Monday, President Bush signed the Housing and Economic Recovery Act of 2008 into law and the press jumped on the obvious storylines:

• First-time home buyers get a $7,500 purchase “credit”
• Conforming loan limits move to $625,000
• Delinquent homeowners get a lifeline from the FHA
• Local governments get federal money for buying and restoring foreclosed homes

However, tucked away on the last few pages of the text, in a section called “Revenue Offsets”, there’s an important tax implication.  The new housing law changes the way in which capital gains exclusions are calculated on the sale of a residence.

Under the old system, a taxpayer was entitled up to $250,000/$500,000 of tax-free gains from the sale of a home if filing separately/jointly provided he lived in the residence for at least 2 of the preceding 5 calendar years.

Savvy homeowners exploited this verbiage, moving from home-to-home every 2 years to avoid paying capital gains.

The new law thwarts this tactic.

Capital gains exclusions are now calculated by taking the capital gains on the sale of the home and multiplying it by a ratio of how long a person has lived in a home, by how long that person owned the home.

In the example above, a person living in a home for 2 of 5 years would be entitled to 40 percent of tax-free gains on a home sale instead of all of it.  As always, however, it’s best to talk with a qualified accountant about how tax code changes may impact you personally.

The new capital gains rules go into effect starting January 1, 2009.

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Falling gas prices is doing more than saving Americans money at the pump — it’s also helping to pressure mortgage rates lower.Mortgage rates had spiked between mid-June and mid-July, mostly because economists identified inflationary signals in the U.S. economy.

The largest signal, of course, was the ever-rising cost to fill a car with gasoline.  As gas prices rose, so did the overall inflationary pressure on the U.S. economy.

Mortgage rates tend to rise when inflation is present because inflation devalues the U.S. dollar.  Higher rates are necessary to offset this consequence.

But, the opposite is also true.  The absence of inflation tends to be good for rates; it’s why we’re cheering the gas price chart above.  As gas prices drop, the Cost of Living drops, too, relieving at least one of the economy’s inflation sources.

Everyday drivers are cheering today’s pump prices but active home buyers and mortgage rate shoppers should be, too.  It’s creating one less upward tug on the cost of financing a home.

Since mid-July, gas is down 19 cents per gallon nationwide and has fallen over 13 consecutive days.

(Image courtesy: GasBuddy.com)

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Move to Plymouth, Minnesota, says Money Magazine in its 2008 100 Best Places To Live survey.According to the report, the Twin Cities satellite has all of the makings of a desirable home town:

• Affordable homes
• Excellent schools
• Low crime
• Lots of jobs
• Abundant “outdoor life”

The top 5 cities as listed by Money Magazine are the aforementioned Plymouth, Fort Collins (CO), Naperville (IL), Irvine (CA), and Franklin Township (NJ).

The 100 Best Places To Live survey is also sortable by metrics, including housing affordability, job growth potential, and cleanest air.

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On the wave of a two-day rally, mortgage rates improved last week overall.  This despite a Friday reversal that had caused rates to tick higher just before weekend house-hunting began.And, like so many other weeks this year, last week’s mortgage market activity was defined by its quick-moving interest rates.

At least one major mortgage lender issued 11 separate rates sheets between — an average of more than 2 per day.

Now, as an active mortgage rate shopper, you can’t predict mortgage rate volatility but you can be prepared for it.

Start by knowing which mortgage product is the best fit for your long- and short-term financial goals and then be ready to pounce on a “good rate” because the rates expire as soon as that next rate sheet gets issued.

Another effective way to prepare for shopping is to watch for data that can influence the market’s opinion of the U.S. economy.  This week, there’s a lot of it — starting with Tuesday’s Consumer Confidence report.   When confidence levels are high, economists expect Americans to spend more, propelling the economy forward towards inflation.

Inflation makes mortgage rates rise.

Then, on Thursday, the Employment Cost Index data is released.  This will be a closely-watched figure this month because it should show if American workers are pressuring employers for raises in light of higher gas and food prices.  If wages are up, it will be considered inflationary because businesses eventually pass that cost back to consumers.

Again, bad for mortgage rates.

And lastly, on Friday, the jobs report will be released.  American businesses have shed jobs in each of the last 6 months, and June is expected to show the same.  The jobs report’s influence on mortgage rates is enormous so expect big rate swings Friday, either up or down.

Overall this week, considering the weight of the data, it may be prudent to finish-up rate shopping as soon as possible and get locked in with your lender.  As the week progresses and the data’s import grows, the markets should get less and less stable.

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Statistics won’t always tell the whole story, but they often provide good perspective.The graph at right shows Existing Home Sales data going back three years.  An “existing home” is one that can’t be called new construction; a “used home”, so to speak.

Note the steep decline from 2005 through late-2007.

Since November, however, Existing Home Sales have remained within a very tight range and appear to have reached a flattening point.

The Existing Home Sales data supports the word-on-the-street from real estate agents nationwide that buyers are returning to the housing market in search of good values.

But let’s not forget — demand is only half of the story.  There is the supply factor, too, and the supply side of the housing market is showing the same leveling signs as the demand part.

Looking at the national inventory at left, the number of existing homes for sale has hovered near 4.5 million for the last several months.  No change suggests strength.

Now again, statistics won’t tell the whole story but there are plenty of positive signals from the real estate market right now, just like there are negative ones, too.

This is one reason why real estate data causes so much debate — people want to take an either/or proposition about the state of the real estate and it doesn’t work like that.  Real estate can be simultaneously strong and weak and when it is, buyers look for value.

Perhaps this is why the national housing data is beginning to level off after a 3-year slide.  There’s good values to be had, and today’s home buyers know it.

(Images courtesy: Wall Street Journal Online)

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Sometimes, the hardest part about news is knowing where to find it.In its filing with the SEC last week, Freddie Mac stated that it will “pursue increases” to its middleman fee.  This would likely make mortgages more expensive for every conforming borrower in the country.

The exact verbiage from the filing is extremely opaque and unless a person knew what things like “delivery fees” were, or “bulk and flow transactions”, he’d be inclined to skip right over the offending passage, tucked away on Page 72 in a paragraph labeled Business Outlook.

But, if we paraphrase the passage and simplify it for laypersons, it reads something like the following:

We didn’t charge enough fees in 2007 to account for the massive number of defaults.  We don’t plan to make that mistake again in 2008.

Strangely, in the entire 1,394-page filing, this passage is the only mention of “future default costs” leading to more loan charges.  In other words, it’s easy to see why this story didn’t get picked up by the major news outlets.

To the media, the major angle in Freddie Mac’s filing was that it registered to sell $10 billion worth of securities.  For everyday Americans, though, the major story was a different one — mortgage fees may never be as low as they are today.

Therefore, if you know that you’ll need a new, conforming home loan soon — for either a home purchase or a refinance — consider moving up your timeframe.  Whether rates rise or fall, it’s likely you’ll pay a more money to borrow money only because you waited.

The implied fee increase would be the third this fiscal year, following increases in December 2007 and in April 2008.

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After falling 7 cents per gallon over the last 7 days, gas prices are being pressured higher today as Hurricane Dolly barrels through the Gulf of Mexico.The first landfall hurricane of the season is expected to flood the southern Texas coast and cause minor disruptions to the nation’s oil supplies.

Versus Hurricane Katrina in 2005, Dolly’s impact on oil supplies is expected to be small but that doesn’t stop traders from bidding up oil prices “just in case” their expectations are wrong.

For instance, oil prices rose almost 2 percent Monday as Dolly drifted into the Gulf.  Oil prices then receded as the storm’s path was better defined.

Regardless, when hurricanes form in the Gulf of Mexico, it’s going to be bad news for home buyers.

Because the Gulf of Mexico is stocked with oil refineries and shipping ports, when specific areas are hit by heavy rains and power outages, supply and demand takes over, pushing oil prices higher.  This causes gasoline prices to rise and that is considered an inflationary pressure on the economy.

Inflation, of course, causes mortgage rates to rise so when hurricanes are brewing, it generally means that housing is about to get less affordable for Americans.

This week, mortgage rates are up by about 0.125 percent overall so far — roughly $8 monthly per $100,000 borrowed.

(Image courtesy: Marketwatch.com)

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The phrase “Consumer Price Index” can be intimidating and unclear to Americans.  It’s an economic term, after all, and not a part of everyday American language.It even has its own abbreviation to add to the confusion — CPI.

So, when a layperson hears that “CPI is rising”, it’s not always clear what it means. The tendency, therefore, is to ignore the news.

This is one reason CPI is commonly substituted with the more down-home expression of ”Cost of Living”.

In contrast to the term “CPI”, the phrase “Cost of Living” is a lot more clear.  When people hear that the Cost of Living is rising, instinctively, they get it.  And now they can see how it works in numbers, courtesy of the Bureau of Labor Statistics.

The Inflation Calculator at the government Web site helps a person compare household income to the changing Cost of Living between any two years since 1913.  For example, a U.S. household earning $48,201 in 2007 would have to increase that income to $50,868 just to keep up with “life”.

CPI touched a 17-year high in June, jumping 5.000 percent year-over-year.  Without a 5.000 percent increase an income, a household falls behind.

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Mortgage rates soared last week as mortgage markets experienced a 4-day freefall.By the end of the trading week, conforming mortgage rates had jumped by as much as 0.500 percent.

The spike in rates can’t be pinned on any one factor, but 3 contributing factors include:

1. The lingering impact of high energy prices on inflation
2. The ongoing weakness of the U.S. dollar
3. A rally in the financial sector, marking a return to risk-taking

Inflation and a weak dollar both devalue mortgage repayments, a well-chronicled relationship on this Web site.  In short, when mortgage bond investors find that their repayments are worth less, they demand a higher return.  This causes mortgage rates to rise.

But, it wasn’t inflation or the dollar that caused the majority of the damage to mortgage rates last week — it was the rally in the financial sector.

Rates had edged higher Tuesday on the inflation data but it wasn’t until Wednesday’s morning stronger-than-expected announcement from banking leader Well Fargo that mortgage rates really started to spike.

In its quarterly report, Wells Fargo said that its balance sheet was strong and that it planned to increase shareholder dividends.  The rosy announcement sparked a strong demand for all things financial and — by day’s end — the sector scored a 12.3 percent gain on Wall Street.

It was the largest one-day gain in financial stocks ever.

Then, following Wednesday’s rally, financials picked up additional momentum and ended up closing out the week higher by 21 percent.

Unfortunately for mortgage rate shoppers, a large chunk of the money that fueled the rally came out from the mortgage bond market.

As investors looked for cash to buy financial stocks, many chose to sell mortgage bond holdings, creating excess supply.  More supply leads prices lower and, in the mortgage world, when prices fall, rates go up.

Because mortgage bond prices fell a lot last week, mortgage rates rose by a lot.

This week, expect momentum to be The Big Story.  There is little data beyond Thursday and Friday’s Existing Home Sales and New Home Sales, respectively, and Friday’s Consumer Sentiment Index.  And only a few members of the Fed will be speaking in public.

The one bright spot last week was falling oil prices.

After an 11 percent decline, Americans are waking up this morning to lower gas prices.  This is anti-inflationary and could help tug mortgage rates lower.

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For the first time in its history, the FHA changed its funding fees and mortgage insurance structure this week.  FHA-insured home loans are now subject to a risk-based pricing adjustment, as shown by the table above.

Because of risk-based pricing, FHA home loans are now more expensive for borrowers with less-than-ideal credit profiles, and less expensive borrowers with perfect ones.

Prior to the changes, most FHA borrowers paid an up-front fee of 1.500 percent, plus on-going annual mortgage insurance payments equal to one-half-percent on the amount borrowed.

FHA-insured mortgages have grown in popularity this year because, while the guidelines of other mortgage products have tightened, FHA program guidelines have remained loose.  FHA allows 3 percent downpayments on purchases, for example, and allows “cash out” refinances to 95 percent.

Fannie Mae and Freddie Mac do not.

(Image courtesy: FHA.gov)

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