people. It's the Fed's preferred measurement because PCE accounts for Americans buying more chicken when meat gets expensive, or buying more fruits when vegetables get expensive, et cetera.
PCE is different from the Consumer Price Index because CPI is a "fixed" basket of products.
If PCE is running high, expect the exodus from mortgage bonds to continue and rates to run higher. If PCE is flat or lower, mortgage rates should fall.
(Image courtesy: Gasbuddy.com)
High oil prices are derailing the mortgage market this week, taking an almost-vertical path higher.
Since mid-February, prices are up by 50 percent.
Rising oil prices can be a threat the U.S. economy because with every extra dollar that Americans pay to energy companies, there is less money available for every other company that makes up our national economy.
Strangely, it comes at a time when the "other" companies need it the most -- their costs of operating are rising, too.
So, businesses are faced with a tough choice and both option prove poor for mortgage rates.
If profits suffer, job cuts and a weak corporate spending can undermine an economic recovery. If higher costs are passed on, it leads to inflation and that devalues the U.S. dollar and mortgage bonds.
This is why mortgage rates have spiked along with oil prices this week. And, when oil prices level off a bit, we can expect that mortgage rates will, too.
Crude oil is up 1.8 percent this morning.
(Image courtesy: Wall Street Journal Online)
Three weeks after adjourning, Federal Reserve officials release detailed minutes of their most recent meeting.
The April 30, 2008 minutes were released Wednesday and it affirmed traders' beliefs that the Federal Reserve will not be in a hurry to lower the Fed Funds Rate again.
This is bad news for two groups of people whose borrowing costs are tied to Prime Rate, the interest rate that is 3 percentage points higher than the Fed Funds Rate:
Because Prime Rate moves in lock-step with the Fed Funds Rate, it, too, has fallen by 3.25 percent since September and now rests at 5.000 percent.
With the release of the April FOMC Minutes, though, it appears that Prime Rate is more likely to increase than to decrease moving forward.
If your home equity line of credit offers a "convert-to-fixed-rate" option, now may be a good time to consider switching over. Be sure to talk with your loan officer first, though -- he/she may have alternate options for you.
(Image courtesy: The Wall Street Journal Online)
Loan-to-value is a math formula that represents the relationship between how much a home is "worth" and how much money is borrowed against it.
Loan-to-value is often abbreviated as "LTV" and is one of the many factors that lenders consider when underwriting a mortgage application.
The math formula is straightforward:
In the LTV equation, Loan Size is the amount of money borrowed from the bank and Home Value is the lower of the home's purchase price or appraised value.
Home loans with low loan-to-value ratios are usually less risky for banks. This is one reason why mortgage rates tend to be more favorable for home buyers and homeowners when their respective LTVs are low.
Typically, a "low" LTV loan is one in which the loan-to-value is 80 percent or less. In some instances, however, 70 percent is considered "low". The cut-off point depends on the mortgage lender and the mortgage product.
On a home purchase, the one way to lower LTV is to make a larger downpayment, thereby reducing the LTV equation's numerator. Buying a home for below-market value would not reduce LTV, for example, because the purchase price would be used as the equation's denominator.
On a home loan refinance, the denominator is always the home's appraised value.
Yesterday, several mortgage lenders issued three separate "rate sheets" in response to the changing mortgage market.
It was the fourth time in the last 6 trading days that mortgage lenders issued multiple rate sheets in a day, and continued the trend that started in mid-January.
The yo-yo nature of mortgage rates underscores the importance of making mortgage rate comparisons within a limited time frame.
Multiple quotes should be gathered with an hour of each other and, even then, it's prudent to ask your lender: "Has there been a mortgage rate reprice in the last hour?"
The current market volatility is in contrast to the "normal" environment of one-rate-sheet-per-day to which mortgage rate shoppers have been accustomed. But with the changing economy, we all have to adapt.
Mortgage rate quotes from this morning won't necessarily be valid this afternoon so if you're in the market for a home loan, be sure to do your shopping in a limited timeframe and don't forget to ask about the reprice.
(Image courtesy: City of Peterborough)
Posted on May 20, 2008
Optimism ruled the markets last week -- optimism about employment, optimism about housing, and optimism about inflation.
Mortgage rates edged lower overall.
Despite the positive sentiment from Wall Street, consumer confidence in the economy reached a 28-year low.
This is a normal divergence because investors live in the "future" of markets while Americans live in the "right now" of life where food prices are high, gas prices are still rising, and job prospects are somewhat weak.
Consumer confidence surveys have to be taken at face value, though. Yes, Americans are nervous about the economy and their household budgets, but that rarely deters them from spending.
In April, for example, Retail Sales (excluded autos) were up 0.5 percent -- more than double analyst expectations. And this was before economic stimulus checks showed up in tax-filers' mailboxes.
Perhaps this is one more reason why markets were so pleased last week.
This week, there isn't much economic information to sway markets. On Tuesday, we'll see the Producer Price Index which is like a Cost of Living for Business measurement and on Friday we'll see the Existing Home Sales report.
Strength in either will be good for economy and should benefit both stocks and bonds, and should lower mortgage rates. Weakness will have the opposite impact.
Posted on May 19, 2008
Retail Sales measures total receipts at stores that sell tangible "things" and -- aside from weak demand for automobiles and automobile parts -- Retail Sales displayed surprising strength in April.
So much strength, in fact, that many experts are changing their predictions about the U.S. economy's fate.
Several months ago, most pundits declared that a economic recession was all but inevitable. Today, a growing number are changing their views.
Not only are stock and credit markets improving, but data such as April's Retail Sales figures suggest that their fears were overblown.
The takeaway from a story like this is that "experts" do a much better job of interpreting the past than predicting the future. A person can make an educated guess, but it's impossible to know what the future holds for the economy, or for housing, or for mortgage rates.
Even when the outcome is "inevitable".
SourceRecession? Not So Fast, Say SomeKelly Evans And Justin LahartMay 14, 2008, The Wall Street Journal Onlinehttp://online.wsj.com/article/SB121068163716188223.html
Posted on May 15, 2008
According to the FBI's 2007 Mortgage Fraud Report, more than 46,000 cases of suspected mortgage fraud were reported last year. This led to bank losses exceeding $813 million.
If you're looking for reasons why mortgage underwriting is measurably more difficult in 2008 -- add "mortgage fraud" to the list. Lenders now perform extra scrutiny on each home loan application to protect against additional losses on all levels.
Mortgage fraud is a federal crime and exists in two basic varieties:
Although both are illegal, Fraud for Profit is most concerning to law enforcement officials and mortgage lenders. That's because Fraud for Profit tends to incorporate multiple loans for multiple homes in a single neighborhood.
In other words, the bank's potential loss is larger with Fraud for Profit schemes.
The photo above (from the FBI report) is from a Fraud for Profit home appraisal. It indicated that the "recently renovated condominium" included Brazilian hardwood, granite countertops, and a value of $275,000.
Clearly, this is untrue.
Despite increasing 31 percent, mortgage fraud growth slowed in 2007 as law enforcement agencies and mortgage lenders increased their efforts to identify and arrest perpetrators.
(Image courtesy: Federal Bureau of Investigation)
Posted on May 14, 2008
Just like real estate markets differ from town to town, so does the Cost of Living.
Courtesy of CNNMoney, this helpful calculator measures the change in living expenses a person would face when moving between any two major cities in America.
The key expenses compared are:
The comparison data is provided by C2ER which, on its own Web site, charges $4.95 for each city-to-city comparison.
At CNNMoney.com, the exact same C2ER data is licensed and available for free.
Posted on May 13, 2008
When the everyday "Cost of Living" increases, our dollars don't go as far as they used to. Economists call this inflation.
One popular method of measuring inflation is to track prices for 84,000 individual items and lump them together into a "basket". If the overall price is higher, then the economy is experiencing inflation.
If a picture is worth a thousand words, this one from The New York Times is worth at least 84,000.
Broken down item-by-item, life is more expensive in some places you expected, and some places you didn't. For example, over the past year:
Aside from damaging household budgets, inflation can be especially rough on both active home buyers and homeowners looking to refinance. Inflation is linked to high mortgage rates.
This is one reason why mortgage rates have fallen since the Federal Reserve's hints last week that its rate-cutting cycle may be over; many believed that additional Fed Funds Rate cuts would stoke inflation later this year.
In the absence of inflation, mortgage rates tend to improve (all things equal).
SourceAll of inflation's little partsMatthew Bloch, Shan Carter and Amanda CoxThe New York Times, May 3, 2008
Posted on May 09, 2008
When real estate news is reported on television or in the papers, it's usually told as a national story. Unfortunately, stories like these aren't helpful for everyday Americans because real estate is not a national market.
Real estate is local.
The graph above was used by Fed Chairman Ben Bernanke in a speech to Columbia Business School earlier this week. Using data from conforming mortgage fundings, it shows the change in home prices from year-to-year on a county level.
Any county not in red increased in value.
In other words, contrary to what reporters tell us, real estate is retaining its value just fine nationwide. Aside from a few counties and states, most areas appreciated.
Graphics like this put important real estate issues in perspective. Home values may falling precipitously in some areas, but those neighborhoods represent just a fraction of the country overall.
In most regions, home values are up.
Posted on May 08, 2008
Four times annually, the Federal Reserve surveys 84 different banks about general banking conditions.
One of the survey questions asks about current mortgage lending standards and whether they are loosening or tightening.
The chart at right is from the April 2008 survey and it illustrates what we already know: It's getting tougher and tougher to get approved for a home loan.
Some of the areas in which mortgage guidelines are tightening are well-known:
Some areas are less well-known:
Overall, getting a mortgage approval from a bank is more difficult than in months past and the tightening trend is expected to continue throughout the rest of the credit cycle.
No "class" of buyers is immune, either -- not even the "prime" ones.
Home prices may fall going forward but stricter mortgage guidelines means that fewer home buyers will be able to take advantage. If you're unsure about your credit profile, check with your loan officer to see how additional restrictions could impact your ability to purchase (and finance!) a home.
(Image courtesy: Federal Reserve)
Posted on May 07, 2008
The ubiquity of "free" credit reporting services like FreeCreditReport.com, TrueCredit.com, and AnnualCreditReport.com have helped breed a new generation of credit-aware Americans.
Because credit ratings have more importance to everyday life than in years past, this is a welcome development. For example:
Unfortunately for Americans, though, not all credit reports are created equal. And when it comes to actually applying for credit in the form of a new credit card or mortgage, the free reports are worth precisely what they cost.
This is one reason why home buyers should have their credit reviewed by a mortgage lender as soon as possible in the home buying process -- the free reports offered by the major credit bureaus may be misleading and incomplete.
Free credit reports are useful for identifying identity theft and reviewing active accounts but do very little to help a potential creditor gauge your creditworthiness.
As the chart shows us, each industry's creditors has a way they like to do business and that way is the "standard" way.
(Image courtesy: The Wall Street Journal)
Posted on May 06, 2008
Mortgage rates ended higher last week on stronger-than-expected jobs data, strong consumer spending, and an appetite for riskier investments.
But, investors were most excited about the Federal Reserve's hint that its rate-cutting cycle may be over.
The week was quiet until Wednesday when the Federal Reserve voted to lower the Fed Funds Rate by a quarter-percent.
The rate cut wasn't the big news, however.
Market players were most interested in Fed's press release in which it confirmed that the economy is struggling, but improving. The remarks were both soothing and a strong contrast to the Alarmist Analysts -- the ones that make for better television than analysis sometimes.
The Fed's statement also forced investors to rethink their economic outlook for the short- and long-term and when investors change their outlook, markets can be volatile.
One of the more important shifts in thinking now is the attitude towards the U.S. Dollar. An improving economy tends to be good for the dollar and that can help lead to lower mortgage rates.
The dollar's gains last week, incidentally, helped lower gas prices nationwide for the first time in almost 3 weeks. In the 18 days leading up to Friday, gas prices had made 18 consecutive record-highs.
This week, with very little new data and with few companies reporting earnings, expect market momentum to determine in which direction mortgage rates will go.
Because momentum can change quickly, be prepared to lock your mortgage rate if you see one that fits your budget -- it may not last long.
Posted on May 05, 2008
According to the Bureau of Labor Statistics, the U.S. economy shed 20,000 jobs in April 2008. The labor force now counts at 146 million people as employed.
Normally, a loss of jobs would foretell economic weakness and would be a good thing for mortgage rate shoppers. Today, though, traders had been expecting a larger loss of 70,000 jobs.
In other words, today's jobs report looks surprisingly strong.
The stock market is now rallying on optimism that "the worst is over" for the U.S. economy and evidence supporting the Federal Reserve's remarks that its rate cuts were starting to take hold.
The stock market's gains are the bond market's losses.
Mortgage rates are up today because the cash that is fueling the stock market is coming from the sale of all types of bonds -- including mortgage bonds.
This is unwelcome news for people doing mortgage comparisons today, or buying a home this weekend.
In general, interest rates on adjustable-rate mortgages are increasing more than on fixed-rate mortgages.
The Fed lowered the Fed Funds Rate by a quarter-percent to 2.000% this afternoon.
Because it is tied to the Fed Funds Rate, Prime Rate also fell by a quarter-percent. Prime Rate is now 5.000%.
Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month's statements.
Mortgage rate shoppers are also benefitting.
Each time the Federal Reserve cuts the Fed Funds Rate, it's meant to stimulate the economy in growth. Too much stimulation can create too much growth and that often leads to inflation (which causes mortgage rates to rise).
This is one reason why mortgage rates had not fallen over the past few months. Each Fed Funds Rate cut made it more likely that the economy would overheat in the second half of 2008.
So, because the Federal Reserve signaled that a rate-cutting "pause" may be ahead, investors are reducing expectations for a Fed-induced inflation cycle for later this year, pushing rates lower.
The FOMC's next scheduled get-together is a two-day meeting June 24-25, 2008.
SourceParsing the Fed StatementThe Wall Street Journal OnlineApril 30, 2008http://online.wsj.com/internal/mdc/info-fedparse0804.html