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All day, every day, conforming and FHA mortgage rates in California are in flux.  Rates move in response to hundreds of factors which exact varying levels of influence.  Among the biggest influences on mortgage rates is inflation.  When inflation is unexpectedly high, mortgage rates tend to rise quickly. Conversely, when inflation is unexpectedly low, rates tend to fall quickly.  But what is inflation?  By definition, inflation is when a currency loses its value; when what used to cost $1.00 now costs $1.10.

As consumers, we recognize inflation by the items we buy on a daily basis becoming more expensive.  However, it’s not that goods are more expensive — it’s that the dollars we’re using to buy them have become worth less.  With respect to mortgage rates, this is a big deal because mortgage rates are directly related to the price of a special type of bond called a mortgage-backed bond.

On Wall Street, mortgage-backed bonds are priced, bought, and sold in U.S. dollars so as inflation renders those dollars less valuable, so it does to mortgage-backed bonds as well. It’s a chain reaction by which mortgage bonds lose value, leading investors sell them, causing bond prices to fall on the excess supply.  And, because mortgage rates move opposite of bond prices, as inflation takes hold, mortgage rates rise.

Lately, inflation has been exceptionally low. The Federal Reserve acknowledged as much in its last statement to the markets, and available data backs that position.  This, after predictions that inflation would be “runaway” in 2010.  The Cost of Living is up just modestly this year and it’s helping mortgage rates stay low. And, so long as it lasts, the cost of owning a home in Stanislaus County will remain relatively inexpensive.

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Mortgage markets improved last week in response to mostly negative data about the U.S. economy, and the Federal Reserve’s acknowledgement that Eurozone financial ills could cross the Atlantic.  Conforming and FHA mortgage rates fell last week, extending a rate rally that dates to early-April.  Mortgage rates have fallen to several, new, all-time lows during this period and last week was no different.

The best rates of last week hit Thursday morning.  This week, mortgage rates should be volatile, and may rise, too.  There’s a bevy of data due for release, and market volume will be light with the long weekend looming.  Monday, the Personal Consumptions Expenditures Price Index is published. More commonly known as “PCE”, the index is the Federal Reserve’s preferred inflation gauge. When inflation is running higher than expected, mortgage rates tend to rise.

Conversely, when inflation is running lower than expected, mortgage rates tend to fall.  Tuesday, the Case-Shiller Index will be released for April’s home prices, along with two consumer confidence reports.  As with PCE, strength tends to lead mortgage rates higher and weakness draws them lower.  Thursday, the National Association of REALTORS® releases its Pending Home Sales Index for May and the Department of Labor releases initial and continuing jobless claims number.

Then, Friday, the Bureau of Labor Statistics publishes June’s jobs report, including the Unemployment Rate.  This number is always a market-mover, but with the long vacation weekend looming, it’s expected that Friday’s volume will be light on Wall Street, creating extra volatility.   Mortgage rates may be erratic, in other words.  If you’ve been shopping for mortgages, you’ve been rewarded with falling rates. However, will rates cutting new lows almost weekly and expected to reverse soon, it may be a good time to lock up your savings.  Talk to your loan officer ASAP about locking in your rate.

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Today, in its first meeting in 5 weeks, the Federal Open Market Committee voted 9-to-1 to leave the Fed Funds Rate unchanged.   The Fed Fund Rate remains within its target range of 0.000-0.250 percent.  In its press release, the FOMC said that, since April, “the economic recovery is proceeding” and that the jobs market “is improving gradually”.  Business spending “has risen significantly”, too, with the exception of commercial real estate.

Today’s statement is the 8th straight press release in which the Fed shows optimism for the U.S. economy, dating back to June 2009.  Since that time, the Fed has terminated all of the programs it created to support the economy through the economic crisis.  The recession is widely believed to be over.  And, although the Fed’s statement acknowledged economic growth, it did highlight lingering threats, too.

1. Employers are still reluctant to hire new workers
2. European debt concerns could spill-over to the U.S.
3. Bank lending is contracting

Also, as expected, the Fed re-affirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period”, citing that “inflation has trended lower” recently.  Mortgage market reaction has been positive thus far. Mortgage rates in California are slightly improved post-FOMC.  The FOMC’s next scheduled meeting is August 10, 2010

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Existing Home Sales dropped in May for the first time in 3 months but still managed to post its second-highest since November 2009, buoyed by the expiring federal tax credit program.  An “existing home” is a home that cannot be considered new construction; a resale of an existing home.  Existing Home Sales fell 2.2 percent in May.   The press is calling the drop in sales “unexpected” and disappointing, but a deeper look at the data shows the news isn’t as bad as it first appears.  First, on a regional basis, sales were mostly solid. Only the Northeast region posted a loss. The West even managed a gain.

• Northeast : -18.3 percent
• Midwest : 0.0 percent
• South : +0.5 percent
• West : +4.9 percent

Second, the supply of homes for sale dropped to 8.3 in May and, because home prices are based on supply and demand, this is a positive for pricing.  By comparison, in 2008, the average existing home inventory was 10.4 months.  And, lastly, in May, first-time home buyers represented 46 percent of all buyers. The number was likely buoyed by the tax credit program but that doesn’t damper the fact that first-time buyers provide a support floor for the housing market. 

First-time buyers in Lodi enable “existing owners” to move-up to bigger homes, which, in turn, trickles up to the mid-size and jumbo markets.  Analysts expected more from May’s numbers and that may explain why the reaction to the data is generally negative.  However, in many cities, home resales did just fine.

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Mortgage markets improved last week on weaker-than-expected jobless figures, ongoing troubles in Europe, and a tame reading on domestic inflation.  As a result, conforming mortgage rates for California fell last week, drawing loads of new refinance applications.  For a brief moment Thursday afternoon, mortgage bond prices pierced a key support level, dropping rates in Stockton to their best levels of the year. 

It didn’t last long, however. By Friday morning, pricing was worsening on profit-taking and in preparation for this week — a week that promises to be heavy on both data and rhetoric.  To mortgage markets, this can be a dangerous combination.  The biggest news of the week is the Federal Reserve’s 2-day meeting, scheduled for Tuesday and Wednesday in Washington D.C. 

The Fed is expected to hold the Fed Funds Rate in its target range near 0.000-0.250 percent. It won’t be what the Fed does at its meeting that will matter to rates, though. It will be what the Fed says — about jobs, about growth, about inflation — in its post-meeting press release.  Remarks that reflect well upon the economy should lead mortgage rates higher. Remarks viewed as negative should lead mortgage rates down.  There’s key data due for release next week, too:

• Tuesday : Existing Home Sales and Home Price Index
• Wednesday : New Home Sales
• Thursday : Continuing Jobless Claims
• Friday : GDP and Consumer Sentiment

Mortgage rates remained relatively tame last week.  This week, volatility should return.  If you’re shopping for a mortgage, rates remain very low but could reverse quickly. Your biggest risk is tied to the Fed’s adjournment Wednesday afternoon.

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Single-family housing starts plummeted to a one-year low in May, just 30 days after soaring to a 20-month high.  It’s no wonder home builders are confused.  Against a revised April figure, Housing Starts fell 97,000 units in May, a figure representing almost one-fifth of the total market size.  It’s the worst showing for Housing Starts since May 2009, a surprise to builders and economists alike.

Furthermore, single-family Building Permits plunged in May, too — down 10 percent from April. A permit is a certification from local government that authorizes home construction.  Housing permits are a precursor to Housing Starts with 82% of homes starting construction within 60 days of permit-issuance. Fewer permits, therefore, directly reduces the number of new homes coming to market in the coming months.

For home buyers in Lodi , this should create a sense of urgency.  Home prices are based on supply and demand and supply appears to be falling about the same time that economists predict a surge in home demand.  It could spell rising home prices and a complete loss of negotiation power with home sellers.  For now, though, home affordability remains high with properties cheap and mortgage rates near all-time lows. If you plan to buy a home later this year, the May 2010 Housing Starts data may be a reason to move up your timeframe a bit.

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If you plan to finance your Lodi home with a conforming interest only mortgage, get your loan application submitted no later than this Friday, June 18.  Starting next week, Fannie Mae is clamping down on the popular loan product.  An “interest only” mortgage is exactly what its name implies — a mortgage for which the monthly payments consist entirely of interest with no principal reduction. Because there’s no amortization, payments are less costly on a month-to-month basis.

For example, assuming principal + interest payments at 5 percent, a $250,000 mortgage carries a monthly payment of $1,342.  The payment on a comparable interest only mortgage, however, drops to $1,042.  That’s a payment difference of $300 and the size of the cost savings, not surprisingly, is the biggest reason why Fannie Mae is making its changes.  In its official announcement, Fannie Mae says it wants the give the interest only option to “borrowers who are in a position to choose it as a financial management tool” rather than allowing homeowners use it as an affordability tool for their budgets.  Going forward, there are new minimum standards for interest only home loans.

• Applicants must have a 720 credit score or better
• Applicants must have at least 24 months of reserves
• The property type may not be a 2-unit, 3-unit or 4-unit
• The property must be a primary residence, or vacation home

Furthermore, only purchase and rate-and-term refinances are eligible.  Cash out refinances are prohibited.  Interest only home loans aren’t for everyone, but if you plan to finance with a Fannie Mae mortgage and interest only is your preference, get your loan application submitted as soon as possible. Starting Monday, approvals will be tougher to come by.