Jacksonville's Home Loan and Mortgage Broker

Gas prices are entering a very similar pattern to 2006 across the United States and — while it’s bad news for motorists — it could be bad news for mortgage rate shoppers, too.

Last summer, gas prices averaged more than $3.00 per gallon for three main reasons:

1. Fear of supply reduction from the Middle East
2. Fear of a repeat of the 2005 Hurricane Season
3. Seasonal demand factors

Mortgage rates skyrocketed last summer because higher oil prices permeated the entire economy — consumers and businesses alike — and the cost of living increased for Americans.

Looking at the chart above, we may be in for a similar Summer Swoon.

Gas prices are mirroring last year’s prices in late-April and not much has changed in the Middle East in the past 12 months.

When home prices are stable or falling, home buyers often mischaracterized their downpayment on a home, calling it their “cushion” against falling home prices.

Nothing could be farther from the truth.

Nobody wants to owe money when they sell their home. In fact, when asked, most people will answer that they just want to “break even” on their sale.

So, if that person later sells their home for $30,000 less than they paid for it plus the cost of improvements, $30,000 is their loss. If their initial downpayment happened to be $30,000 and they walk away from the closing table “even”, it doesn’t change the fact the home owner lost $30,000 on the sale.

The downpayment is not a cushion — it’s an investment. And when facing falling prices, it can be a simple game of Pay Now, or Pay Later.

Up and down. Up and down. Up and down.

It’s been a veritable roller coaster over the past two weeks for mortgage rates, mostly because traders can’t find the answer to the most important question facing mortgage markets:

Are in the midst of inflation, or not?

Everytime we see strong data in one sector of the economy (i.e. jobs), there is weak data to offset it somewhere else.

Yesterday’s tame Consumer Price Index, for example, showed that maybe prices aren’t increasing as fast as expected.

So, what’s an ordinary Joe to make of it all?

If you’re rate shopping, it may be better to just lock in your rate today and hope that rates don’t drop. Rates have been so erratic that waiting even one extra day can cause your mortgage rate to jump by as much as 0.250%.

We’ve seen that twice in the past three weeks.

Mortgage rates take the elevator up, but they take the stairs down. So, any softening of rates happens at a much slower pace than an increase.

If the data is correct, the U.S. consumers keep doing what they do best — consume.

Despite weak consumer confidence surveys, retail sales posted a 0.7% gain, according to the U.S. Census Bureau. This means that despite rising costs, Americans continue to fuel the economy.

Speaking of fuel, a large reason for the unexpectedly large figure is that gasoline prices have been increasing lately. The average consumer, it appears, is unfazed.

With the housing sector showing weakness, consumer spending is especially important. After all, it makes up 70% of our economy as a whole. If Americans cut back on spending, it could push the country into a recession and could lead to lower mortgage rates.

By contrast, strong retail store receipts should continue to place upward pressure on mortgage rates as we’ve seen lately.

Just a reminder that taxes are due tomorrow, April 17 — even if your tax documents state otherwise. This is because of Emancipation Day, a legal holiday in the District of Columbia.

Emancipation Day dates to April 16, 1862 when President Abraham Lincoln signed a bill ending slavery in that area. When IRS deadlines fall on a weekend or legal holiday, the due dates are moved to the next business day.

According to the IRS, at the time that tax instructions were approved for printing, the tax group believed that the April 16 date was accurate. They have since changed their mind.

Any IRS form, instruction or publication that shows April 16, 2007 as a due date is incorrect and should read April 17, 2007. This is the true 2007 tax due date.

(Image Courtesy: U.S. National Archives and Records Adminstration)

Unlike the stock market, it’s hard for the average person to know when the bond market is getting turned upside-down.

So, looking back at last Friday, when mortgage rates jumped very, very quickly in a short period of time, a lot of people got surprised (and burned).

With stocks, we can all turn on CNBC, Bloomberg, or host of other channels when the Dow Jones Industrial Average heads into a tailspin. That sort of “market event” usually the lead story on the evening news when it happens, too.

With the bond market, though, that almost never happens. There is no clear “buy” or “sell” signal.

So, even though mortgages are so important to everyday people and mortgage rates are determined by the pricing of mortgage bonds, there is nobody there when things are souring to “make it real” for the everyday Joe like there is for stockholders. We all just sit in the dark.

Last Friday, markets turned quickly and rate shoppers could have locked in lower rates if they only knew that the market was slipping away from them.

Until the media starts covering the bond market and mortgage rates, be sure to saddle up with a trusted advisor that can walk you through the land mines of the mortgage-backed securities markets.

The interest rate you save may be your own.

So, just how quickly have the markets turned?

According to Fed Futures Trading as watched by the Cleveland Federal Reserve, on March 13, it was as likely that the August Fed Funds Rate level would be 5.250% as it would be 5.000%.

In other words, markets were betting with equal odds that the Fed would drop rates as it would keep them steady.

Today, 30 days later, the odds are decidedly not 50/50.

Today, as the divergence between “blue” and “purple” show in the graph above, the probability now reads 75% vs. 15% in favor of the FFR staying put at 5.250%.

Markets have only a small bet that the Fed will drop rates prior to August.

This abrupt change in sentiment reflects the growing concerns that inflation continues to dog our economy. Remember, when inflation is present, the Fed tends to raise the FFR in hopes of slowing down the economy.

From a mortgage rate perspective, this partially explains why rates have been rising steadily over the past month. The more likely it is that inflation is present, the higher that mortgage rates will trend over time. Inflation pushes mortgage rates higher because an inflating dollar is worth less money.

Therefore, investors in mortgage-backed securities demand a higher interest payment on their mortgage bonds to compensate for that.

Interesting fact of the day: 55.5% of “wealthy” Americans have mortgages on their primary homes vs. 44.6% of the overall population.

This doesn’t mean that the wealthy are more indebted than the rest of us; it means that the wealthy are maximizing the tax deductions that the IRS makes available to every homeowner in the country.

It’s also possible that wealthy Americans may be more likely to work with financial planners and CPAs to devise short- and long-term financial plans that take advantage of mortgage interest.

See, unlike every other type of consumer debt, interest paid on most home loans are tax-deductible and are deducted from the homeowner’s annual income. For this reason, a homeowner’s “bottom line” interest cost is much, much less than his note rate.

If you are in the 28% tax , for example, and your note rate is 6.00%, your “bottom line” interest rate is 4.32%. Check with your CPA for exact math, of course.

Wealthy or not, every homeowner should consider the impact of losing tax deductions before paying off their mortgage. If the wealthy are doing it and they have a team of advisors surrounding them, maybe there’s something to it for everybody else.

With three members of the Federal Reserve scheduled to speak today, don’t be surprised if mortgage rates show some brief volatility.

Despite weakness in housing, the economy has shown resiliency and continues to push forward. Markets had widely expected a slowdown, but are now having to change course — rapidly. T

his is why mortgage rates have changed so suddenly in the past week.

Traders will be looking for clues about what the Fed sees that they don’t in the speeches from Mishkin, Fisher, and Plosser.

Of the three speakers, Dallas Federal Reserve President Richard Fisher is expected to provide the best “sound bites”. It was Fisher, after all, who claimed that the Fed was in the “8th Inning” of its rate hike cycle in June 2005 after nine previous rate hikes.

The Fed later increased the Fed Funds Rate eight more times before settling at today’s rate of 5.250%.

On strength in jobs and hiring, mortgage rates finished last week at their highest levels in six weeks.

It was a slow week last week until Friday when — with the stock market closed for Good Friday and with most bond traders on early vacation — the Non-Farms Payroll report handily beat expectations.

This created a ton of doubt with economists about whether our economy is speeding up instead of slowing down.

When the economy speeds up, it tends to erode the value of the dollar and that forces mortgage rates higher because mortgages are “paid” in dollars. If the dollar is weaker, investors will demand more dollars in return for every dollar they invest.

The stock market re-opened this morning and now momentum trading is continuing to push mortgage rates higher.

This week is practically devoid of economic data until Friday’s PPI data. So, until then, expect a lot of discussion around Wednesday’s minutes release from the March FOMC meeting.

The jobs data from last Friday whiplashed investors that were predicting a slowdown so these folks will be looking for clues about the Fed’s next move. There may be rate volatility surrounding the release.