Making English Out Of Fed-Speak (June 2007 Edition)

The Fed left the Fed Funds Rate unchanged again today for the eighth time in a row after 17 consecutive hikes. None of this is news to us.

The Fed's press release, though, highlights a key theme about our country's economy: inflation may be moderating, but we are far from in the clear.

In other words, there are still a handful of outside factors that could push the Fed back out of their "comfort zone" and force them to raise the Federal Funds Rate.

Mortgage rates were up only slightly after the Fed's remarks which were neither tough nor soft on inflation and the economy.

Source
Parsing the Fed Statement
The Wall Street Journal Online
June 28, 2007
http://online.wsj.com/mdcapp/public/page/2_3024-info_fedparse_shell.html

Which Way Will They Go? Inflation Up, Growth Down, Or Both?

The Federal Open Market Committee adjourns from a two-day meeting today and so this is a good time to remind yourself: The Fed does not control mortgage rates.

Rather, the Fed sets the Federal Funds Rate.

And the FFR is, in turn, used to determine Prime Rate.

Prime Rate, in turn, is used to determine the rates for credit cards, charge cards and home equity lines of credit.

This is why today's meeting should be important to holders of debt -- the Fed's decision to lower, raise or hold the FFR at its current level can impact the spending of every American household.

The Fed is widely expected to hold the Fed Funds Rate steady today, but Ben Bernanke & Co will issue a press release discussing the group's view on the economy and the outlooks for the future.

It is the statement that has the biggest influence over mortgage rates. If the FOMC expresses concerns about inflation, mortgage rates should jump in response. Naturally, the reverse is true.

Yesterday, after starting the day with strong improvement, mortgage bonds gave up their gains to end the day flat. Today, bonds are already trending lower (which means higher mortgage rates).

One thing is for sure: there is a lot of uncertainty surrounding today's press release and traders are unsure of what bets to make next.

(Image courtesy: Wall Street Journal)

The Fed Starts Its Two-Day Meeting

The mortgage markets officially enter "Wait-and-See" mode beginning today as the Federal Open Market Committee begins their two-day meeting.

The importance of the FOMC's meeting to mortgage markets is all in the words of the committee as opposed to their actions (or lack thereof).

After all, the group has not "done anything" in a year and yet markets always consider its meetings to be a highly-anticipated event.

What will the FOMC say about inflation, the economy, and the outlook for the future? This is what impacts the mortgage markets more than anything else.

If the Fed is fearful of inflation, mortgage rates will go up because the dollar is expected to lose value. That dimishes the value of mortgage bonds to foreign investors.

If the Fed is satisfied that the economy is exhibiting controlled growth, mortgage rates will come down, by contrast.

Right now, markets are anticipating a bullish view on inflation from the Fed and that is one of the reasons why mortgage rates increased so dramatically since March.

It will be looking for further clues at 2:15 P.M. ET Thursday afternoon.

How To Protect Yourself From Becoming A "Trigger Lead"

From the CBS News Video Web site, an interesting story for anyone who's recently applied for credit.

Credit repositories now sell the contact information of people applying for new mortgage loans to other mortgage lenders that want to compete for the business.

Called "trigger leads", an unsuspecting mortgage applicant can have his credit checked by a mortgage lender, and then discover that the credit bureaus have sold the rights to his personal information to countless other credit firms across the country.

Because trigger leads identify a person making a lending decision right now, one marketer of trigger leads calls them "the best leads in the business". It's no wonder that the credit bureaus are marketing them, and that some lenders are salivating over them.

As the family in the CBS video learned, though, it's difficult to make the phone stop ringing. Some of the calls bordered on harassment.

For consumers, there is a very low-tech opt-out Web site called http://www.optoutprescreen.com that is sponsored by the three major credit bureaus (and are also the ones that sell trigger leads). You can opt out for five years, or submit a form by mail to opt out forever.

Watch the video and then go protect yourself.

(Image courtesy: CBS News Video)

When Selling Your Home, It May Be Profitable To Invest In It

The NBC Today Show recently ran a Home Staging series that's worth watching. Hosted by Barbara Corcoran, the trio of 5-minute pieces resemble HGTV Reality Shows but carry much more insight and "everyday tips" that ordinary folks can use.

The video clip above is look at a home on Long Island that, as Barbara called it, is "the worst house on the block". You can't help but feel bad for the agent whose name is on the For Sale sign.

Of course, the story has a happy ending -- the home is now under contract.

Watch all three home staging clips via YouTube:

• Home staging with a $100 budget
• Home staging with a $500 budget
• Home staging with a $5,000 budget (see clip above)

"People don't want to put the money in," Barbara says. "They're thinking about taking the money out."

This series of videos shows how that line of thinking can actually reduce your profits.

The Week In Review (June 25, 2007) : What To Watch For

For the first week in a long while, mortgage rates ended the week better than how they started.

As we talked about last week, when there are no major data releases, the markets tend to move on momentum and psychology. That's precisely what pushed mortgage rates lower over the past five days.

This week, though, it's back to reality.

Beginning in March, mortgage markets started to change their bets about the Federal Reserve's next steps with the Fed Funds Rate. Previously, investors believed that the Fed would lower the FFR in the first half of 2007, signaling a tamer inflation outlook in the economy.

Data didn't support that view, though.

Then, at the Fed's May meeting, the tide really turned as the nation's monetary policymakers noted how housing was cooling off, but that the economy was roaring ahead despite that.

And that's right around when the bond market started to take it on the chin.

Well, the Federal Open Market Committee meets again this week for a two-day meeting, adjourning Thursday. The markets will be closely watching every word from Ben Bernanke & Co. to see if the new bets they've made on the economy and inflation will be backed up by the Central Bank.

The Fed drops their press release at 2:15 P.M. ET Thursday.

Until Thursday, watch for small movements in mortgage bonds in response to Monday and Tuesday's housing data, and Thursday jobless claims statistics.

Be Wary Of Opinions That Masquerade As News

Is "news" always news, or is it masked opinion?

When doing research on mortgages, it's important to pay attention to the objectivity of your research source.

Often, a writer will deploy key adjectives, phrases, and/or images that distort an otherwise factual story.

This cartoon from clangnuts.com is a terrific example.

It implies that interest only home loans are for people that can't otherwise afford homeownership.

The truth is that interest only loans are used by all economic classes of homeowners -- not just those that need payment relief.

Many people choose interest only home loans for their flexibility, or as a financial planning tool.

Sure, there are some people that use interest only loans to "get onto the housing ladder", but that is a statement about the homeowner and not the mortgage product.

Our opinions are often formed by the words and images we hear in a public forum. Sometimes, it pays to look a little deeper.

In The Summer, Mortgage Rates Can Change More Swiftly Than Usual

It was another favorable day for mortgage rates yesterday as average housing data and momentum trading carried bond prices higher.

Bond prices up, mortgage rates down, of course.

All things considered, mortgage bonds should not have moved as much as they did. But, this is the summer season and in the summer, fewer traders show up for work.

Especially during a week like this one in which there is no major data release.

With fewer traders participating, there are fewer bond buyers to match with sellers, and fewer bond sellers to match with buyers.

Therefore, it is much less likely that a person who wants to buy at a certain price will find somebody who wants to sell at a certain price. Therefore, mortgage bonds (and interest rates) tend to move a lot more sharply during the summer than we're otherwise used to seeing.

Today, three Fed presidents take the stump: Janet Yellen (San Francisco), Timothy Geithner (New York), and Richard Fisher (Dallas). Markets will listen to the Fed speaker for clues on inflation and the economy.

If the speakers indicate worry over inflation, mortgage rates will rise in response.

Gas Prices Dip Below $3.00 But Are Still More Than Double Five Years Ago

For those that spend a lot of time in their car, this is old news.

Since Memorial Day weekend when gas prices touched $3.24/gallon nationally, the cost of filling up dipped below $3.00. According to Gas Buddy, Monday's average cost per gallon was $2.995.

Despite the dip, gas prices are still much higher for late-June than in years prior.

2002: approximately $1.40/gallon
2003: approximately $1.48/gallon
2004: approximately $1.92/gallon
2005: approximately $2.14/gallon
2006: approximately $2.82/gallon
2007: approximately $2.99/gallon

Gas prices change quickly and those changes can be attributable to the price of crude oil, increased demand for gas from road travelers (i.e. summer road trips), or an interruption in the overall production (i.e. supply) of Gulf Coast refineries or from crude oil sources.

Since 2002, all three factors have contributed to the increased cost of gasoline. Over the past three weeks, though, we've all gotten a break.

The Week In Review (June 18, 2007) : What To Watch For

After a tame Consumer Price Index report Friday, mortgage bonds staged a brief rally and rates retreated slightly.

Earlier in the week, mortgage rates were at their highest point in almost a year.

Unfortunately for rate shoppers, mortgage investors are behaving like Dr. Jekyll and Mr. Hyde right now. One moment, they hate the outlook on inflation; the next, they love it.

What's really confusing is that data points that made mortgage rates move higher or lower 6-9 months ago (i.e. jobs report, crude oil prices, housing stats) are now being discounted.

Broader data points such as CPI seem to have taken center stage.

At least for now.

This week, there are virtually no data points of consequence aside from Tuesday's Housing Starts data. Given last month's seasonable weather across the country, don't be surprised if the number surprises to the hot side.

So, without data, expect mortgage rates to respond to external factors, technical trading factors, and/or irregular weather patterns.

Why Square Footage Is A Matter Of Debate, or The Difference Between Guidance and Law

Square footage of a home is a matter of debate -- a homeowner measures it one way, a real estate agent another way, and an appraiser a third way.

The local tax assessor has his own method, too.

So, who is right?

Until 2003, they all were! That's when the NATIONAL ASSOCIATION OF REALTORS® Appraisal Committee defined the term "square footage" to include the following:

Finished square footage on each level of the home, measured from the exterior-facing surface of outside-facing walls.

The committee defined "finished" as an enclosed area that is suitable for year-round use and includes walls, floors and ceilings.

Seems basic enough, but there were some added notes and exceptions:

1. An opening to a floor below (e.g. vaulted ceiling, open-air living room) is not included.
2. Stairs are counted as square footage and are added to the floor from which they descend
3. Finished areas must have a ceiling height of 7 feet to be included (except under duct work or beams in which case the requirement is reduced to 6 feet, 4 inched)
4. If a room is sloped, at least half of the room must have the minimum 7-foot height in order to be included
5. "Detached" finished areas are only included if they are connected to the main structure by another finished area. Detached garages, therefore, are excluded.

Even with the standard defined, the Appraisal Committee's approach to square footage is still just a guideline; no states have formally adopted it as a standard for appraisers, tax assessors and other real estate industry players.

Until then, the debate will continue. Despite the "official" guidance.

(Image Courtesy: Gables at Copper Creek)

How The Recasting of Interest Only Loans Helps With Financial Planning

An interesting feature of interest only loans is that your payment is re-calculated each month based on how much money you are borrowing.

The industry term for the re-calculation is "recasting".

When an extra principal payment is made on an interest only loan, the new loan payment is calculated as:

(Outstanding Loan Size) * (Annual Interest Rate) / (12 months)

Therefore, an additional $500 principal payment against a $200,000 interest only loan at 6.000% will reduce next month's mortgage by $2.50, or $30 annually.

$30 is six percent of $500.

This is in contrast to an amortizing loan in which your mortgage payment never changes until the loan is satisfied. Any additional payments to principal on these types of loans shave months off the end of a loan.

Recasting is not exclusive to interest only loans, however. Many lenders will allow you to recast an amortizing loan for a small fee ($100-500) but may limit the total number of times you can recast over the life of your loan.

Interest only loans recast once monthly.

Interest only loans require discipline and are not proper for every homeowner (the same way that a 30-year fixed is not appropriate for every homeowner, either). However, within a balanced financial portfolio, they can be a terrific financial planning tool.

What Role Do You Play In This Rising Mortgage Rate Environment?

The American Consumer keeps spending.

This morning, the monthly Retail Sales report showed a larger-than-expected jump. Even after stripping out elevated gas prices, the sales increase was more than double the expected amount.

The economy surges ahead, fueled by everyday spending, and this does not bode well for the future of mortgage rates.

The recent run-up in mortgage rates is largely from inflation fears. With inflation, investors' dollar-denominated securities have less value over time because the dollar itself is worth less.

Runaway consumer spending exacerbates the potential for an overheated economy and that is why today's figures are slightly troubling. Each time you and I make a purchase, we are (in a small way) contributing to the economy's growth.

Inflation, of course, is the enemy of bonds and your mortgage rates are determined by the prices of mortgage bonds. Inflation erodes the value of the bonds and that is what causes mortgage rates to increase.

As a homeowner, higher mortgage rates may depress your local market because fewer home buyers can qualify for home loans, lowering overall demand.

Rates are up by as much as 0.875% in the past 3 months.

Proof That Mortgage Bonds Are A Global Market

If you ever wanted proof that mortgage rates react to global events, the past four days are it.

Worldwide, investors are shunning the United States mortgage market in search of higher returns elsewhere.

The more they sell, the worse mortgage rates get.

The latest catalyst for extra supply: speculation about a Bank of Japan interest rate increase coming soon. The Japanese central bank meets Thursday and Friday and is expected to hold its overnight lending rate at 0.500% although Finance Minister Omi has hinted at future rate hikes.

Japan is a major player in the U.S.-based mortgage bond market so the thought of higher returns at home is putting mortgage bonds on the market and forcing prices down.

As always, prices down, yields up. And the carnage continues.

The Week In Review (June 11, 2007) : What To Watch For

After a semi-calm start, last week ended terribly for mortgage rate shoppers highlighted (lowlighted?) by Thursday's mortgage bond market crash.

The drubbing Thursday was the worst day for the bond market in three years and is one of the reasons why the conforming and jumbo 30-year fixed mortgage is up 0.625% since late-April.

Conforming and jumbo ARMs are up as well, although not as much.

One factor impacting the mortage bond market is central bank activity in other countries. The European Central Bank, for example, raised its benchmark interest rate by 0.25% last week. That caused investor cash to move away from the United States and into the Eurozone.

As the cash leaves the U.S. markets for markets elsewhere, it creates an excess supply which pushes prices down.

For bonds, lower prices equals higher rates.

This week, there is little news to report until Wednesday so expect momentum trading to continue until then. The week then finishes with a few reports of consequence:

• Retail Sales
• Producer Price Index
• Consumer Price Index

Markets will be watching these reports with an eye towards the Fed's next meeting June 27-28. As of today, markets are not expecting an increase in the Fed Funds Rate, but "hot" data could change that point of view.

Regardless of data (and like we discussed last week), unless mortgage bond traders engage in profit-taking, the upward trend in rates should continue this week.

(Image Courtesy: Bankrate.com)

When Mortgage Rates Snowball Higher And It Becomes An Avalanche

Yesterday was the single worst day for mortgage rates in more than four years.

Because so few homeowners understand how mortgage rates are determined, a day like yesterday may have little context.

So, let's try to put it in perspective.

If somebody told you that the stock market crashed, you'd understand. A stock market crash happens when many more investors are selling stocks than those that are buying.

Supply and Demand causes prices to plummet.

This is what happened to bonds yesterday -- the market had a "crash" because global investors fled the U.S. markets in search of better returns elsewhere.

In other words, lots of sellers and very few buyers.

Because mortgage rates are based on the prices of mortgage bonds and because Supply and Demand dropped the prices of mortgage bonds, mortgage rates jumped as a result.

The bond markets have been under selling pressure for several weeks but yesterday a psychological price level was tripped and that triggered selling that led to a Snowball Effect.

Then, the snowball became an avalanche. A big one. Hence, "the crash".

The 30-year fixed mortgage rate is up 0.625% over 60 days, an 11% increase.

It is NOT a good time to be floating a mortgage rate.

All Real Estate Is Local, Or Why National News Programs Are Misleading

This is just a quick reminder to ignore national news stories about real estate. It may sound like strange advice, but real estate is a highly local phenomenon.

The "national scene" is comprised of data from:

• 50 states, with
• More than 30,000 incorporated cities, and with
• An innumerable number of neighborhoods

It also combines data from:

• Single family residences
• 2-4 units
• Condominiums/Co-ops

In other words, throw a dart at a map of the United States and the street on which the dart lands is in the same data set as the street on which you live.

Like I said, ignore the national statistics -- focus on your local statistics.

Unfortunately, getting local real estate statistics is not always easy. The best place to start is by asking a real estate agent, a title company representative, or somebody else that has access to (and knows how to interpret!) raw real estate data for your neighborhood.

By talking to professionals that are "in the market" every day, you'll get a much more reliable opinion than from national news sources.

The Five Words Spoken By Ben Bernanke That Rattled Mortgage Markets

Behold the power of the English language.

With just five words, Federal Reserve Chairman Ben Bernanke rattled markets Tuesday.

In discussing how housing has slumped (and may continue to slump), Bernanke cited that weakness in the sector should not hold the rest of the economy back.

This is departure from earlier this year. In Q1, it was widely believed that a housing slowdown would result in a slowdown of consumer spending which, in turn, would result in a slowdown in overall growth.

Despite lackluster numbers in the housing sector and rising gas prices, however, the American consumer has proved quite resilient, and continues to buy, buy, buy. That slowdown doesn't seem to be coming anytime soon.

Bernanke addressed his concerns about inflation by saying that the "risks remain to the upside." Inflation, as you'll remember, is the enemy of mortgage bonds.

Bernanke's remarks jolted the markets somewhat. In seconds, the mortgage market turned and, by the end of the day, mortgage rates had finished the day higher.

So, How Much Is Starbucks Costing You Each Year?

Have you ever wondered how much your coffee habit is costing you?

Courtesy of software developer Hugh Chou, use the Coffee Calculator to calculate how much you pay for coffee each year, and how much money you forgo in savings because of it.

Did you know: If you buy a $1.87 grande drip coffee from Starbucks every working day instead of drinking free coffee in your office, you'll forfeit more than $6,000 over 10 years' time?

Compounding the problem? Very few of us take our coffee "plain".

If you prefer the grande, sugar-free vanilla, non-fat latte, well, you'd best check out the savings for yourself.

The next time you wonder where you'll find money for a downpayment on a new home, or pay for lawn care, or a car repair, begin the planning process by studying the dollars you spend on non-essential items.

Starting with specialty coffee.

The Week In Review (June 4, 2007) : What To Watch For

Another week, another vicious rise in mortgage rates. There just wasn't enough "bad" news to reverse the market's recent trend to the upside.

There were three notable pieces of news from last week:

1. The Fed's May meeting minutes revealed a genuine concern that inflation is not slowing as anticipated
2. The employment report showed that employers are still hiring
3. Even though incomes slowed dramatically, spending is on the rise

Making matters worse for mortgage bonds is that the stock market continues to flourish. In search of better return, many investors are taking their dollars out from the bond market and using them for stock purchases.

With the extra supply, mortgage bond prices are falling and that raises their respective yields/rates.

This week is devoid of data so mortgage markets will be looking for clues from outside influencers including global oil supply, hurricane weather patterns and geopolitics.

Unless mortgage bond traders engage in some profit-taking this week, the upward trend should continue.

(Image Courtesy: National Geographic)

How Expectations For The Future Impact Mortgage Rates Today

Mortgage rates will not get a helping hand from the bevy of data released this morning.

As markets anticipated, headline data supports the notion that the Fed will raise the Fed Funds Rate from its current 5.250% level before lowering it.

This is completely opposite from what we were seeing just two months ago.

The graph above shows how the market's expectation of the Fed have changed since March.

• The colored lines represent the Fed Funds Rate as set at the FOMC's August meeting.
• The x-axis represents time
• The y-axis represents the percent likelihood of an event happening

So, moving from left-to-right, we can see how the markets gamble on the Fed Funds Rate.

On March 13, there was an equal probability -- 30 percent -- that August's Fed Funds Rate would be the same today (5.250%) as that it would drop to 5.000%.

Today, markets predict with 95% certainty that the rate will remain unchanged with just a 2% chance that it will drop. Today's employment data should push that spread even wider.

Remember: the Fed does not control mortgage rates, but it does raise the Fed Funds Rate when it believes inflation is running too hot for comfort and inflation is the enemy of mortgage bonds.

So, when the Fed Funds Rate increases, it sends a signal to mortgage bond markets and that is what can move mortgage rates. The expectation of the FFR increasing is impacting markets more than the actual action itself.

If you like graphs and wanted an illustration to support the rapid rise in mortgage rates, this is it.

(Image Courtesy: Federal Reserve Bank of Cleveland)

Federal Reserve: Inflation Remains "Uncomfortably High"

Today, the fireworks began. Or, continued, depending on your point of view.

After a span of several weeks in which mortgage rates have steadily increased, markets geared up for a heavy day of data that may have confirmed the worst fears of investors everywhere: the U.S. economy is not slowing down.

The Fed's May meeting minutes showed that it is concerned about inflation, too.

Despite "more favorable" readings, inflation remained "uncomfortably high" and is following neither a downward trend, nor an upward trend.

Reported today, year-over-year inflation data is running at its highest rate in 16 years.

Overall, this makes it less likely that the Fed will lower the Fed Funds Rate rate in the near future.

If you are currently floating your interest rate, get in and get locked. Because there is already an upside bias on rates, it won't take "hot" numbers to move interest rates higher -- it will only take average numbers to do it.