For the first week in a long while, mortgage rates ended the week better than how they started. 

As we talked about last week, when there are no major data releases, the markets tend to move on momentum and psychology.  That’s precisely what pushed mortgage rates lower over the past five days.

This week, though, it’s back to reality.

Beginning in March, mortgage markets started to change their bets about the Federal Reserve’s next steps with the Fed Funds Rate.  Previously, investors believed that the Fed would lower the FFR in the first half of 2007, signaling a tamer inflation outlook in the economy.

Data didn’t support that view, though. 

Then, at the Fed’s May meeting, the tide really turned as the nation’s monetary policymakers noted how housing was cooling off, but that the economy was roaring ahead despite that. 

And that’s right around when the bond market started to take it on the chin.

Well, the Federal Open Market Committee meets again this week for a two-day meeting, adjourning Thursday.  The markets will be closely watching every word from Ben Bernanke & Co. to see if the new bets they’ve made on the economy and inflation will be backed up by the Central Bank.

The Fed drops their press release at 2:15 P.M. ET Thursday.

Until Thursday, watch for small movements in mortgage bonds in response to Monday and Tuesday’s housing data, and Thursday jobless claims statistics.

The NBC Today Show recently ran a Home Staging series that’s worth watching.  Hosted by Barbara Corcoran, the trio of 5-minute pieces resemble HGTV Reality Shows but carry much more insight and “everyday tips” that ordinary folks can use.

The video clip above is look at a home on Long Island that, as Barbara called it, is “the worst house on the block”.  You can’t help but feel bad for the agent whose name is on the For Sale sign.

Of course, the story has a happy ending — the home is now under contract.

Watch all three home staging clips via YouTube:

• Home staging with a $100 budget
• Home staging with a $500 budget
• Home staging with a $5,000 budget (see clip above)

“People don’t want to put the money in,” Barbara says. “They’re thinking about taking the money out.” 

This series of videos shows how that line of thinking can actually reduce your profits.

Is “news” always news, or is it masked opinion? 

When doing research on mortgages, it’s important to pay attention to the objectivity of your research source. 

Often, a writer will deploy key adjectives, phrases, and/or images that distort an otherwise factual story.

This cartoon from clangnuts.com is a terrific example. 

It implies that interest only home loans are for people that can’t otherwise afford homeownership.

The truth is that interest only loans are used by all economic classes of homeowners — not just those that need payment relief. 

Many people choose interest only home loans for their flexibility, or as a financial planning tool.

Sure, there are some people that use interest only loans to “get onto the housing ladder”, but that is a statement about the homeowner and not the mortgage product.

Our opinions are often formed by the words and images we hear in a public forum.  Sometimes, it pays to look a little deeper.

It was another favorable day for mortgage rates yesterday as average housing data and momentum trading carried bond prices higher. 

Bond prices up, mortgage rates down, of course. 

All things considered, mortgage bonds should not have moved as much as they did.  But, this is the summer season and in the summer, fewer traders show up for work. 

Especially during a week like this one in which there is no major data release. 

With fewer traders participating, there are fewer bond buyers to match with sellers, and fewer bond sellers to match with buyers. 

Therefore, it is much less likely that a person who wants to buy at a certain price will find somebody who wants to sell at a certain price.  Therefore, mortgage bonds (and interest rates) tend to move a lot more sharply during the summer than we’re otherwise used to seeing.

Today, three Fed presidents take the stump:  Janet Yellen (San Francisco), Timothy Geithner (New York), and Richard Fisher (Dallas).  Markets will listen to the Fed speaker for clues inflation and the economy. 

If the speakers indicate worry over inflation, mortgage rates will rise in response. 

For those that spend a lot of time in their car, this is old news.

Since Memorial Day weekend when gas prices touched $3.24/gallon nationally, the cost of filling up dipped below $3.00.  According to Gas Buddy, Monday’s average cost per gallon was $2.995.

Despite the dip, gas prices are still much higher for late-June than in years prior.

2002: approximately $1.40/gallon
2003: approximately $1.48/gallon
2004: approximately $1.92/gallon
2005: approximately $2.14/gallon
2006: approximately $2.82/gallon
2007: approximately $2.99/gallon

Gas prices change quickly and those changes can be attributable to the price of crude oil, increased demand for gas from road travelers (i.e. summer road trips), or an interruption in the overall production (i.e. supply) of Gulf Coast refineries or from crude oil sources.

Since 2002, all three factors have contributed to the increased cost of gasoline. Over the past three weeks, though, we’ve all gotten a break.

After a tame Consumer Price Index report Friday, mortgage bonds staged a brief rally and rates retreated slightly.

Earlier in the week, mortgage rates were at their highest point in almost a year. 

Unfortunately for rate shoppers, mortgage investors are behaving like Dr. Jekyll and Mr. Hyde right now.  One moment, they hate the outlook on inflation; the next, they love it. 

What’s really confusing is that data points that made mortgage rates move higher or lower 6-9 months ago (i.e. jobs report, crude oil prices, housing stats) are now being discounted. 

Broader data points such as CPI seem to have taken center stage. 

At least for now.

This week, there are virtually no data points of consequence aside from Tuesday’s Housing Starts data.  Given last month’s seasonable weather across the county, don’t be surprised if the number surprises to the hot side.

So, without data, expect mortgage rates to respond to external factors, technical trading factors, and/or irregular weather patterns.

Square footage of a home is a matter of debate — a homeowner measures it one way, a real estate agent another way, and an appraiser a third way. 

The local tax assessor has his own method, too.

So, who is right?

Until 2003, they all were!  That’s when the NATIONAL ASSOCIATION OF REALTORS® Appraisal Committee defined the term “square footage” to include the following:

Finished square footage on each level of the home, measured from the exterior-facing surface of outside-facing walls.

The committee defined “finished” as an enclosed area that is suitable for year-round use and includes walls, floors and ceilings.

Seems basic enough, but there were some added notes and exceptions:

1. An opening to a floor below (e.g. vaulted ceiling, open-air living room) is not included.
2. Stairs are counted as square footage and are added to the floor from which they descend
3. Finished areas must have a ceiling height of 7 feet to be included (except under duct work or beams in which case the requirement is reduced to 6 feet, 4 inched)
4. If a room is sloped, at least half of the room must have the minimum 7-foot height in order to be included
5. “Detached” finished areas are only included if they are connected to the main structure by another finished area.   Detached garages, therefore, are excluded.

Even with the standard defined, the Appraisal Committee’s approach to square footage is still just a guideline; no states have formally adopted it as a standard for appraisers, tax assessors and other real estate industry players.

Until then, the debate will continue.  Despite the “official” guidance.

(Image Courtesy: Gables at Copper Creek)

An interesting feature of interest only loans is that your payment is re-calculated each month based on how much money you are borrowing. 

The industry term for the re-calculation is “recasting”.

When an extra principal payment is made on an interest only loan, the new loan payment is calculated as:

(Outstanding Loan Size) * (Annual Interest Rate) / (12 months)

Therefore, an additional $500 principal payment against a $200,000 interest only loan at 6.000% will reduce next month’s mortgage by $2.50, or $30 annually. 

$30 is six percent of $500.

This is in contrast to an amortizing loan in which your mortgage payment never changes until the loan is satisfied.  Any additional payments to principal on these types of loans shave months off the end of a loan.

Recasting is not exclusive to interest only loans, however.  Many lenders will allow you to recast an amortizing loan for a small fee ($100-500) but may limit the total number of times you can recast over the life of your loan.

Interest only loans recast once monthly.

Interest only loans require discipline and are not proper for every homeowner (the same way that a 30-year fixed is not appropriate for every homeowner, either).  However, within a balanced financial portfolio, they can be a terrific financial planning tool.

 The American Consumer keeps spending.              

This morning, the monthly Retail Sales report showed a larger-than-expected jump.  Even after stripping out elevated gas prices, the sales increase was more than double the expected amount. 

The economy surges ahead, fueled by everyday spending, and this does not bode well for the future of mortgage rates.

The recent run-up in mortgage rates is largely from inflation fears.  With inflation, investors’ dollar-denominated securities have less value over time because the dollar itself is worth less. 

Runaway consumer spending exacerbates the potential for an overheated economy and that is why today’s figures are slightly troubling.  Each time you and I make a purchase, we are (in small way) contributing to the economy’s growth.

Inflation, of course, is the enemy of bonds and your mortgage rates are determined by the prices of mortgage bonds.  Inflation erodes the value of the bonds and that is what causes mortgage rates to increase. 

As a homeowner, higher mortgage rates may depress your local market because fewer home buyers can qualify for home loans, lowering overall demand.

Rates are up by as much as 0.875% in the past 3 months.

If you ever wanted proof that mortgage rates react to global events, the past four days are it.  

Worldwide, investors are shunning the United States mortgage market in search of higher returns elsewhere.

The more they sell, the worse mortgage rates get. 

The latest catalyst for extra supply: speculation about a Bank of Japan interest rate increase coming soon.  The Japanese central bank meets Thursday and Friday and is expected to hold its overnight lending rate at 0.500% although Finance Minister Omi has hinted at future rate hikes. 

Japan is a major player in the U.S.-based mortgage bond market so the thought of higher returns at home is putting mortgage bonds on the market and forcing prices down.

As always, prices down, yields up.  And the carnage continues.