Sometimes, the hardest part about news is knowing where to find it.
In its filing with the SEC last week, Freddie Mac stated that it will "pursue increases" to its middleman fee. This would likely make mortgages more expensive for every conforming borrower in the country.
The exact verbiage from the filing is extremely opaque and unless a person knew what things like "delivery fees" were, or "bulk and flow transactions", he'd be inclined to skip right over the offending passage, tucked away on Page 72 in a paragraph labeled Business Outlook.
But, if we paraphrase the passage and simplify it for laypersons, it reads something like the following:
We didn't charge enough fees in 2007 to account for the massive number of defaults. We don't plan to make that mistake again in 2008.
Strangely, in the entire 1,394-page filing, this passage is the only mention of "future default costs" leading to more loan charges. In other words, it's easy to see why this story didn't get picked up by the major news outlets.
To the media, the major angle in Freddie Mac's filing was that it registered to sell $10 billion worth of securities. For everyday Americans, though, the major story was a different one -- mortgage fees may never be as low as they are today.
Therefore, if you know that you'll need a new, conforming home loan soon -- for either a home purchase or a refinance -- consider moving up your timeframe. Whether rates rise or fall, it's likely you'll pay a more money to borrow money only because you waited.
The implied fee increase would be the third this fiscal year, following increases in December 2007 and in April 2008.
After falling 7 cents per gallon over the last 7 days, gas prices are being pressured higher today as Hurricane Dolly barrels through the Gulf of Mexico.
The first landfall hurricane of the season is expected to flood the southern Texas coast and cause minor disruptions to the nation's oil supplies.
Versus Hurricane Katrina in 2005, Dolly's impact on oil supplies is expected to be small but that doesn't stop traders from bidding up oil prices "just in case" their expectations are wrong.
For instance, oil prices rose almost 2 percent Monday as Dolly drifted into the Gulf. Oil prices then receded as the storm's path was better defined.
Regardless, when hurricanes form in the Gulf of Mexico, it's going to be bad news for home buyers.
Because the Gulf of Mexico is stocked with oil refineries and shipping ports, when specific areas are hit by heavy rains and power outages, supply and demand takes over, pushing oil prices higher. This causes gasoline prices to rise and that is considered an inflationary pressure on the economy.
Inflation, of course, causes mortgage rates to rise so when hurricanes are brewing, it generally means that housing is about to get less affordable for Americans.
This week, mortgage rates are up by about 0.125 percent overall so far -- roughly $8 monthly per $100,000 borrowed.
(Image courtesy: Marketwatch.com)
The phrase "Consumer Price Index" can be intimidating and unclear to Americans. It's an economic term, after all, and not a part of everyday American language.
It even has its own abbreviation to add to the confusion -- CPI.
So, when a layperson hears that "CPI is rising", it's not always clear what it means. The tendency, therefore, is to ignore the news.
This is one reason CPI is commonly substituted with the more down-home expression of "Cost of Living".
In contrast to the term "CPI", the phrase "Cost of Living" is a lot more clear. When people hear that the Cost of Living is rising, instinctively, they get it. And now they can see how it works in numbers, courtesy of the Bureau of Labor Statistics.
The Inflation Calculator at the government Web site helps a person compare household income to the changing Cost of Living between any two years since 1913. For example, a U.S. household earning $48,201 in 2007 would have to increase that income to $50,868 just to keep up with "life".
CPI touched a 17-year high in June, jumping 5.000 percent year-over-year. Without a 5.000 percent increase an income, a household falls behind.
Mortgage rates soared last week as mortgage markets experienced a 4-day freefall.
By the end of the trading week, conforming mortgage rates had jumped by as much as 0.500 percent.
The spike in rates can't be pinned on any one factor, but 3 contributing factors include:
- The lingering impact of high energy prices on inflation
- The ongoing weakness of the U.S. dollar
- A rally in the financial sector, marking a return to risk-taking
Inflation and a weak dollar both devalue mortgage repayments, a well-chronicled relationship on this Web site. In short, when mortgage bond investors find that their repayments are worth less, they demand a higher return. This causes mortgage rates to rise.
But, it wasn't inflation or the dollar that caused the majority of the damage to mortgage rates last week -- it was the rally in the financial sector.
Rates had edged higher Tuesday on the inflation data but it wasn't until Wednesday's morning stronger-than-expected announcement from banking leader Well Fargo that mortgage rates really started to spike.
In its quarterly report, Wells Fargo said that its balance sheet was strong and that it planned to increase shareholder dividends. The rosy announcement sparked a strong demand for all things financial and -- by day's end -- the sector scored a 12.3 percent gain on Wall Street.
It was the largest one-day gain in financial stocks ever.
Then, following Wednesday's rally, financials picked up additional momentum and ended up closing out the week higher by 21 percent.
Unfortunately for mortgage rate shoppers, a large chunk of the money that fueled the rally came out from the mortgage bond market.
As investors looked for cash to buy financial stocks, many chose to sell mortgage bond holdings, creating excess supply. More supply leads prices lower and, in the mortgage world, when prices fall, rates go up.
Because mortgage bond prices fell a lot last week, mortgage rates rose by a lot.
This week, expect momentum to be The Big Story. There is little data beyond Thursday and Friday's Existing Home Sales and New Home Sales, respectively, and Friday's Consumer Sentiment Index. And only a few members of the Fed will be speaking in public.
The one bright spot last week was falling oil prices.
After an 11 percent decline, Americans are waking up this morning to lower gas prices. This is anti-inflationary and could help tug mortgage rates lower.
For the first time in its history, the FHA changed its funding fees and mortgage insurance structure this week. FHA-insured home loans are now subject to a risk-based pricing adjustment, as shown by the table above.
Because of risk-based pricing, FHA home loans are now more expensive for borrowers with less-than-ideal credit profiles, and less expensive borrowers with perfect ones.
Prior to the changes, most FHA borrowers paid an up-front fee of 1.500 percent, plus on-going annual mortgage insurance payments equal to one-half-percent on the amount borrowed.
FHA-insured mortgages have grown in popularity this year because, while the guidelines of other mortgage products have tightened, FHA program guidelines have remained loose. FHA allows 3 percent downpayments on purchases, for example, and allows "cash out" refinances to 95 percent.
Fannie Mae and Freddie Mac do not.
(Image courtesy: FHA.gov)
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Another day, another piece of inflationary data.
June's Consumer Price Index showed a 5 percent year-over-year increase in what is now the largest annual Cost of Living increase for Americans in 17 years.
This is bad news for both home buyers and homeowners in want of a new mortgage because rising costs are inflationary and inflation causes mortgage rates to move higher.
Predictably, mortgage rates jumped Wednesday morning after the CPI data was released and they edged higher throughout the rest of the day.
This morning, mortgage rates are higher again on unexpected strength in housing starts and building permits across the country.
On most mortgage products, rates are now higher by 0.250 or more since Tuesday. This is equivalent to $192 in extra mortgage payments per year per $100,000 borrowed.
(Image courtesy: The New York Times)
Last week, Forbes Magazine published a Top 10 list that should grab the attention of housing market bottom-feeders.
The Top 10 list of Increasingly Affordable U.S. Housing Markets shows that falling home prices and steady mortgage rates are providing a support floor in some of the country's most beat-up regions.
The report's methodology is simple:
- Take citywide income data as reported by HUD
- Match it against purchase prices from court records
- Run the math using "prevailing interest rates" from Wells Fargo
A city is considered "more affordable" if increasing numbers of "average families" can afford "average homes". It's not surprising, therefore, that the Forbes list is dominated by cities in which home prices have plummeted over the last year, and in which he economy is relatively sound.
This may suggest that a housing rebound is already underway in several of the cities listed as Increasingly Affordable U.S. Housing Markets, including:
- San Diego, CA
- Orlando, FL
- Riverside, CA
- Phoenix, AZ
- Las Vegas, NV
Read the complete study and its results at Forbes.com.
(Image courtesy: Memorable San Diego Vacations)
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Mortgage markets have turned their attention back to the U.S. economy this morning, causing yesterday's rate improvements to unwind a bit.
Rates had fallen Monday after the Federal Reserve and U.S. Treasury's joint announcement in support of Fannie Mae and Freddie Mac. Today, it's the data that is taking center stage.
Most notably, the U.S. Dollar is trading at an all-time low versus the Euro and other currencies.
This is a negative for active home buyers because American homeowners repay their mortgage interest in U.S. dollars. When the dollar loses value, so does the value of those interest payments so mortgage rates end up increasing in order to attract new investors.
Another reason why mortgage rates are higher this morning is that June's Producer Price Index registered much higher than was expected, posting its largest one-month gain since November 2007.
PPI is a lot like the Cost of Living index, except that it measures operating costs for businesses instead. When business costs are increasing, they are often passed onto consumers and this is why rising PPI is thought to be inflationary and inflation -- like a weakening dollar -- pressures mortgage rates to rise.
So, while Monday's rate improvements haven't completely erased, today's action reminds us that mortgage markets wait for no one and yesterday's mortgage rates rarely carry forward.
Especially when inflation is in the mix.
(Image courtesy: The Wall Street Journal)
Mortgage rates fell slightly in a week that included a bank failure, more oil price spikes, and questions about the health of the nations' mortgage market.
Rates would have fallen more if not for a late-Friday sell-off that added 0.125 percent to most products.
As financial markets fell under stress, most people missed the strong points that emerged about the U.S. economy last week:
And, also worth noting: homes under contract slipped but remained above the lowest levels of the year, suggesting a potential housing floor.
But, the biggest story of last week was the stock-price collapse and subsequent pressure on Fannie Mae and Freddie Mac. It should be the biggest story of this week, too.
So far, Fannie and Freddie's issues appear to be more psychological in nature than fundamental, but to an already roiled market, negative perception can quickly become reality. This is one of the biggest reasons why both the Federal Reserve and the U.S. Treasury made public statements Sunday in support of Fannie and Freddie, and in advance of the Asian markets' opening.
Other events that may move markets this week include Retail Sales data on Tuesday, consumer inflation data on Wednesday and Ben Bernanke's two-day testimony to Congress which takes place over both Tuesday and Wednesday.
It's unclear in which direction mortgage rates will go, but because the markets are on-edge, expect rate movements to be sharp and quick. In other words, if you're in the market for a mortgage this week and you see a rate and payment you like, don't mess around with it -- just get it locked.
(Image courtesy: Wall Street Journal Online)
"Economic uncertainty" is turning into a 2008 buzzword and there's good reasons why.
On the one hand, there are precursors to inflation in the economy:
- Rising oil costs
- Rising food prices
- Higher Cost of Living
On the other hand, there are precursors to recession in the economy, too:
- Mounting job losses
- Less access to credit and/or loans
- Falling consumer confidence data
The pie chart at right illustrates just how uncertain the "experts" are about the state of the U.S. economy. They're evenly split, right down the middle.
This isn't good news or bad news for Americans, per se, but it does legitimize the idea that the economy's future direction is in doubt. This is one of the biggest reasons why there's been no clear direction for mortgage rates or stock markets since the start of the year.
Until the picture gets more clear, we can expect the volatility to continue.
(Image courtesy: Wall Street Journal)
According to RealtyTrac, the rate of foreclosures across the U.S. is slowing. Versus May, June foreclosures fell at a 3 percent clip.
25 states showed improvement month-over-month, led by many of the same areas that had fueled foreclosure activity in 2007.
A sampling of RealtyTrac's data includes:
- California : Foreclosures down 4.54 percent
- Georgia : Foreclosures down 14.91 percent
- Arizona : Foreclosures down 0.07 percent
- Michigan : Foreclosures down 6.00 percent
- Illinois : Foreclosures down 15.65 percent
However, the improving nature of the data is not what is making news this morning. Instead, the press is reporting that foreclosures are up by half since last year and that bank seizures have tripled.
And while the annual data may be accurate, that doesn't mean that it's necessarily relevant to home buyers and home sellers across the country.
This is because people buying and selling homes don't usually boast an "annual" mentality; when someone's an active participant in the real estate market, the mentality is "right now".
In other words, annual data fits an economist, but month-to-month data fits you.
June's foreclosure data may be the start of a trend, or it may be a blip. It's really too soon to tell. But the RealtyTrac data reinforces what real estate professionals already know -- that markets all over the country are showing signs of life.
A noon-hour, mortgage-bond rally rendered homes more affordable for Americans Tuesday. It was the second straight day on which this happened.
On both days, the action was swift.
The speed at which Monday's and Tuesday's respective rallies tore through mortgage markets illustrates how deep the uncertainty that surrounds the U.S. economy really is.
One reason why the market swings so quickly is that, lately, traders are tending to follow the herd.
As a mortgage rate shopper, it's outstanding when the herd is moving in your favor. However, when the herd moves in the opposite direction, the impact on your monthly housing cost can be huge.
Volatility has been the common theme for mortgage rates in 2008 and it's likely to remain a factor until the nation's economic picture gets a little bit more clear.
Some experts are saying that may happen in 2009. Therefore, you should be prepared for rapid mortgage rate movement and act accordingly when you see a rate-and-payment combination that makes sense for your household budget.
The payment you see in the morning is likely to be gone by the afternoon.
It's a terrific time to buy a home, but not because homes happen to be affordable.
It's a terrific time to buy because the variety of mortgage products available to home buyers looks poised to shrink.
Monday, Alt-A mortgage lender IndyMac Bank stopped accepting mortgage applications and it's likely that other Alt-A lenders will likely follow suit.
Alt-A loans are ones in which borrowers can't (or won't) verify one of two major underwriting criteria:
- Evidence of income
- Evidence of assets
Since the Credit Crunch began last July, Alt-A mortgages have been a steady source of funds for "in-between" borrowers -- those that are not quite prime, and not quite sub-prime. IndyMac was among the largest lenders of its type and had outlasted many of its peers.
Its position as a market leader and subsequent exit from lending means that the remaining Alt-A lenders will likely make one of two choices in the coming weeks:
- Raise rates and fees because of greater Alt-A mortgage risk, or
- Follow IndyMac's lead and exit mortgage lending altogether
Both outcomes would be harsh for home buyers of all types because when any large bank takes mortgage-related losses like IndyMac just did, it tends to create major risk aversion in the market.
Risk aversion impacts everyone -- even the "good" borrowers.
Banks have been nervous about lending for several months and so they'd rather pass on an "average" mortgage application rather than risk getting stuck with a potentially "bad" one. IndyMac's exit may cause fewer mortgages to get approved.
In other words, buyers eligible for financing today may be ineligible tomorrow.
Therefore, if you're a home buyer and you know your credit profile is less-than-ideal, consider writing a purchase contract sooner rather than later. Your mortgage options may be thinning, and the ones you have may be getting more expensive.
Last week was fairly uneventful in the mortgage markets, with rates slightly edging lower across the board and without much data to influence trading.
Even Thursday morning's hotly-anticipated jobs report was met with lukewarm interest; many traders had already left for the weekend.
Mortgage rates just drifted -- a little up and little down, but mostly unchanged.
Mortgage insiders may have found last week to be boring, but for active home buyers, the semi-lull was a welcome break from the up-and-downs that have gripped the markets since January.
It's been three consecutive weeks without a substantial increase to mortgage rates.
This week, rates aren't expected to be as calm because Fed Chairman Ben Bernanke is taking two heavy topics and making public speeches about them.
The first speech is to the FDIC on Tuesday. The speech will focus on mortgage lending. The second is to House Financial Services Committee on Thursday and it will cover financial market regulation. In both speeches, expect Bernanke is expected to address inflation and the health of the U.S. banking system.
These two subjects are closely linked to mortgage rates so watch for rate movement during, and after, the speeches.
- If Bernanke says inflation is moderating, mortgage rates should fall
- If Bernanke says the financial system is stabilizing, mortgage rates should rise
From a data perspective, there's not much doing other than Friday's Consumer Confidence survey. Confidence surveys don't have a direct impact on the economy, but markets are watching them more closely. A strong reading could benefit the stock market which should, in turn, cause mortgage rates to rise.
(Image courtesy: Wall Street Journal Online)
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On the first Friday of each month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.
More commonly, it's called the "jobs report".
The jobs report is a sector-by-sector look into the U.S. economy and whether businesses are hiring -- or firing -- workers. This is one of the reasons why its release is so hotly anticipated each month -- the jobs report can reveal a lot about the state of the U.S. economy.
Last month, the economy shed 62,000 jobs.
Now, many people will assume that job losses like this are terrible for the U.S. economy. Sometimes, that's true.
This month, it's not.
Given the ongoing tug-o-war between inflation and recession, markets are somewhat pleased with the June job loss figures because job losses reduce the likelihood of inflation in the U.S. economy.
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Inflation is considered by many -- Ben Bernanke included -- to be among the top threats to the U.S. economy -- it devalues the dollar and leads to increases in the Cost of Living.
Inflation also threatens home affordability because mortgage rates tend to rise when inflation is present.
June's job losses -- while bad for those impacted -- is helping to relieve inflationary pressures on the economy and that is boosting markets performance this morning. Stocks are slightly up, and mortgage rates are slightly down.
(Image courtesy: The Wall Street Journal)
In the summer of 2005, sub-prime mortgage lending was at its peak. Rates were relatively low and lending guidelines were relatively loose.
At the time, the "standard" sub-prime mortgage product was the 3/27 ARM.
The 3/27 had a few basic traits:
- A fixed, 3-year "starter rate"
- Every six months thereafter, the mortgage rate changed
- The formula by which it changed was (4.999 percent + the 6-month LIBOR rate)
If the loan was interest only, it usually converted to principal + interest at the first adjustment, too.
Because the summer of 2005 was the peak of sub-prime lending, it makes sense that the summer of 2008 is the peak of sub-prime adjusting.
For homeowners with adjusting sub-prime loans, there is some (relative) good news out there.
Today, the 6-month LIBOR hovers near 3.15 percent, meaning that an adjusted mortgage rate will be in the neighborhood of 8.15 percent.
This is versus the rate of 10.30 percent that sub-prime borrowers faced last summer when LIBOR was much higher than it is today.
Adjustments of any size can strain a household budget, though, so if you're a sub-prime borrower and your pending adjustment will cause financial strife, be proactive -- talk to your lender before you miss a payment.
Lenders are often more willing to talk with "current" borrowers than with delinquent ones.
(Image courtesy: Washington Post)
As flood waters ran through Iowa and other Midwestern states, the nation's corn supply was thought to be in danger.
Prices spiked in the wake of the floods, adding to the already-peaking grocery bills that many Americans are now bearing.
But yesterday, in a surprise report, the Agriculture Department said that many farmers had over-planted corn earlier in the season in order to cash in on corn's rising market value.
The abundance of planting is offsetting a portion of the flood damage and this year's harvest is now predicted to be the second highest on record.
For Americans in need of a home loan, this is terrific news because more corn supply means lower food prices and that puts a hold on at least one source of inflation.
Inflation is the enemy of mortgage rates.
The revised outlook for this year's corn supply is now so much better than it was yesterday that the price of a corn bushel fell by 30 cents at the Chicago Board of Trade -- the maximum allowable amount by rule.
Now, rapid movements in the price of corn may not seem relevant to everyday life, but even the smallest of details about the economy can trickle down and impact you as a homeowner.
The strength of the housing market may be correlated to consumer confidence and consumer confidence is definitely tied to the Cost of Living. And the same goes for the mortgage market -- it's all related to inflation.
With a surprise crop of extra corn, things may look just a little bit better.
Source
Corn Crop Largely Intact, Despite Floods
Scott Kilman
The Wall Street Journal, July 1, 2008
Mortgage rates improved last week, marking the first time since mid-May that has happened.
The rate drop is the result of how mortgage markets interpreted the Federal Reserve's Wednesday press release.
In it, the Fed said:
- Inflation pressures should lessen soon
- Growth should remain steady this year
- The credit market is currently fragile
Separately, none of this was news to the markets. But considering all three statements together, investors grew nervous of leaving money in the stock market -- specifically in financials.
Post-Fed announcement, there was a wave of selling that dropped the Dow Jones Industrial Average nearly 20 percent from its October 2007 high.
As stocks sold off, though, mortgage shoppers were benefiting.
Rates ticked down in the Fed announcement's wake because the mortgage bond market acted as a "safe haven" for traders. More demand for mortgage-backed bonds caused rates to fall, accented by a favorable run very late in the day Friday.
This week, the momentum may continue, or it may not. There is a lot to capture traders' attention in this holiday-shortened, four-day work week.
The biggest data release of the week will undoubtedly be Thursday's Unemployment Report, but there are also two Fed speakers stumping, as well as Treasury Secretary Paulson speaking about the economy.
As the week goes on, more and more traders will be leaving for the long weekend so expect rates to move with greater force as Thursday afternoon gets nearer. And, if stocks haven't regained favor with investors by then, expect that mortgage rates will have a good week.
A Home Equity Line of Credit is bank product that grants homeowners access to the equity in their home at anytime, usually using checks.
Often called a HELOC, these equity-based credit lines function very much like credit cards:
- The rate is adjustable, tied to Prime Rate
- There is a minimum monthly payment
- There is a pre-set spending/credit limit
But different from credit cards is that a HELOC is "guaranteed" by real estate and with real estate values in question nationwide, many banks are exercising a little-known clause in the HELOC contract.
With alarming frequently, banks are reducing the pre-set spending limits on their active equity lines. Via USPS, lenders are notifying homeowner with $100,000 HELOCs that their new HELOC limit is $25,000, for example.
And the banks aren't being discriminate based on payment history or local real estate conditions, either -- it's happening everywhere with equal force.
The good news is that banks will accept appeals on HELOC reductions on a case-by-case basis.
One way to appeal a HELOC reduction is:
- Call your lender's Customer Service line. Do not send an email.
- Politely ask why the HELOC limit was reduced. Listen carefully to explanation.
- Explain why you would like your HELOC reinstated. Acceptable reasons may include home improvement projects or improper home valuation by the lender.
- Be prepared to write a formal letter, if asked. Address the issues explained in #2.
Banks will typically not reinstate a HELOC if a borrower has been delinquent on payments, or lives in a severely depressed neighborhood. However, because lenders rely on computer models to assess risk, it's always a good idea to ask.
Sometimes the Human Element of an appeal can work in your favor.
The Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent this afternoon, as expected.
In its press release, the Federal Reserve noted the co-existence of inflation and recession.
On inflation, the Fed said that energy and food prices are contributing to an "elevated state" of inflation, but that it expects price pressures to ease "later this year and next year".
On the topic of recession, the Fed seemed a bit more concerned.
Overall, markets reacted favorably to the press release; both stocks and mortgage rates showed signs of improvement in the statement's wake.
Source
Parsing the Fed Statement
The Wall Street Journal Online
June 25, 2008
http://online.wsj.com/internal/mdc/info-fedparse0806.html
The Federal Open Market Committee adjourns from its 2-day meeting at 2:15 P.M. ET today. It's widely expected that the group will leave the Fed Funds Rate unchanged at 2.000 percent.
However, it's not what the Fed does today that has markets so interested. It's what the Fed will say.
One of the Federal Reserve's roles is to promote stability in the U.S. economy by protecting it from two major threats:
- Inflation
- Recession
The Federal Reserve's primary weapon against both of these hazards, though, is the same -- the Fed Funds Rate. To combat inflation, the Fed raises the Fed Funds rate. To fight recession, it lowers the Fed Funds Rate.
But in today's economy, there is evidence of both inflation and recession meaning that the Federal Reserve is likely to leave the Fed Funds Rate unchanged for fear of setting the economy too far towards either threat.
Therefore, markets will be left looking for clues in the carefully-worded press release signed by Federal Reserve Chairman Ben Bernanke and the other voting members of the FOMC.
If the Fed admits added vigilance against inflation, it's expected that mortgage rates will fall because inflation causes rates to rise. By contrast, if the Fed harps on the downside risks in the economy, it's expected that mortgage rates will increase.
Either way, today's press release should be a market-mover.
If you're currently floating your mortgage rate or are deciding between different lenders, be aware that mortgage rates will enter a period of extreme volatility this afternoon.
It may be prudent to complete your rate shopping before 2:00 P.M. ET.
Most homeowners make four housing-related payments each month:
- Principal on a mortgage
- Interest on a mortgage
- Taxes on the real estate owned
- Insurance for the real estate owned
Collectively, these payments are known by the acronym PITI but don't let it fool you -- a homeowner's monthly expenses are still called PITI even if one or more of the elements doesn't apply.
For example, a homeowner with an interest only mortgage does not pay principal each month.
Additionally, condo owners typically don't pay homeowners insurance -- they pay a monthly assessment and/or maintenance fees to an association instead.
But regardless for what it stands, determining a comfortable PITI should be every homeowner's starting point when looking for a new home. PITI is the monthly housing cost, after all, and by knowing what fits in your budget, it's a lot easier to compare homes and their related expenses.
It's certainly better than asking the bank "how much home can I afford" -- all that's going to tell you is the P and the I. As a homeowner, you need to know all four.
PITI is most commonly pronounced pee-eye-tee-eye.
(Image courtesy: Contractor-Books.com)
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Mortgage rates edged higher for the fifth straight week and the benchmark 30-year fixed-rate mortgage is now at a 10-month high.
One reason why rates are spiking is because the temporary jolt from higher energy and food costs is starting to look like a longer-term trend.
For example, high energy prices get a lot of press, but its 19.4 percent increase since last year is dwarfed by the 64.8 percent increase in the price of grains over the same period of time.
Eventually, as businesses spend more because of these rising costs, they have no choice but to pass those costs on to consumers.
This very topic figures to loom large this week as the Federal Open Market Committee gets together for a 2-day meeting, adjourning Wednesday. The overwhelming expectation is that the Federal Reserve will hold the Fed Funds Rate steady at 2.000 percent.
However, it won't be what the Fed does that should impact mortgage rates this week, but what it says. The Fed's press release will hit the wires at precisely 2:15 P.M. ET and markets will look for clues about how Ben Bernanke & Co are viewing inflation and its impact on the sagging U.S. economy.
If the Fed indicates that fighting inflation is its primary goal, expect that mortgage rates will fall because inflation and mortgage rates tend to go in opposite directions.
Conversely, if the Fed says it promoting growth in the economy is paramount and that the country can sustain additional inflationary pressures for now, expect that mortgage rates will rise.
There is other data hitting the wires this week including:
- Consumer Confidence (Tuesday)
- New Home Sales (Wednesday)
- Existing Home Sales (Thursday)
- Personal Consumption Expenditures (Friday)
Of all of these data points, only Personal Consumption Expenditures should have a major impact on rates. PCE is the Federal Reserve's preferred inflationary measurement.
Flooding in the Midwest has displaced thousands of families and caused billions of dollars in damages.
It may also cause mortgage rates to rise.
As the extent of the damage becomes more clear, prices for grain and livestock are soaring. For example, a host of dietary staples are suddenly more expensive at the supermarket, including:
- Meat
- Pork
- Chicken
- Dairy
- Eggs
Rising food prices are considered inflationary and inflation tends to make mortgage rates rise.
But of all the foods that are increasing in price, it's corn whose price is rising the most -- up 70 percent so far since January. This is mostly because flood waters damaged up to 3 million acres of harvest in Iowa, our top-producing state.
Corn, of course, is a primary feed for livestock, so rising prices make it more expensive for farmers to raise hogs, cows and chickens. These higher costs get passed along to consumers and contribute to a higher Cost of Living around the country.
After facing (and adjusting) to rising gasoline prices, Americans are facing higher costs again -- this time at the supermarket. And if food prices don't recede with the flood waters, Americans may find that they're getting hit in a third place -- right in their mortgage rates.
Source
Hog Farmers Face a Perfect Storm
Ilan Brandt, Joe Barrett
The Wall Street Journal, June 20, 2008
(Image courtesy: The Wall Street Journal Online)
Home buyers are often surprised when a "rate quote" from the morning won't be honored in the afternoon. Sometimes, the assumption is that the loan officer is just being sneaky.
This couldn't be less true.
Rate quotes change in the middle of the day because mortgage markets are in constant flux. All day, every day -- just like stocks.
And like stocks, a mortgage bond's morning price will likely "expire" before the day ends.
One way to visualize this is to look at today's Microsoft's stock price:
- At 9:30 A.M. ET, the price was $28.46
- At 9:38 A.M. ET, the price was $28.72
Over the course of 8 minutes, the stock rose by 26 cents and the "9:30 A.M. quote" was no longer available. For example, you couldn't call your stock broker at 9:38 A.M. and place an order for the 9:30 A.M. price because the price had changed.
Mortgage rates behave the same way.
Throughout 2008, mortgage rates have changed mid-day more frequently than in the past. On more than half the days, morning rate quotes were no longer valid in the afternoon. And, on at least 5 separate occasions, rates changed 4 times in just one day.
It's not typical, but it does happen.
So, if you're talking with your loan officer in the morning about a rate quote, be prepared to do all of your shopping in a compacted amount of time, and then be ready to make a decision.
By the time the afternoon rolls around, after all, that rate quote may well be expired.
A "Housing Start" is a new home on which construction has commenced and in May, Housing Starts fell to a 17-year low nationally.
At first glance, this may seem like a negative for the already-battered U.S. housing market.
It's not.
Falling Housing Starts reflects the broader real estate market and shows us that builders are working hard to get their already-built homes "off the books".
It would be foolish for them to build new homes now -- each new unit makes selling the existing ones tougher.
So, when we look at the figure objectively, we can see that Housing Starts reaching a 17-year low is actually good news -- real estate prices are based on Supply and Demand, after all.
With Housing Starts touching new lows, we can infer that there will be fewer new homes coming on the market in the coming months and that should help support higher home values nationwide for everyone.
(Image courtesy: The Wall Street Journal Online)
Each month, University of Michigan researcher survey the U.S. population about their thoughts on the economy -- is it improving, it is worsening, is it staying the same.
May's consumer confidence survey registered it's lowest reading since 1980.
Given the recent headlines, that shouldn't be surprising:
But despite all of that, the American Consumer appears to be taking the economy's hiccups in stride.
For example, last month, retailers around the country reported rising sales levels that doubled what economists expected. This isn't supposed to happen when consumer confidence is falling as fast as it is, right?
But, a closer look at the retail sales data shows that discount retailers such as Target and Wal-Mart led the charge higher. So, although consumers are feeling worse about the economy, they're still spending money.
And when they do, they look for value.
For home buyers, this should sound familiar because it's every real estate agent's mantra right now -- "there's a lot of good values to be had." It's why some homes are getting multiple offers within days while other languish on the market for months.
The difference lies in the perceived value of the home.
Home buyers are actively looking for "good buys" and when they find them, they're quick to make an offer. It's why the housing market is showing pockets of strength despite low consumer confidence levels overall -- everyone's snapping up the bargains.
(Image Courtesy: Wall Street Journal Online)
Mortgage rates moved higher last week on lingering concerns about inflation, the fourth straight week in which rates rose.
Mortgage rates are now as high as they've been since October 2007.
Because inflation devalues mortgage bonds, market players are quick to unload them when signs of inflation are present.
Last week, there were several such signs:
- The American Consumer is spending undettered despite economic uncertainty
- The Cost of Living is rising faster than expected
- The Federal Reserve reports that some business are passing higher costs on to consumers
Hence, the higher mortgage rates.
This week, only Tuesday registers as a "big data day" with reports on housing, productivity, and Producer Price Index -- the "Business Cost of Living" report.
There will be four members of the Federal Reserve speaking, though, and that will add some volatility to the market. Fed Chairman Bernanke is among the speakers, addressing Congress this morning at 10:00 A.M. ET.
So, expect mortgage rates to continue to jump and dip this week, taking their cues from inflation. More inflation means higher rates and a slowing economy should cause rates to retreat.
(Image Courtesy: LA Times)
RealtyTrac released its most recent foreclosure statistics and if you only read the headlines, you think the entire country was on the verge of losing its homes.
The underlying data tells a different story, however.
More than half of the country's foreclosure activity in May 2008 was tied to just 4 states in the union:
- California (28 percent)
- Florida (14 percent)
- Arizona (5 percent)
- Michigan (5 percent)
In other words, the majority of mortgage defaults are coming from a small minority of states.
See, between 2002 and 2006, California, Florida and Arizona were very popular with real estate speculators, many of whom over-extended themselves on real estate; and Michigan's economy has been decimated by job losses in the auto and manufacturing industries.
In addition, these 4 states are among the nation's most populous. It makes sense that they are distorting the national statistics.
On a local level, the news is not so grim. Not only did 20 states show a reduction in monthly foreclosure activity, but many more fell below the national foreclosure average. That type of story, though, doesn't make for good headlines, is all.
Search the full May 2008 foreclosure report for yourself on RealtyTrac's Web site.
