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
According to the FBI's 2007 Mortgage Fraud Report, more than 46,000 cases of suspected mortgage fraud were reported last year. This led to bank losses exceeding $813 million.
If you're looking for reasons why mortgage underwriting is measurably more difficult in 2008 -- add "mortgage fraud" to the list. Lenders now perform extra scrutiny on each home loan application to protect against additional losses on all levels.
Mortgage fraud is a federal crime and exists in two basic varieties:
- Fraud for Housing -- Misrepresentation by a mortgage applicant for purposes of buying a home, usually related to income, assets, or debts. The applicant intends to repay the loan as agreed.
- Fraud for Profit -- Coordinated misrepresentations by a group of people related to applicants, appraisals, loan documents and relationships between buyer and seller. The applicant does not intend to repay the loan as agreed.
Although both are illegal, Fraud for Profit is most concerning to law enforcement officials and mortgage lenders. That's because Fraud for Profit tends to incorporate multiple loans for multiple homes in a single neighborhood.
In other words, the bank's potential loss is larger with Fraud for Profit schemes.
The photo above (from the FBI report) is from a Fraud for Profit home appraisal. It indicated that the "recently renovated condominium" included Brazilian hardwood, granite countertops, and a value of $275,000.
Clearly, this is untrue.
Despite increasing 31 percent, mortgage fraud growth slowed in 2007 as law enforcement agencies and mortgage lenders increased their efforts to identify and arrest perpetrators.
(Image courtesy: Federal Bureau of Investigation)
Just like real estate markets differ from town to town, so does the Cost of Living.
Courtesy of CNNMoney, this helpful calculator measures the change in living expenses a person would face when moving between any two major cities in America.
The key expenses compared are:
- Groceries
- Housing
- Utilities
- Transportation
- Healthcare
The comparison data is provided by C2ER which, on its own Web site, charges $4.95 for each city-to-city comparison.
At CNNMoney.com, the exact same C2ER data is licensed and available for free.
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:
- The economy was stabilizing
- 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 the everyday "Cost of Living" increases, our dollars don't go as far as they used to. Economists call this inflation.
One popular method of measuring inflation is to track prices for 84,000 individual items and lump them together into a "basket". If the overall price is higher, then the economy is experiencing inflation.
If a picture is worth a thousand words, this one from The New York Times is worth at least 84,000.
Broken down item-by-item, life is more expensive in some places you expected, and some places you didn't. For example, over the past year:
- Gasoline: +26%
- Milk: +13.3%
- Children's Shoes: +4.6%
- Pet Supplies: +6.8%
Aside from damaging household budgets, inflation can be especially rough on both active home buyers and homeowners looking to refinance. Inflation is linked to high mortgage rates.
This is one reason why mortgage rates have fallen since the Federal Reserve's hints last week that its rate-cutting cycle may be over; many believed that additional Fed Funds Rate cuts would stoke inflation later this year.
In the absence of inflation, mortgage rates tend to improve (all things equal).
Source
All of inflation's little parts
Matthew Bloch, Shan Carter and Amanda Cox
The New York Times, May 3, 2008
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.
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)
The ubiquity of "free" credit reporting services like FreeCreditReport.com, TrueCredit.com, and AnnualCreditReport.com have helped breed a new generation of credit-aware Americans.
Because credit ratings have more importance to everyday life than in years past, this is a welcome development. For example:
- Lenders use credit ratings to determine borrowing rates
- Insurers use credit ratings to determine premiums
- Employers use credit ratings to make hiring decision
Unfortunately for Americans, though, not all credit reports are created equal. And when it comes to actually applying for credit in the form of a new credit card or mortgage, the free reports are worth precisely what they cost.
This is one reason why home buyers should have their credit reviewed by a mortgage lender as soon as possible in the home buying process -- the free reports offered by the major credit bureaus may be misleading and incomplete.
Free credit reports are useful for identifying identity theft and reviewing active accounts but do very little to help a potential creditor gauge your creditworthiness.
As the chart shows us, each industry's creditors has a way they like to do business and that way is the "standard" way.
(Image courtesy: The Wall Street Journal)
Mortgage rates ended higher last week on stronger-than-expected jobs data, strong consumer spending, and an appetite for riskier investments.
But, investors were most excited about the Federal Reserve's hint that its rate-cutting cycle may be over.
The week was quiet until Wednesday when the Federal Reserve voted to lower the Fed Funds Rate by a quarter-percent.
The rate cut wasn't the big news, however.
Market players were most interested in Fed's press release in which it confirmed that the economy is struggling, but improving. The remarks were both soothing and a strong contrast to the Alarmist Analysts -- the ones that make for better television than analysis sometimes.
The Fed's statement also forced investors to rethink their economic outlook for the short- and long-term and when investors change their outlook, markets can be volatile.
One of the more important shifts in thinking now is the attitude towards the U.S. Dollar. An improving economy tends to be good for the dollar and that can help lead to lower mortgage rates.
The dollar's gains last week, incidentally, helped lower gas prices nationwide for the first time in almost 3 weeks. In the 18 days leading up to Friday, gas prices had made 18 consecutive record-highs.
This week, with very little new data and with few companies reporting earnings, expect market momentum to determine in which direction mortgage rates will go.
Because momentum can change quickly, be prepared to lock your mortgage rate if you see one that fits your budget -- it may not last long.
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)
The Fed lowered the Fed Funds Rate by a quarter-percent to 2.000% this afternoon.
Because it is tied to the Fed Funds Rate, Prime Rate also fell by a quarter-percent. Prime Rate is now 5.000%.
Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month's statements.
Mortgage rate shoppers are also benefitting.
Each time the Federal Reserve cuts the Fed Funds Rate, it's meant to stimulate the economy in growth. Too much stimulation can create too much growth and that often leads to inflation (which causes mortgage rates to rise).
This is one reason why mortgage rates had not fallen over the past few months. Each Fed Funds Rate cut made it more likely that the economy would overheat in the second half of 2008.
So, because the Federal Reserve signaled that a rate-cutting "pause" may be ahead, investors are reducing expectations for a Fed-induced inflation cycle for later this year, pushing rates lower.
The FOMC's next scheduled get-together is a two-day meeting June 24-25, 2008.
Source
Parsing the Fed Statement
The Wall Street Journal Online
April 30, 2008
http://online.wsj.com/internal/mdc/info-fedparse0804.html
The Federal Open Market Committee adjourns from its two-day meeting at 2:15 P.M. ET today.
Markets expect the Fed to lower the Fed Funds Rate by 0.250 percent in its press release but it's not what the Fed does that matters to economy right now.
It's what the Fed says.
If the Fed states that future rate cuts are needed to stabilize the economy, mortgage rates should rise because rate cuts tend to create inflation. Inflation is the enemy of mortgage rates.
By contrast, if the Fed states that it will "pause" before making additional rate cuts (or hikes), mortgage rates should fall.
We'll dissect the message in full late this afternoon but the most important message to remember is this:
The Federal Reserve does not directly control mortgage rates.
The Fed only controls the Fed Funds Rate, the interest rate on a very specific type of loan made from one bank to another. The Fed Funds Rate, however, is directly related to a consumer-focused interest rate called Prime Rate.
Prime Rate is the basis of interest rates on credit cards and home equity lines of credit.
If the Federal Open Market Committee votes to lower the Fed Funds Rate by a quarter-percent, it means that the interest rate on Americans' collective credit card and home equity line debt will fall by a quarter-percent, too.
RealtyTrac released Q1 2008 foreclosure statistics and the data follows an interesting statistical phenomenon most commonly known as the "80/20 Rule".
The 80/20 Rule states that 80 percent of the effects come from 20 percent of the causes.
In this case, 80 percent of bank repossessions in the first three months of 2008 came from 20 percent of the states in the union.
Accounting for 156,463 repossessed homes nationwide:
- California (40,023 homes)
- Texas (14,935 homes)
- Michigan (12,016 homes)
- Ohio (10,299 homes)
- Florida (10,185 homes)
- Georgia (8,265 homes)
- Arizona (7,956 homes)
- Colorado (7,022 homes)
- Tennessee (4,533 homes)
- Indiana (4,446 homes)
- Illinois (4,216 homes)
Overall, 0.55 percent of homes were repossessed by banks in the first quarter.
Mortgage markets lost ground last week on inflation concerns and a general feeling that "the worst may be over" on Wall Street.
As investors moved money into the stock market, mortgage rates ticked higher for the second straight week.
The biggest story from last week was the rising cost of gasoline.
Rising energy costs combined with rising food prices are creating worries about the American consumer's ability to spur the economy forward.
That sets up the biggest story of this week -- the Federal Open Market Committee meeting.
The FOMC starts a 2-day meeting Tuesday and is widely expected to lower the Fed Funds Rate by 0.250 percent at its adjournment.
Cuts to the Fed Funds Rate are meant to promote growth in the economy by decreasing borrowing costs for businesses and consumers. For example, credit card rates are tied to the Fed Funds Rate so when the Fed Funds Rate falls, American households pay less interest and (theoretically) have more money to spend on "things".
But the FOMC meeting is not the only big news to watch for.
On Thursday, the Personal Consumption Expenditures data is released. PCE is the Federal Reserve's favorite inflation gauge because it's a smarter version of the "Cost of Living" index. If PCE rises more than expected, it's an indication of inflation and inflation tends to make mortgage rates rise.
Then, on Friday, it's the jobs report. The economy is expected to post the fourth consecutive month of negative job growth. Markets have been highly sensitive to the jobs data lately so expect wild swings in mortgage rates in its wake.
And lastly, sprinkled throughout the week, more than 100 influential members of the S&P 500 will report their earnings. If earnings and outtlooks are strong, mortgage rates should rise. If earnings are weak, mortgage rates should fall.
Newspaper headlines rarely tell the full story and today's papers provide a terrific example.
From the Baltimore Sun (and others):
New-home sales lowest since 1991
8.5% March decline exceeds forecasts; prices also tumble
As always, there's more to the story than the headline.
The Census Bureau reported a 8.5 percent decline in New Home Sales last month, but in the "fine print" of the report, the Census Bureau cites a margin of error of 16.1 percent.
By including a margin of error, the Census Bureau is acknowledging that the "headline number" is not precise and that the actual change in New Home Sales data lies somewhere between the values -24.6% and +7.6%.
Notice that the range of possible reading includes positive numbers.
This means that New Home Sales could have just as easily shown growth in March -- if only the Census Bureau had interviewed a different set of home builders.
The Census Bureau acknowledges this possibility, adding that it "does not have sufficient statistical evidence to conclude that the actual change is different from zero." The data, therefore, is worthless.
The housing market may be strong or the housing market may be weak. Most likely, it is both of these things. It all depends on your street in your neighborhood because all of real estate is local.
Either way, look deeper than the headlines. They're a good source of information, but the real analysis requires a deeper look.
Source
New Residential Sales In March 2008
Census.gov
April 24, 2008
http://www.census.gov/const/newressales.pdf
More than 130 million Americans will receive tax rebates this year as part of Congress' $168 billion economic stimulus package.
Payments begin in about two weeks and range from $600 for individuals to $1,200 for couples, plus an additional $300 per child.
Not everyone is eligible for a full rebate, however.
For single filers earning more than $75,000 and joint filers earning more than $150,000, the tax rebate is reduced by $50 for each $1,000 of income beyond the limits.
An individual with no children, therefore, will not receive a tax rebate if income exceeds $87,000 annually. The IRS provides a tax rebate calculator that can help make sense of the math.
For tax filers using direct deposit, the rebates will be paid based on the last two digits of the social security number:
- SSN ending in 00-20 will arrive May 2
- SSN ending in 21-75 will arrive May 9
- SSN ending in 76-99 will arrive May 16
For tax filers using paper checks instead of direct deposit, payouts begin a little bit later on May 16 and extend through mid-July. The IRS makes the exact dates known on its Web site.
For late income tax filers, the IRS send rebate checks about two weeks after the returns are processed, but not before the regularly scheduled date.
The National Association of REALTORS released its Existing Home Sales report for March 2008. An "existing home" is one that is not considered new construction.
A sub-headline in the report showed that the median sales price of all homes sold in March increased by 2.5 percent to $200,700.
But don't assume that the housing market is improving because of a statistic like that because in the field of Statistics, median is just the "middle" in a group of numbers.
With respect to the Existing Home Sales, the median sales price is the price point at which half of all homes sold went for more, and half went for less.
If more homes sell in high-priced San Jose, CA than in low-priced Youngstown, OH, for example, the median will be skewed to the high-side. The reverse is true, too.
Median sales price make for good headlines, but it does nothing to talk about the local market and that's where real estate is bought and sold.
(Image courtesy: New York Times)
As mortgage lenders limit how much money they will lend and to whom, co-signing home loans is growing in popularity.
"Co-signing" a home loan is when a third-party -- usually a parent or relative -- promises to make repayments to the bank in the event that the borrower falls behind on his obligations.
Money experts usually advise against co-signing notes because of the long-term financial risks, but people still do it for a number of reasons including "wanting to help".
If you're thinking about co-signing a home loan for a friend or loved one, it's important to consider the implications of sharing credit with another person.
The four questions below may help you with your decision:
- Why can't the borrower get approved on his own? It is because of poor credit ratings? Lack of income? History of foreclosure?
- If the borrower stops paying the mortgage, can you afford to make the full payment due each month?
- If the borrowers defaults on the mortgage and doesn't notify you, how will a foreclosure on your credit rating impact your family finances?
- When the co-signed loan appears on your credit, will the debt load prevent you from getting approved for your own loans in the future?
Not only can a co-signed home loan create serious financial burdens, but it's a long-term commitment, too.
Once the note is co-signed, the only way to separate the signers is terminate the note entirely. The two ways to accomplish that are to remortgage the home out of the co-signer's name, or to sell the home and retire the debt.
Co-signing on a mortgage is not "bad" but bad things can happen should the primary signer face personal and/or financial difficulties. Before agreeing to share credit, consider the implications should something go wrong.
The S&P 500 added 4.3 percent last week -- more than during all of 2007 -- in what was a good week for the economy and a bad week for mortgage rate shoppers.
After Friday's close, mortgage rates were higher by as much as 0.375% versus the Friday prior. This reversed a trend of falling rates for Americans.
In recent weeks, mortgage rates had been falling as investors fled risky stocks and parked their money in the bond markets.
A trading pattern such as this one is sometimes called "Flight to Quality" and it creates a high demand for all types of bonds. When bond demand is high, bond prices increase and that drives bonds' relative rates of return down.
Over this past week, however, the Flight to Quality unwound.
Investors saw opportunities for stock market gains and funded stock purchases by selling bonds that they had amassed over the weeks prior. This created an imbalance of bond supply versus bond demand and that caused bond prices to fall.
Naturally, the corresponding rates of return on the bonds rose.
And so, because mortgage rates are really just "rates of return" on mortgage-backed bonds, we can understand why mortgage rates suffered last week as the stock markets were gaining.
It wasn't anything fundamentally bad in the bond market as much as it was the attraction of stock market gains.
This week, there won't be much economic data to cross the wires but 160 companies in the S&P 500 will report their earnings. This could have a broad impact on mortgage rates, similar to last week.
If corporate earnings are stronger-than-expected, expect mortgage rates to continue higher as additional monies flow into stocks at the expense of bond markets.
In the world of real estate, Days On Market is the number of days between when a home lists for sale and when it goes under contract.
It is often abbreviated as DOM.
Average Days on Market is a similar statistic but instead of applying to one home in particular, it applies to all homes in a given neighborhood, ZIP code, or city.
Average DOM is calculated by adding the number of days for which every listed home in an area was available for sale, and then dividing that number by the total number of listings.
In a buyer's market, Average Days On Market is often elevated. This is because homes don't sell as fast as during a seller's market when the Average DOM can be quite low.
For buyers and sellers of real estate, Average Days On Market can be a strong indicator of home prices. When Average DOM falls, home prices tend to increase.
Credit scoring is becoming more important to mortgage pricing so now would be a terrific time to brush up on your credit education.
If you understand how the system works, after all, you can make it work to your advantage. One terrific place to start your research is at myFICO.com.
Published by credit scoring powerhouse Equifax, myFICO.com give you information right from the source. There are tens of pages of tips and tricks from which everybody can learn.
Here are some basic pointers to get you started:
Use It Or Lose It: If you don't use credit, the credit agencies can't assign you a credit score. Spend $10 monthly on your credit cards and then pay it in full to "get on the grid" and get yourself a score.
30 Is The Magic Number: Holding your credit card balances below 30 percent of their respective limits shows an ability to manage credit responsibly. Before consolidating multiple credit cards onto one credit line, consider that card's credit limit. Overload it and the consolidation could hurt your credit score.
The Trend Is Your Friend: A track record of paying accounts on-time means that you're likely to continue paying on-time. Credit bureaus like on-time payments. If you've been late, catch up immediately. At 35 percent, this is the largest component of your credit score.
History Is The Best Teacher: Don't close unused credit cards. Having a credit "history" accounts for 10 percent of your score.
There are more helpful hints available at the Web site so with additional credit score adjustments to mortgage rates expected later this year, the best way to protect yourself is to be proactive.
Identify potential issues in your credit profile and work to improve them.
Credit scoring is not always intuitive so if you're not getting the personal information you need from general Web sites, ask your loan officer for an in-depth analysis. The mortgage rate you save may be your own.
Average gas prices reached an all-time U.S. high Tuesday, touching $3.40 per gallon. San Francisco and Tulsa are the nation's bookends at $3.94 per gallon and $3.11 per gallon, respectively.
But before you wonder if relief is coming to your family budget, remember that "rising gas prices" is a conversation we have every April.
Using data from gasbuddy.com and looking back to 2004, we can see that gas prices tend to rise during the Spring season.
If the pattern holds, we'll should see another 10 percent increase at the pump before gas prices settle back down over the summer and fall months.
Today is Tax Day so here's some IRS-related trivia to share at the water cooler:
Did you know... President Lincoln and Congress enacted the first income tax in 1862 to pay Civil War expenses.
Did you know... The Civil War income tax was repealed in 1872, revived by Congress in 1894, and ruled unconstitutional by the Supreme Court in 1895.
Did you know... In 1913, Wyoming was the deciding vote in the 16th Amendment which gave Congress the authority collect income tax.
Did you know... The first income tax was 1 percent on net personal incomes above $3,000. There was a 6 percent surtax on incomes over $500,000.
Did you know... The first 1040 form was 4 pages long -- including instructions. Today, the instructions ALONE are 92 pages.
Did you know... During World War I, the highest rate of income tax was 77 percent. Taxes were used to help finance the war.
Did you know... In 1954, the tax filing date changed from March 15 to April 15.
Did you know... Electronic filings started in 1986. Today, e-filings have an error rate of 0.5 percent versus an error rate of 21 percent for paper filings.
And remember: If you don't file tax returns, the Treasury Department won't send your economic stimulus check. Happy April 15, everyone.
Source
A Brief History of the IRS
IRS.gov
http://www.irs.gov/irs/article/0,,id=149200,00.html
Through 5 days of see-saw trading, mortgage rates ended last week relatively flat; the downward tick into Friday's close was a boon for home buyers this past weekend.
It may be short-lived, however.
Oil continues to sit near all-time highs and a slew of inflation-related data is crossing the wires this week.
When inflation pressures are high, mortgage rates rise.
The first piece of data is Retail Sales for March and it hits Monday at 8:30 A.M. ET.
Traders pay close attention to Retail Sales because consumer spending accounts for two-thirds of the economy. If sales growth is negative, it's unlikely that Americans will spend the economy out of its weakness.
That should bode well for mortgage rates because a sluggish economy can combat some forms of inflation.
Next, on Tuesday, markets will see the Producer Price Index from March and, on Wednesday, it will see the Consumer Price Index from March. These are "Cost of Living" measurement for businesses and consumers, respectively.
Over the past few months, rising energy costs have pushed both indices to record levels, taxing Americans on all fronts. Rising costs are the heart of inflation and this tends to push mortgage rates higher.
Another "hot" number this month will be bad for mortgage rate shoppers.
Also impacting mortgage markets this week will be the earnings reports of key financial companies including Washington Mutual, JPMorgan Chase, Wells Fargo, Citigroup, and Wachovia. This list is a Who's Who of mortgage-exposed banks and dramatic weakness will force investors to sell stocks in favor of bonds.
Because mortgage rates are based on the price of mortgage bonds, this sort of "safe haven" buying would lower rates.
Mortgage markets have been manic since the start of the year and there's no reason to expect a reprieve this week. It's data-heavy so if you see a rate you like, lock it before it's gone.
Getting approved for a conforming home loan is now tougher than before.
Again.
As home loan defaults mount, government-sponsored financier Fannie Mae has imposed new guidelines on what it will lend and to whom, highlighting the need for a strong credit profile and a downpayment.
In other words, Fannie Mae is outright declining mortgage applicants whose credit is weak and whose payment history shows signs of trouble. But, it's not just the "fringe" borrowers that are finding it harder to get a mortgage.
Buyers with strong credit profiles are being hit by new changes, too.
One such change says that owners of second homes must now have a 10 percent equity position in their homes; 15 percent if the property is in a "declining market".
This is up from 5 and 10 percent, respectively, and represents a growing trend to make homeowners have a "stake" in their own homes. Downpayment requirements are higher for all mortgage products, in general.
Fannie Mae's changes are the third set of restrictions imposed since December 2007 and more tightening is expected over the next few months. That makes now a compelling time to buy a home -- borrowing money will be more restrictive (and more costly) later.
If you are actively shopping for homes and have not been pre-qualified in the last few weeks, reach out to your loan officer and get checked against the latest set of mortgage guidelines.
It's better to know today than after you make an offer.
(Image courtesy: myFico.com)
Every two years, the Jump$tart Coalition issues a "personal finance" exam to high school seniors.
The test highlights the importance of personal financial literacy among America's youth and comes at an especially important juncture.
Many experts -- including Fed Chairman Ben Bernanke -- believe that basic financial knowledge is essential for (and lacking in) teenagers. Jump$tart's exam did little to disprove this.
This year, 12th graders answered 48.3% correct on average and posted the lowest scores since Jump$tart first issued the test in 1996.
A sample question from the 31-question test:
Which of the following types of investment would best protect the purchasing power of a family’s savings in the event of a sudden increase in inflation?
- A twenty-five year corporate bond
- A house financed with a fixed-rate mortgage
- A 10-year bond issued by a corporation
- A certificate of deposit at a bank
Find out the answer to the sample questions and 30 other questions by taking the complete Jump$tart Personal Financial Literacy test for yourself online.
The average adult scores 68%.
In three weeks, the Federal Open Market Committee will meet again and markets anticipate another cut to the Fed Funds Rate.
Based on data compiled by the Federal Reserve Bank of Cleveland at the close of business yesterday, traders put the probabilities of the Fed's next move at:
- 62 percent chance that the Fed Funds Rate falls to 2.000%
- 36 percent chance that the Fed Funds Rate falls to 1.750%
Currently, the Fed Funds Rate is 2.250%.
Cuts to the Fed Funds Rate are meant to stimulate the economy by lowering borrowing costs for banks, businesses, and consumers. When less money is spent on interest payments, more money is available for goods and services and that tends propels the economy forward.
Cuts to the Fed Funds Rate, however, do not equal cuts to mortgage rates.
Mortgage rates are based on the price of mortgage bonds and -- although it exerts an influence -- the Federal Reserve does not set the prices for mortgage bonds any more than it sets the price for other investments such as stocks or mutual funds.
Since September 2007, the Federal Reserve has lowered the Fed Funds Rate by 3 percent. Over the same period of time, conforming mortgage rates have been mostly unchanged.
News sources like to use the term "credit crunch" in describing the U.S. economy, but they rarely define what a credit crunch is and what it means for Americans.
A credit crunch is when the amount of available loans suddenly decreases over a very short period of time.
Usually, it follows a period of lending which, in hindsight, becomes known for its "easy money".
The start of a credit crunch often coincides with consumer loans starting to go bad and lenders losses starting to mount.
The realization that more losses are ahead forces lending institutions to tightening their respective lending guidelines.
Since the current credit crunch began in mid-2007, Americans looking for credit now face:
- Higher credit score requirements on auto loan applications
- Higher fees and interest rates on credit cards
- Larger downpayment requirements on their home purchases
And now, the newest symptom of the credit crunch: the largest buyer of mortgage loans -- Fannie Mae -- has instituted a new, 580 minimum score requirement for all mortgage applicants.
As consumer delinquencies mount and the economy continues to sputter, getting access to credit will likely get tougher for every American -- good credit and bad.
And that's the defining characteristic of a credit crunch.
Source
Credit Crunch
Wikipedia, April 8, 2008
http://en.wikipedia.org/wiki/Credit_crunch
Mortgage rates edged lower last week, buoyed by a weak employment report for March.
After shedding 80,000 jobs last month, the number of working Americans is lower by 232,000 so far this year.
Many pundits are claiming these figures are proof of a U.S. economic recession but it's important to keep the data in perspective.
According to the government, there are 153 million people in the workforce.
The 232,000 terminated workers, therefore, represent a fractional 0.15 percent of the workforce. This is a very small percentage.
This week, there isn't much new data for markets to digest but we'll want to keep an eye on some important events.
The first is Monday's Consumer Credit report. As the Federal Reserve has lowered the Fed Funds Rate, Prime Rate has fallen, too, and that means that credit card interest rates are down.
The Consumer Credit report will show whether Americans are spending the country out of a recession. Ballooning national debt levels should cause mortgage rates to rise because more spending on the consumer level increases the likelihood of inflation later this year.
The second is Tuesday's release of the Federal Open Market Committee's March meeting minutes.
We know what the Fed said and did after its last meeting; the minutes, though, give us the "Behind the Scenes" look at the debate. There shouldn't be much in the minutes that we haven't already heard, but if there is, expect mortgage rates to swing wildly in response.
Other than that, there's not much doing this week. A few Federal Reserve speakers will be out and Friday we'll get to see the University of Michigan Consumer Sentiment survey.
The biggest threat to mortgage rates this week is ongoing news of financial stability (or instability) with large banks and investment houses.
Mortgage markets do not like it when banks go insolvent so be aware of that type of news if it surfaces because it can change the direction of mortgage rates in an instant.
(Image courtesy: The Wall Street Journal Online)
