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High oil prices are derailing the mortgage market this week, taking an almost-vertical path higher. 

Since mid-February, prices are up by 50 percent.

Rising oil prices can be a threat the U.S. economy because with every extra dollar that Americans pay to energy companies, there is less money available for every other company that makes up our national economy.

Strangely, it comes at a time when the "other" companies need it the most -- their costs of operating are rising, too.

So, businesses are faced with a tough choice and both option prove poor for mortgage rates.

1. Keep prices level and suffer smaller margins (and profits)
2. Pass higher costs onto consumers in the form of higher prices

If profits suffer, job cuts and a weak corporate spending can undermine an economic recovery.  If higher costs are passed on, it leads to inflation and that devalues the U.S. dollar and mortgage bonds.

This is why mortgage rates have spiked along with oil prices this week.  And, when oil prices level off a bit, we can expect that mortgage rates will, too.

Crude oil is up 1.8 percent this morning.

(Image courtesy: Wall Street Journal Online)

The market optimism that had pushed mortgage rates lower since late-March reversed last week on ever-rising oil prices and a bleak outlook from the Federal Reserve.

When gas prices reached $3.93 Friday, it re-igniting inflation concerns and inflation is the enemy of mortgage rates.

As expected, mortgage rates spiked into Friday's market close.

Markets were closed for Memorial Day but re-open this morning with traders feeling apprehensive about mortgage market investments. There are many reasons to park money elsewhere, after all.

1. The U.S. dollar is trolling near all-time lows against the Euro
2. Oil markets are returning incredibly high rates of return
3. Big banks are still writing off large mortgage losses

All three of these reasons reduce demand for mortgage bonds and -- because mortgage rates move in the opposite direction of mortgage bond prices -- mortgage rates rise.

This week, a few inflation-related data points will cross the wires including the Fed's preferred inflation gauge -- PCE.

PCE stands for Personal Consumption Expenditures and it measures the cost of living for ordinary people. It's the Fed's preferred measurement because PCE accounts for Americans buying more chicken when meat gets expensive, or buying more fruits when vegetables get expensive, et cetera.

PCE is different from the Consumer Price Index because CPI is a "fixed" basket of products.

If PCE is running high, expect the exodus from mortgage bonds to continue and rates to run higher. If PCE is flat or lower, mortgage rates should fall.

(Image courtesy: Gasbuddy.com)

Yesterday, several mortgage lenders issued three separate "rate sheets" in response to the changing mortgage market. 

It was the fourth time in the last 6 trading days that mortgage lenders issued multiple rate sheets in a day, and continued the trend that started in mid-January.

The yo-yo nature of mortgage rates underscores the importance of making mortgage rate comparisons within a limited time frame. 

Multiple quotes should be gathered with an hour of each other and, even then, it's prudent to ask your lender: "Has there been a mortgage rate reprice in the last hour?"

The current market volatility is in contrast to the "normal" environment of one-rate-sheet-per-day to which mortgage rate shoppers have been accustomed.  But with the changing economy, we all have to adapt.

Mortgage rate quotes from this morning won't necessarily be valid this afternoon so if you're in the market for a home loan, be sure to do your shopping in a limited timeframe and don't forget to ask about the reprice.

(Image courtesy: City of Peterborough)

It's not often that a mainstream media publication taunts renters into buying homes, but that's exactly what Smart Money does in its latest issue.

The Smart Money Web site "lead-in" reads 5 (Lame) Excuses for Not Buying a Home.  That's a forceful title!

It's unfortunate that renters could feel antagonized by the author's tone because the article raises very good counter-points to the more popular reasons why renters avoid homeownership.

Owning a home is a serious responsibility and does require commitment.  However, a renter should not feel bullied or hurried into buying because for as much as personal economics are at play, personal emotions are at play, too.  Both deserve respect.

So, renters: Put your blinders on and give the Smart Money article a read.  There's good advice in there once you get past the author's bias.

Retail Sales measures total receipts at stores that sell tangible "things" and -- aside from weak demand for automobiles and automobile parts -- Retail Sales displayed surprising strength in April. 

So much strength, in fact, that many experts are changing their predictions about the U.S. economy's fate.

Several months ago, most pundits declared that a economic recession was all but inevitable.  Today, a growing number are changing their views.

Not only are stock and credit markets improving, but data such as April's Retail Sales figures suggest that their fears were overblown.

The takeaway from a story like this is that "experts" do a much better job of interpreting the past than predicting the future.  A person can make an educated guess, but it's impossible to know what the future holds for the economy, or for housing, or for mortgage rates.

Even when the outcome is "inevitable".

Source
Recession? Not So Fast, Say Some
Kelly Evans And Justin Lahart
May 14, 2008, The Wall Street Journal Online
http://online.wsj.com/article/SB121068163716188223.html

Four times annually, the Federal Reserve surveys 84 different banks about general banking conditions.

One of the survey questions asks about current mortgage lending standards and whether they are loosening or tightening.

The chart at right is from the April 2008 survey and it illustrates what we already know: It's getting tougher and tougher to get approved for a home loan.

Some of the areas in which mortgage guidelines are tightening are well-known:

• More thorough income documentation
• Higher credit score requirements
• More "money in the bank" post-closing

Some areas are less well-known:

• More scrutiny of prior delinquencies
• Strict review of appraised values

Overall, getting a mortgage approval from a bank is more difficult than in months past and the tightening trend is expected to continue throughout the rest of the credit cycle.

No "class" of buyers is immune, either -- not even the "prime" ones.

Home prices may fall going forward but stricter mortgage guidelines means that fewer home buyers will be able to take advantage.  If you're unsure about your credit profile, check with your loan officer to see how additional restrictions could impact your ability to purchase (and finance!) a home.

(Image courtesy: Federal Reserve)

With little economic news to influence trading and despite a late-Friday afternoon spike, mortgage rates edged lower last week.

Two weeks ago, when it lowered the Fed Funds Rate by a quarter-percent, the Federal Reserve noted two things:

1. The economy was stabilizing
2. High energy costs threatened inflation

In the days that followed, though, the U.S. dollar strengthened and crude oil prices fell. 

This positive reinforcement of the Fed's outlook spurred the stock market at the expense of the bond market. 

Mortgage rates rose during that period.

But, starting last Monday, the dollar started to soften and oil touched another all-time high.  At $126 per barrel, crude oil is now close to double its May 12, 2007 price of $69.

High oil prices are inflationary and speak directly to the Federal Reserve's concerns: Too much inflation can derail a fragile, recovering economy.

The stock market gave up its prior gains last week and that is why we saw mortgage rates improve -- it was the unwinding of the economic optimism.

This week, optimism (or pessimism) about the economy will be swayed by a number of factors including Tuesday's Retail Sales report and Friday's Consumer Sentiment survey.

The most important data point to watch, though, will be Wednesday's Consumer Price Index report.  We know we should watch it Ben Bernanke told us to watch it.  Keeping inflation in check, remember, is one of the Fed's major focal points for the economy.

In addition, this week will feature 14 public speaking appearances by Federal Reserve members.  Expect each speaker to speak plainly about the economy, its future and the Fed's current rate-cutting cycle.

When Fed speakers stump, markets listen closely so expect mortgage rates to be jumpy all week long.

(Image courtesy: The New York Times)

When real estate news is reported on television or in the papers, it's usually told as a national story.  Unfortunately, stories like these aren't helpful for everyday Americans because real estate is not a national market. 

Real estate is local.

The graph above was used by Fed Chairman Ben Bernanke in a speech to Columbia Business School earlier this week.  Using data from conforming mortgage fundings, it shows the change in home prices from year-to-year on a county level.

Any county not in red increased in value. 

In other words, contrary to what reporters tell us, real estate is retaining its value just fine nationwide.  Aside from a few counties and states, most areas appreciated.

Graphics like this put important real estate issues in perspective.  Home values may falling precipitously in some areas, but those neighborhoods represent just a fraction of the country overall.

In most regions, home values are up.

According to the Bureau of Labor Statistics, the U.S. economy shed 20,000 jobs in April 2008.  The labor force now counts at 146 million people as employed.

Normally, a loss of jobs would foretell economic weakness and would be a good thing for mortgage rate shoppers.  Today, though, traders had been expecting a larger loss of 70,000 jobs.

In other words, today's jobs report looks surprisingly strong. 

The stock market is now rallying on optimism that "the worst is over" for the U.S. economy and evidence supporting the Federal Reserve's remarks that its rate cuts were starting to take hold. 

The stock market's gains are the bond market's losses.

Mortgage rates are up today because the cash that is fueling the stock market is coming from the sale of all types of bonds -- including mortgage bonds. 

This is unwelcome news for people doing mortgage comparisons today, or buying a home this weekend.

In general, interest rates on adjustable-rate mortgages are increasing more than on fixed-rate mortgages.

(Image courtesy: Wall Street Journal Online)

Home prices are continuing to decline and rates remain low. Now is the time to buy, sell, or refinance. Experts predict that rates may increase over the next year while home price decline. For example on a $300,000 purchase price will to $285,000 with a 5% decline. Howver, if rates go up 1% and house price drop 5% over the next year you will still save about $100 if you act now as opposed to waiting.

Home-Price Drop Accelerates, Damping Hopes
Wall Street Journal (04/30/08) P. A3; Reddy, Sudeep
The 20 cities included in the Standard & Poor's/Case-Shiller index all recorded home price declines in February from the prior month, falling 2.6 percent. Year-over-year, prices were down 12.7 percent overall and more than 20 percent in such markets as Miami, Phoenix and Las Vegas. Since the index peaked in July 2006, the index has tumbled 14.8 percent; and experts do not believe prices will bottom out until they fall another 10 percent or so, taking into account the weak economy, stricter mortgage lending standards and a large supply of unsold homes. Meanwhile, an April survey of consumers by The Conference Board reveals a decline in respondents who expect to purchase homes during the next six months to 2.4 percent from 3.4 percent in March