Archive for April, 2007

The Week In Review (April 30, 2007) : What To Watch For

David Kosmecki | April 30, 2007 in Uncategorized | Comments (0)

Last week, a ranking Fed official delivered a “wait-and-see” speech on inflation and that roiled the mortgage markets plenty.

After sitting in a tight range for Monday through Wednesday, rates exploded higher Thursday as markets abruptly changed their expectations of growth for the rest of 2007.

Despite weak housing numbers, employment and consumer spending figures remain elevated.

With a plethora of relevant data coming down the road this week, expect mortgage rates to vary wildly from day-to-day. This may be one of those weeks when a bird in hand is worth two in the bush, with respect to mortgage rates.

We should see some significant movement today after this morning’s new data on personal consumption. The figures showed:

  • Personal income is increasing
  • Personal spending is declining
  • The Fed’s preferred measure of inflation — Personal Consumption Expenditures — is showing signs of tempering

These data points are a mixed bag for mortgage rates and should help to trend rates lower today and tomorrow, but there are still a lot of questions about the economy.

With oil prices fluctuating wildly, questions about the weakening dollar, and a Capitol Hill showdown surrounding Iraq and a military budget, there are significant external risks that can shake up mortgage rates this week — for better or for worse.

One way in which mortgage rate shoppers could be aided would be if traders suspect that the oil supply will be in any way constricted. That should cause oil prices to climb which will cause mortgage rates to fall in response.

Of course, the markets could move the other way, too.

By Thursday afternoon, expect mortgage rates to fall into a lull as traders await Friday morning’s jobs data. Analysts are calling for 100,000 new jobs created in March and a 4.5% unemployment rate, both weaker than in February.

If either data comes in stronger than expected, mortgage rates will increase as the Fed’s “wait-and-see” moves towards a “waited-and-saw… and we were right about inflation.”


What’s All That Yellen About?

David Kosmecki | April 27, 2007 in Uncategorized | Comments (0)

San Francisco Fed President Janet Yellen

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)


With The Next Fed Meeting 13 Days Away, Markets Will Listen For Clues

David Kosmecki | April 26, 2007 in Uncategorized | Comments (0)

Mortgage rates are flatlining in the absence of data or opinion

Mortgage rates have been fairly lazy this week, reaching a near flatline. Even the much-talked about housing data didn’t do much to unperch markets from their current levels.

This afternoon, Fed officials Yellen, Fisher, and Mishkin each speak to the public in separate appearances. If data can’t move mortgage rates, perhaps opinion can.

Of the group, only Mishkin is a voting member on the committee that sets the Fed Funds Rate. All three, however, can influence markets with their remarks.

With the Fed’s next meeting set for May 9, 2007 and some key data expected between now and then (i.e. employment, PCE), expect markets to look for clues to a Fed bias.

If markets interpret the speakers’ comments to mean that the economy is running out of control, mortgage rates will move higher. If the comments show a softness, expect mortgage rates to fall.


Builders May Be Figuring Out The Market Faster Than Home Sellers

David Kosmecki | April 25, 2007 in Uncategorized | Comments (0)

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

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

David Kosmecki | April 24, 2007 in Uncategorized | Comments (0)

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

David Kosmecki | April 23, 2007 in Uncategorized | Comments (0)

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.


How 2007 Gas Prices Are Pacing With 2006 Gas Prices

David Kosmecki | April 20, 2007 in Uncategorized | Comments (0)

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.


Why Downpayments Are Investments, Not Cushions

David Kosmecki | April 19, 2007 in Uncategorized | Comments (0)

Downpayments are not protection against flling real estate prices

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

David Kosmecki | April 18, 2007 in Uncategorized | Comments (0)

Mortgage rates take the elevator up, but the stairs down

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 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

David Kosmecki | April 17, 2007 in Uncategorized | Comments (0)

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.