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On the first Friday of every month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.

More commonly called the "jobs report", today's 2-page analysis of May 2008 shows that the economy shed jobs and that unemployment surged.

This is terrific news for home affordability.

That may sound counter-intuitive, so let's dig deeper into the jobs report and what it really tells us about the U.S. economy.

Over the last year, rising food and energy costs have chipped away at household budgets, leaving Americans with two basic choices:

1. Spend less on discretionary items like vacations and dining out
2. Demand more pay at work so they can vacation and dine out

If Americans choose to spend less, the economy eventually slows down because two-thirds of it is tied to Consumer Spending.  This is anti-inflationary.

But, if Americans demand pay raises instead, businesses eventually pass those higher wage costs back to consumers in the form of higher prices.

This is called a "wage-price spiral" and it's very inflationary.

So, because today's jobs report showed unemployment surging by a half-percent to 5.5%, Americans really have no choice but to follow the "Spend Less" path -- they're not in a position to demand more pay at work.

Today's jobs data is good for home affordability because it relieves inflationary pressures in the economy and when inflation is falling, mortgage rates tend to do the same.

Better mortgage rates mean less expensive housing payments.

Source
Employment Situation Summary
BLS.gov, June 6, 2008

(Image courtesy: Wall Street Journal)

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:

1. Inflation pressures should lessen soon
2. Growth should remain steady this year
3. 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.

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

1. Principal on a mortgage
2. Interest on a mortgage
3. Taxes on the real estate owned
4. 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)

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)

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:

1. The American Consumer is spending undettered despite economic uncertainty
2. The Cost of Living is rising faster than expected
3. 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)

Several years ago, when homes sometimes sold within hours, prospective buyers often drafted "Dear Seller" letters, an accompanying personal note to help purchase offers stand out in a multiple-bid situation.

Today, some buyers are writing a different kind of letter to win a seller's favor -- a letter explaining why the buyer's offer is so far below the seller's asking price.

You can't blame buyers for trying to explain themselves, but after reading this tongue-in-cheek piece from The New York Times, it's clear that real estate negotiations between a buyer and a seller are simply a matter of perspective. 

Whereas a buyer may use Fear to get his price, a seller may counter with Hope.

The article drafts a buyer letter and a suggested seller response.  Both letters are powerful and persuasive, and hint at the real truth in real estate -- that reaching a purchase price agreement is only as difficult as finding a buyer and a seller committed to working together.

And that match happens every day in every city in America -- even the ones in which the housing market is reeling the most.

It's been said that a listing price is just a starting point for conversation, but if that conversation starts with "Dear Seller" and the seller is feeling hopeful, don't be surprised if you get a Dear John in response. 

(Image source: The New York Times)

Mortgage rates are a big deal when you're buying a home. 

With even the slighest uptick in rates, 30 years of mortgage payments can get substantially more expensive and one of the most substantial threats to mortgage rates is an economic event called inflation. 

Inflation's influence on mortgage rates is so large that markets can get jarred on just the mention of it and that's exactly what happened Wednesday when Fed Chairman Ben Bernanke uttered "inflation" 55 times in a 5-page speech at Harvard.

The speech started at 2:45 P.M. ET and by 2:53 P.M., the damage was done. 

Market players interpreted Bernanke's remarks to mean that inflation may be worse that previously expected and mortgage rates moved up by 0.125 percent, or $8 per $100,000 borrowed.

This equates to $2,880 in extra payments over 30 years.

If you're actively shopping for a home loan and rapid rate movements make you nervous, consider locking in your mortgage rate today; rates have been especially jumpy all year and don't look to smooth out anytime soon.

(Image courtesy: ABC News)

Some conforming mortgage rates rose by as much as three-quarters of a percent before Friday's closing.

Even in a year in which mortgage rates have been extremely volatile, last week's spike was a large one.

The main driver of last week's increase was additional evidence that the U.S. economy was never in a recession at all; only that it was "weak". 

From last week:

1. New Homes Sales (including cancellations) reported strong
2. Durable Goods showed surprising strength
3. The Chicago "Business Barometer" showed confidence

All three data points run opposite to what market players believed just six weeks ago and the reversal in mortgage rates is, in part, related to those traders selling out of bonds and moving into something else.

Another part of the shift is weak demand foreign for U.S. treasuries.  Lackluster support from buyers drove down prices last week and helped push up yields.

It all adds up to mean that this is a dangerous time to float a mortgage rate and this week shouldn't be safer than last.  Friday is Jobs Reports Day and that always swings a big stick in the mortgage markets.

Until Friday, though, mortgage rates are expected to exhibit the same volatility that they have all year -- some days up, some days down and most days by a lot. 

Falling oil prices may create some downward pressure this week, but the overall momentum is higher.

(Image courtesy: Wall Street Journal Online)