What's All That Yellen About?

So much for market calm.

The mortgage market tanked yesterday when, in response to conflicting data about growth and inflation, San Francisco Fed President Janet Yellen said "watchful waiting" is the Fed's likely next step.

This surprised markets because most expect the Fed to lower the Fed Funds Rate within the next few months.

The Fed Funds Rate does not control mortgage rates, but it can have an impact.

This is because the Fed Funds Rate is related to Prime Rate, the basis for most bank-to-business lending (i.e. business loans) and bank-to-consumer lending (i.e. credit cards, home equity lines of credit).

When the FFR drops, it's signals that inflation is less of a threat and that is what moves mortgage rates. As the cost of living slows (or falls), mortgage rates tend to fall with it.

So, when Yellen alluded that the Fed may not drop the FFR as soon as markets anticipated, it signals that inflation is still a concern. Mortgage markets unwound in response and rates surged higher.

(Image Courtesy: Federal Reserve)

Builders May Be Figuring Out The Market Faster Than Home Sellers

According to all of the headlines, existing home sales are down across the country. Way down. Check out this sampling:

• Sales of Existing Homes Plunge Steeply (NY Times)
• Existing Home Sales Plunge In March (Houston Chronicle)
• Existing Home Sales Plunge, Biggest Retreat In 18 Years (Salt Lake Tribune)

However, it's important to keep these statistics in perspective.

Nationwide, housing may be showing softness, but real estate is a highly local phenomenon and different local markets across the county may be showing signs of strength.

As one example, New Home Sales posted an increase last month. The biggest difference between Existing Home Sales and New Home Sales is that new homes are purchased from builders.

There are no blanket truths that apply to any real estate market so it's still important to do your homework when shopping for a new home.

Even as sales fall overall, the buyer is not in the driver's seat necessarily. A seller with a well-maintained home that is priced fairly will still sell quickly -- and maybe that's something that builders have figured out.

Do Your Own Research And Your Appraisal Process Can Be Worry-Free

The appraisal of a home can be a bit frightening. After buyer and seller have agreed on a price and signed a contract, a mortgage lender will send an independent professional to verify that the price is "reasonable" and fair.

The appraisal process begins with a licensed appraiser making a thorough inspection of the home, its dimensions, and its fixtures. Aside from measuring square footage and counting rooms, the appraiser also looks for structural integrity and home quality.

He ignores the dirty dishes that may be in the sink, or the unmade bed -- they have no bearing on a home's value.

After inspecting the home, the appraiser uses databases to find the prices at which similar homes have sold in the immediate area.

For example, if comparing to a 3-bedroom, 2.1-bathroom home, the appraiser will look for other 3-bedroom, 2.1-bathroom homes to compare against. Once identified, the "comps" are adjusted for features. A finished basement may add $10,000 of value; a new roof may add $10,000; a detached garage may decrease a home's value by $15,000.

The process is called "gridding" and it's all up to the opinion of the appraiser. This is also the step that determines how good the appraisal is.

A poor choice of comparable properties, or out-of-the-ordinary gridding adjustments will doom an appraisal in the eyes of a mortgage lender. The lender, of course, has its own in-house appraisal department that performs a quality review on most appraisals that come through the door.

If your home's appraiser uses bad comps, ignores a recent sale that should be a comp, or doesn't account for the local market conditions, the home appraisal will get flagged.

Aside from introducing time delays -- the appraised value of the home may be cut to something less than the purchase price.

Regardless if you are buyer or seller, this is an unwelcome event. As a buyer, an appraisal may reveal that you paid more for a home than what other similar homes have sold for. As a seller, your buyer may walk away from the deal because they feel "cheated".

The best way to avoid appraisal issues is to price your home appropriately at the start and use your real estate agent's help in determining fair market value.

The Week In Review (April 23, 2007) : What To Watch For

The economy showed signs of pushing forward last week, but major pressure on the average American consumer surfaced in the form of rising gas prices.

Overall, it was a mixed bag for mortgage markets.

The Consumer Price Index (CPI) jumped 0.6% last month. This cost of living increase was much larger than expected and mostly the result of surging gas prices at the pump.

If we negate the impact of energy and food, however, the CPI rose just 0.1%. This shows that inflation may not be prevalent in all parts of our daily lives.

Mortgage rates will react to a number of data points this week as traders position themselves ahead of the next Federal Open Market Committee meeting May 9.

The most important releases come in waves this week.

On Wednesday, we'll see New Home Sales, Existing Home Sales and the Fed's report on regional economic conditions called the Beige Book.

On Friday, we'll see how big the economy is with Gross Domestic Product (GDP) and we'll see how much more (or less) expensive employees are for business with the Employment Cost Index. As businesses pay employees more, they tend to pass those costs on to consumers and that leads to inflation (see CPI above).

Inflation pushes mortgage rates higher.

(Image Courtesy: Pedal Car Power)

How 2007 Gas Prices Are Pacing With 2006 Gas Prices

Gas prices are entering a very similar pattern to 2006 across the United States and -- while it's bad news for motorists -- it could be bad news for mortgage rate shoppers, too.

Last summer, gas prices averaged more than $3.00 per gallon for three main reasons:

1. Fear of supply reduction from the Middle East
2. Fear of a repeat of the 2005 Hurricane Season
3. Seasonal demand factors

Mortgage rates skyrocketed last summer because higher oil prices permeated the entire economy -- consumers and businesses alike -- and the cost of living increased for Americans.

Looking at the chart above, we may be in for a similar Summer Swoon.

Gas prices are mirroring last year's prices in late-April and not much has changed in the Middle East in the past 12 months.

SSUUNA: Voices of War

Well, every once in a while I like to make a personal post that may or may not have anything to do with mortgage news or the economy.

Today was a makeup field-trip day for my daughter's first grade class. We went to Harmony Hall in Fort Washington, MD.

And, what a GREAT performance we were treated to for this outing.

SSUUNA: Is a dancer, percussionist, singer, songwriter, storyteller and recording artist from Uganda with a wide range of performing experience.

In 1988, he embraced the opportunity to further his education in the United States. He has since continued to spread the teachings of his elders through his performances, sharing with the audience his vast experience from Uganda thus promoting authentic East African art and literature.

SSUUNA’s solo shows are not only full of energy and command undivided attention, they also captivate the audience into participation. With plenty of opportunities to try several traditional dances and instruments, the participants learn the origin of the instruments, meaning of the dances, and different drum rhythms.

SSUUNA was absolutely energetic and captivating. He was completely engaged with the young audience. Even handling the unscheduled and unplanned visit to the stage by a young boy while Ssuuna was in the middle showing another student how to hold and use the NDONGO (8-string Bowl-Lyer). Without missing a beat (pun intended), Ssuuna included the young student in the demonstration and continued with the performance.

At the end of the performance, Ssuuna brought the different teachers from the various schools on stage and closed the show with a fusion of traditional and modern dance. The students (and adults) loved the performance and Ssuuna's charisma. They kept calling out to Ssuuna expressing their enjoyment and approval. He had to come back out for an encore, and then met the students in the lobby of Harmony Hall.

Ssuuna was very humble and appreciative of the audience's attention. I absolutely recommend catching one of his performances whenever possible. You can read more of Ssuuna's BIO at his website. You can also visit his myspace page here.

And, while you're at it, I also recommend purchasing his CDs here. My wife and I bought his two current CDs: Abakazi Mayinja (Women Are Rocks) and Voices of War. Both are excellent.

Through an exotic fusion of traditional and contemporary East African music, dance and storytelling accompanied by traditional instruments, SSUUNA will take the audience on a crucial but delightful cultural extravaganza with a promise to experience our cultural similarities and to walk away respecting the differences. SSUUNA; The Spirit of Africa is here to keep love in action.

Why Downpayments Are Investments, Not Cushions

When home prices are stable or falling, home buyers often mischaracterized their downpayment on a home, calling it their "cushion" against falling home prices.

Nothing could be farther from the truth.

Nobody wants to owe money when they sell their home. In fact, when asked, most people will answer that they just want to "break even" on their sale.

So, if that person later sells their home for $30,000 less than they paid for it plus the cost of improvements, $30,000 is their loss. If their initial downpayment happened to be $30,000 and they walk away from the closing table "even", it doesn't change the fact the home owner lost $30,000 on the sale.

The downpayment is not a cushion -- it's an investment. And when facing falling prices, it can be a simple game of Pay Now, or Pay Later.

Whichever Way The Winds Blows

Up and down. Up and down. Up and down.

It's been a veritable roller coaster over the past two weeks for mortgage rates, mostly because traders can't find the answer to the most important question facing mortgage markets:

Are we in the midst of inflation, or not?

Everytime we see strong data in one sector of the economy (i.e. jobs), there is weak data to offset it somewhere else.

Yesterday's tame Consumer Price Index, for example, showed that maybe prices aren't increasing as fast as expected.

So, what's an ordinary Joe to make of it all?

If you're rate shopping, it may be better to just lock in your rate today and hope that rates don't drop. Rates have been so erratic that waiting even one extra day can cause your mortgage rate to jump by as much as 0.250%.

We've seen that twice in the past three weeks.

Mortgage rates take the elevator up, but they take the stairs down. So, any softening of rates happens at a much slower pace than an increase.

How Consumer Spending Changes Mortgage Rates

If the data is correct, the U.S. consumers keep doing what they do best -- consume.

Despite weak consumer confidence surveys, retail sales posted a 0.7% gain, according to the U.S. Census Bureau. This means that despite rising costs, Americans continue to fuel the economy.

Speaking of fuel, a large reason for the unexpectedly large figure is that gasoline prices have been increasing lately. The average consumer, it appears, is unfazed.

With the housing sector showing weakness, consumer spending is especially important. After all, it makes up 70% of our economy as a whole. If Americans cut back on spending, it could push the country into a recession and could lead to lower mortgage rates.

By contrast, strong retail store receipts should continue to place upward pressure on mortgage rates as we've seen lately.

(Image Courtesy: Wall Street Journal)

REMINDER: This Year, Taxes Are Due April 17

Just a reminder that taxes are due tomorrow, April 17 -- even if your tax documents state otherwise. This is because of Emancipation Day, a legal holiday in the District of Columbia.

Emancipation Day dates to April 16, 1862 when President Abraham Lincoln signed a bill ending slavery in that area. When IRS deadlines fall on a weekend or legal holiday, the due dates are moved to the next business day.

According to the IRS, at the time that tax instructions were approved for printing, the tax group believed that the April 16 date was accurate. They have since changed their mind.

Any IRS form, instruction or publication that shows April 16, 2007 as a due date is incorrect and should read April 17, 2007. This is the true 2007 tax due date.

(Image Courtesy: U.S. National Archives and Records Adminstration)

Until Bonds Get More Press, You're Going To Have To Find An Advisor You Trust

Unlike the stock market, it's hard for the average person to know when the bond market is getting turned upside-down.

So, looking back at last Friday, when mortgage rates jumped very, very quickly in a short period of time, a lot of people got surprised (and burned).

With stocks, we can all turn on CNBC, Bloomberg, or host of other channels when the Dow Jones Industrial Average heads into a tailspin. That sort of "market event" is usually the lead story on the evening news when it happens, too.

With the bond market, though, that almost never happens. There is no clear "buy" or "sell" signal.

So, even though mortgages are so important to everyday people and mortgage rates are determined by the pricing of mortgage bonds, there is nobody there when things are souring to "make it real" for the everyday Joe like there is for stockholders. We all just sit in the dark.

Last Friday, markets turned quickly and rate shoppers could have locked in lower rates if they only knew that the market was slipping away from them.

Until the media starts covering the bond market and mortgage rates, be sure to saddle up with a trusted advisor that can walk you through the land mines of the mortgage-backed securities markets.

The interest rate you save may be your own.

For some guidelines on finding yourself a trusted advisor be sure to take a look at my Learning Center link.

Can You Juggle The Changing Economic News Like This ???

What does this have to do with the economy, in general, and mortage news, specifically ???

Nothing.

This guy is amazing and the video is a nice break from the norm !!!

Markets Turned Quickly And Left Rate Shoppers In Their Wake

So, just how quickly have the markets turned?

According to Fed Futures Trading as watched by the Cleveland Federal Reserve, on March 13, it was as likely that the August Fed Funds Rate level would be 5.250% as it would be 5.000%.

In other words, markets were betting with equal odds that the Fed would drop rates as it would keep them steady.

Today, 30 days later, the odds are decidedly not 50/50.

Today, as the divergence between "blue" and "purple" show in the graph above, the probability now reads 75% vs. 15% in favor of the FFR staying put at 5.250%.

Markets have only a small bet that the Fed will drop rates prior to August.

This abrupt change in sentiment reflects the growing concerns that inflation continues to dog our economy. Remember, when inflation is present, the Fed tends to raise the FFR in hopes of slowing down the economy.

From a mortgage rate perspective, this partially explains why rates have been rising steadily over the past month. The more likely it is that inflation is present, the higher that mortgage rates will trend over time. Inflation pushes mortgage rates higher because an inflating dollar is worth less money.

Therefore, investors in mortgage-backed securities demand a higher interest payment on their mortgage bonds to compensate for that.

Wealthy Americans Are 25% More Likely To Hold Mortgage Debt

Interesting fact of the day: 55.5% of "wealthy" Americans have mortgages on their primary homes vs. 44.6% of the overall population.

This doesn't mean that the wealthy are more indebted than the rest of us; it means that the wealthy are maximizing the tax deductions that the IRS makes available to every homeowner in the country.

It's also possible that wealthy Americans may be more likely to work with financial planners and CPAs to devise short- and long-term financial plans that take advantage of mortgage interest.

See, unlike every other type of consumer debt, interest paid on most home loans are tax-deductible and are deducted from the homeowner's annual income. For this reason, a homeowner's "bottom line" interest cost is much, much less than his note rate.

If you are in the 28% tax , for example, and your note rate is 6.00%, your "bottom line" interest rate is 4.32%. Check with your CPA for exact math, of course.

Wealthy or not, every homeowner should consider the impact of losing tax deductions before paying off their mortgage. If the wealthy are doing it and they have a team of advisors surrounding them, maybe there's something to it for everybody else.

Three Fed Speakers On Tap For Today

With three members of the Federal Reserve scheduled to speak today, don't be surprised if mortgage rates show some brief volatility.

Despite weakness in housing, the economy has shown resiliency and continues to push forward. Markets had widely expected a slowdown, but are now having to change course -- rapidly. T

his is why mortgage rates have changed so suddenly in the past week.

Traders will be looking for clues about what the Fed sees that they don't in the speeches from Mishkin, Fisher, and Plosser.

Of the three speakers, Dallas Federal Reserve President Richard Fisher is expected to provide the best "sound bites". It was Fisher, after all, who claimed that the Fed was in the "8th Inning" of its rate hike cycle in June 2005 after nine previous rate hikes.

The Fed later increased the Fed Funds Rate eight more times before settling at today's rate of 5.250%.

The Week In Review (April 9, 2007) : What To Watch For

On strength in jobs and hiring, mortgage rates finished last week at their highest levels in six weeks.

It was a slow week last week until Friday when -- with the stock market closed for Good Friday and with most bond traders on early vacation -- the Non-Farms Payroll report handily beat expectations.

This created a ton of doubt with economists about whether our economy is speeding up instead of slowing down.

When the economy speeds up, it tends to erode the value of the dollar and that forces mortgage rates higher because mortgages are "paid" in dollars. If the dollar is weaker, investors will demand more dollars in return for every dollar they invest.

The stock market re-opened this morning and now momentum trading is continuing to push mortgage rates higher.

This week is practically devoid of economic data until Friday's PPI data. So, until then, expect a lot of discussion around Wednesday's minutes release from the March FOMC meeting.

The jobs data from last Friday whiplashed investors that were predicting a slowdown so these folks will be looking for clues about the Fed's next move. There may be rate volatility surrounding the release.

(Image Courtesy: Technology Associates)

Good Friday + Jobs Report Data = Major Mortgage Rates Movement

Today's mortgage rates are getting slammed on the heels of the Non-Farm Payrolls report. Instead of hitting the consensus estimate figure of 135,000 jobs, the report showed a very large 180,000 new jobs created in March.

Unemployment levels dropped to 4.4% pointing to underlying strength in the economy.

Mortgage bonds are selling off right now and that is driving mortgage rates higher.

On a normal trading day, the reaction in the trading pits would be extreme. But, with today being Good Friday, there aren't many people in the office, so to speak. Fewer traders results in lower-than-normal trading volume and that is causing prices to swing even more wildly than normal.

Mortgage bonds have been down as much as 29 basis points today and when bond prices go down, mortgage rates go up.

To make a tough situation tougher, the stock market is closed today. When it re-opens Monday, expect a continuation of today's bond sell-off as dollars move out of it and into the stock market.

More bonds sales will cause mortgage rates to climb even higher.

(Image Courtesy: Wall Street Journal)

The Magic of Video Games: Ride the 117-Year Housing Roller Coaster

Want some help putting home values in historical perspective?

Using the video game Roller Coaster Tycoon, Speculative Bubble created a roller coaster whose tracks follow home values (adjusted for inflation) from 1890 to 2007.

The ride lasts three-and-a-half minutes, but the last thirty seconds really hammer home the point.

You can almost hear the people screaming...

The Domino Effect of Sub-Prime Lending on Move-Up Home Buyers

Wondering how the dramatic change in sub-prime mortgage lending will impact you?

Try this stat on for size:

Since 1998, 1.4 million families have used sub-prime mortgages to buy their first home.

As sub-prime lending guidelines get tighter, there will be fewer first-time home buyers and that impacts every homeowner in the country.

The reason lies in "move up" buying.

When a sub-prime family buys their first home, the sellers of that home likely "move up" to a bigger home. In turn, the sellers of the second home may move up, too. And of the third home. And fourth, and so on.

Somewhere in that chain of events, all of our homes are represented.

Without sub-prime mortgages, maybe the move-up buyer is less prevalent with fewer buyers we could see higher home supply.

We are all connected in the real estate economy. What's good for one, is good for all. And, the reverse is true, too.

Source
Testimony of Michael D. Calhoun
Center for Responsible Lending
March 27, 2007
http://www.responsiblelending.org/pdfs/House-Calhoun-Mar27-final.pdf

It's A Waiting Game Until Thursday Afternoon

There is little on the domestic front to move markets today as traders wait for Friday's jobs report.

The jobs data will take on more significance this month than in recent months because of Ben Bernanke's testimony to Congress last week.

The Fed Chief spoke more strongly about inflation than we've heard from him in a long while.

That's partly in response to market reaction to the Fed's press release last week.

When the Fed softened it's language on inflation, markets interpreted that to mean that the Fed planning to lower the Fed Funds Rate sometime soon in 2007. Bernanke needed to set the record straight (and he did).

With an eye on labor markets, Friday's release takes on added importance and mortgage rates may move wildly as early as Thursday afternoon as traders place their bets.

Expectations are for 120,000 new jobs created in March.

The Week In Review (April 2, 2007) : What To Watch For

Last week, Ben Bernanke's testimony before Congress served as a stark wake-up call that inflation is not going away so easily.

Later in the week, hard data backed that up. PCE, the Fed's favorite inflation gauge, beat expectations and pushed the year-over-year increase to 2.4%.

The Fed hopes that PCE will be 2.0% by 2008 and -- if markets aren't lowering inflation on their own -- the Fed can increase the Fed Funds Rate to help drive PCE down to that figure. A higher FFR would squeeze profit margins for business and that would slow down the economy.

This week, the major data event is Friday's jobs report. Stronger than expected growth in jobs will lead to a jump in mortgage rates because markets will shift their expectations for inflation and a weakening dollar.

In addition, rising oil prices may also place upward pressure on mortgage rates so watch for news from Iran about oil supply disruptions or other conflicts.