The Mortgage Rundown

2010 is just a few days old and already the “experts” are making predictions for the year.

Housing calls and mortgage rate predictions run the gamut:

• Home prices will fall in 2010
• Home prices will rise in 2010
• Mortgage rates will rise in 2010
• Mortgage rates will rise by a lot in 2010

Given how varied their outlooks, it’s clear that the professionals have no better view of the future than the amateurs. An expert can make an educated guess, but it’s a guess nonetheless.

Last year, Wall Streeters predicted a 25% pullback in home prices. 12 months later, we know prices didn’t fall. Wall Street also predicted higher mortgage rates for 2009. That prediction was fulfilled.

There’s a lot of talk on CNBC and elsewhere about what’s coming in 2010. Before you take those predictions to the bank, just remember that analysts do a much better job interpreting data from the past than projecting it into the future.

The only thing that’s certain right now is that mortgage rates are historically low, the government is giving tax credits to qualified buyers, and there’s a lot of good “deals” in housing. Make the most of what’s out there today because it will take 12 months for us to look back and know which predictions were right and which were wrong.

Until then, predictions are just opinions and guesses.

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Mortgage markets were relatively flat last week during holiday-shortened trading. After starting the week with a Monday surge higher, mortgage rates settled down through Tuesday and remained somewhat flat into the early-close for New Year’s Eve.

However, as compared to the 4-month low posted post-Thanksgiving, conforming mortgage pricing has now worsened by more than 300 basis points. In English, that means that a December 1 mortgage rate quoted with zero points is available today at a cost of 3 points.

1 “point” is equal to 1 percent of how much you borrow.

If you were shopping for homes or rates last month, you no doubt noticed that pricing zoomed higher to close out 2009. How 2010 starts is anyone’s guess. This week will hold the answer.

It’s a week light with data, but heavy on importance. The biggest news comes Friday in the form of the December employment report.

Last month, the Unemployment Rate fell for just the second time in 2 years and net job gains nearly turned positive. Both points were bad for mortgage rates because a weak economy has helped keep rates down. Evidence of improvement, therefore — at least according to Wall Street — is reason for reversal.

This month, analysts expect a net job gain of zero. If they get it, the psychological effect of the data should cause stock markets to rise and mortgage markets to sink.

A worsening market is bad for rates.

Other data to watch this week is Tuesday’s Pending Home Sales report and Wednesday’s FOMC November Minutes release. Both can forcefully impact markets and rates.

Today is January 4 — there’s a lot of 2010 to go. However, that won’t stop Wall Street from trying to figure it out. As the stock market rises and falls this week, the bond market will likely be in tow. Abrupt movements mean changing mortgage rates and we’ll see more of our fair share of it over the next few weeks.

If you’re quoted a mortgage rate this week that fits your budget, consider locking it in. Rates may fall in 2010, or they may not. It’s a gamble on which you don’t want on the wrong side because when rates do rise, they’re likely to rise quickly.

Markets can’t sustain rates like this in an expanding economy.

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More positive signals from housing — home values are still on the rise.

According to the Federal Housing Finance Agency, after posting its first quarterly increase since 2007 this past September, the Home Price Index rose by another 0.6 percent in October.

Prices are up in 4 of the last six months.

But before we take the stats to the proverbial bank, it’s important that we recognize the Home Price Index for its shortcomings.

1. HPI only accounts for homes with mortgages backed by Fannie Mae or Freddie Mac
2. HPI only accounts for re-sold homes — newly-built homes are excluded
3. HPI aggregates national data whereas real estate markets are local phenomena

On a broad scale, the Home Price Index can be useful, but it doesn’t specifically apply to any specific U.S. market. For that, analysts tend to turn to the Case-Shiller Index, a privately-produced report that assesses home values in 20 cities nationwide.

The good news for home sellers is that Case-Shiller’s most recent report corroborates the government’s conclusion — home values are creeping back.

Home buyers should pay attention. When public and private sector data is in accord, markets tend to go along and, looking back, housing likely bottomed in February 2009. Since then, home sales are up, home supplies are down, and values have increased in most U.S. markets. Furthermore, so long as mortgage rates remain low and government stimulus is in place, the trend should continue through at least the first quarter of 2010.

If you’re on the fence about buying a home right now, or wondering about timing, consider your options vis-a-vis today’s market. Into the new year, homes won’t likely be as cheap to buy, nor to finance.

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It’s not only the real estate markets that differ from town to town — the Cost of Living does, too.

Insurance costs, tax bills and just plain, day-to-day living will dent a household budget differently depending on where that household is. It can be a nerve-wracking fact for families moving across state borders.

As an aid for the budget-aware, Bankrate.com keeps a Cost of Living Comparison Calculator on its website. The calculator asks 3 questions: (1) Where do you live now, (2) To where you are moving, and (3) What is your salary. It then spits out a detailed, 58-item cost comparison list between the two cities.

Some of the key costs compared include:

• Everyday groceries
• Energy bills
• Routine healthcare
• Home ownership
• Clothes
• Sporting goods

The Cost of Living Comparison Calculator is thorough, with data culled from the ACCRA. You’ll be surprised at how granular the list can get. On the ACCRA website, you can buy a similar report for $5.

On the Bankrate.com site, the data is free.

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Mortgage markets made a 4-day losing streak last week on thin holiday volume and overall economic optimism. It was awful news for rate shoppers because mortgage rates were higher every day last week.

The holiday-shortened week marked the third out of 4 during which rates worsened and last week’s action happened to be especially harsh. Monday’s action was the worst for rates since July, for example.

Tuesday’s was only slightly less worse.

Today, conforming, 30-year fixed mortgage rates have reached at a 15-week high — well off the lows set in early-December.

Normally, when mortgage markets worsen this badly, this quickly, it’s because of strong economic data, or growing inflationary expectations. Last week saw neither.

• Existing Home Sales showed strength, but was offset by New Home Sales
• 3rd Quarter GDP showed the economy growing at a slower-than-expected pace
• Inflationary data wasn’t as high as was expected

Furthermore, consumer confidence didn’t rise as planned.

And yet — stock markets gained. All 10 sectors improved and they did so at the expense of mortgage bonds.

This week is again holiday-shortened so expect the same low-volume, high-volatility trading as last week. There’s few data releases save for Tuesday’s Case-Shiller Index. Therefore, watch for momentum trading in either direction.

Markets close early Thursday and re-open Monday, January 4, 2010. If you need to lock a rate, make sure of your loan officer’s hours.

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One day after November’s Existing Home Sales report blew away estimates, the Census Bureau’s related New Homes Sales report failed to impress.

A “new home” is a home that is newly-constructed; not bought as a resale.

In a lackluster showing, New Home Sales dropped 11 percent in November, falling to the lowest levels since April. Furthermore, the all-important “months of supply” climbed by a half-month to 7.9.

The press pounced on the figures and if you only read the headlines, you’d think that housing had cratered. Some of the angles were quite bold, even:

• Weak U.S. Home Sales Show Recovery’s Shakiness (Reuters)
• New Home Sales Plunge In November (CNNMoney.com)
• Housing Forecast : Off Life Support, Still In Critical Care (CBS News)

These headlines, although technically accurate, only tell half the story, however. The other half relates to November 30’s role as the original First-Time Home Buyer Tax Credit ending date.

See, different from home resales, when a contract is written on a newly-built home, the home is rarely finished. According to the Census Bureau, just 1 in 4 new homes are sold “move-in ready”. The other 3 of 4 are in various stages of construction when a buyer signs on the dotted line.

Some have yet to break ground, even.

Regardless, it’s at this date of signing that the Census Bureau counts the home as “sold” — not at the actual closing. This is the main driver of the November New Home Sales data dip.

First-time home buyers would have risked up to $8,000 in federal tax credits if they bought a newly-built home and it wasn’t ready for move-in by November 30, 2009. And it wasn’t until November 5 that the credit was officially extended.

Suddenly, first-timers representing more than half of last month’s Existing Home Sales isn’t so shocking. Buying new carried a lot risk.

There’s always more to the story than the headline. Sometimes, you have to dig deeper. Looking back over 10 months, the housing market is on a steady course of improvement. November’s New Home Sales data — although weak — is not terrible.

Despite what the papers might say.

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Home resales are soaring.

For the 4th consecutive month, the Existing Home Sales report revealed what today’s buyers and sellers already know — there’s a lot of buyer activity right now.

Existing Home Sales surged 7-plus percent in November, posting its largest number of recorded sales in 33 months. Sales volume is up 44% higher versus last year.

It’s another example of the housing market in recovery.

There were other interesting statistics buried in the November data, too. According to the National Association of Realtors:

1. 51 percent of home buyers were first-timers
2. Distressed properties accounted for one-third of all sales
3. The median home sale price rose slightly

But of all the stats from the November Existing Home Sales report, perhaps the most important one is the one showing home supplies falling to 6.5 months. It’s nearly half of the home supply available last November.

The rapid run-off of inventory throughout 2009 is more than a trend at this point and suggests higher home valuations in 2010. Especially because mortgage rates are low, tax credits are available, and the press is giving housing positive coverage.

You shouldn’t feel rushed to buy, but you probably don’t wait too long, either. The best deals of 2010 may be gone before that Spring Buying Season even starts.

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Mortgage pricing worsened Monday, driving mortgage rates to their highest levels since October.

The day’s action was drastic, too.

Some banks issued as many as 3 rate sheets Monday — each worse than the preceding and one reason why rates got so bad, so quickly, is because this week marks the beginning of mini-Vacation Season on Wall Street.

Between now and January 4, 2010, be prepared for big swings in pricing from day-to-day. Shopping for a mortgage could be a challenge.

The relationship between vacation days and mortgage rate volatility is rooted in how mortgage rates are “made”.

1. Conforming mortgage rates are based on the price of mortgage-backed bonds, a security that is sold on Wall Street
2. Mortgage-backed bonds can’t sell without a bond buyer and a bond seller agreeing to a specific sale price

So, during vacation week, when the total number of market participants are less, there are fewer opportunities for buyers and sellers to meet at a specific price. As a result, bond prices rise and fall with a higher velocity than on a “normal” day. Rallies and momentum plays are exaggerated, too.

Now, mortgage market action like this can work in your favor, or it could work out of your favor. Unfortunately, on Monday, rates moved out of favor.

This rest of this week is stacked with market-moving economic data. The data could be better-than-expected, or worse-than-expected. Either way, markets will react a little more feverishly than normal. Therefore, if you have a chance to lock a favorable rate, consider taking it.

Before long, the rate could be gone.

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Mortgage markets improved last week as pricing followed a roller coaster-like pattern. After touching a 6-week high Tuesday, rates rallied to weekly lows Thursday, and then jumped back higher Friday.

Despite the improvement last week overall, mortgage pricing remains significantly worse from the all-time lows set in late-November.

Oddly, last week’s most prominent mortgage-related story wasn’t the most influential one.

On Wednesday, the Federal Open Market Committee adjourned from a two-day meeting. It voted to leave the Fed Funds Rate unchanged from its current target zone of 0.000-0.250 percent. This wasn’t news, per se — markets expected the “no change” vote.

However, in its accompanying press release, the Fed appeared more rosy in its economic outlook, citing improving labor markets and low levels of inflation. Results like this are a mixed bag for rate shoppers, but is generally welcomed as good news.

Rates were unchanged after the FOMC release.

The bigger story last week comes from Greece.

Concerns for the country’s debt burden have been in play for weeks, but last week, Standard & Poor’s officially downgraded Greece’s debt rating. The move triggered concerns regarding broader Eurozone debt, especially considering the recent issues in Dubai.

U.S. mortgage markets benefitted from Greece’s troubles as “safe haven” attracted investors, driving down rates Thursday afternoon.

Debt concerns should remain in focus this week. Furthermore, there’s a bevy of domestic data that could swing rates in either direction, too. Most notably, watch for Tuesday’s housing data, Wednesday’s inflation data, and Thursday’s consumer confidence data. Each can be a powerful influence on rates.

There will be less volume on Wall Street because of Christmas and less volume tends to spur mortgage rate volatility. Be wary of swings in either direction.

Markets close early Thursday and will be closed Friday.

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Housing Starts jumped last month as builders got back to business. It’s a telling sign for the economy, but bad news for next season’s sellers.

With more homes coming online, home prices may be slow to rise nationwide.

A “Housing Start” is a privately-owned home on which construction has started. In November, starts rose by nearly 9 percent while remaining within the same tight range we’ve seen since June.

More interesting that Housing Starts, though, is the accompanying data for Housing Permits. After a 5-month plateau, Housing Permits finally broke through, posting its largest number in 12 months.

This, too, bodes poorly for sellers.

Housing permits are precursors to housing starts so because the number of permits are higher today, we expect that the number of starts will be higher just a few months from now.

According to the Census Bureau, 82% of homes start construction within 60 days of permit-issuance.

More permits means more starts which, in turn, leads to a larger home inventory. And when home supplies grow faster than the home demand, prices fall.

Throughout the early part of 2010, low mortgage rates and federal tax credits should help hold demand high but if builders flood the market with new, quality product, sellers may find that they’ve lost some of their leverage.

For home buyers, the rise in starts is welcomed.

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