The Markets Abnormal Reaction To July's Producer Price Index Reading

The Producer Price Index is a business inflation meter and it's now up 9.8 percent annually.

This is a huge number for PPI and represents the highest year-over-year rate of inflation since 1981.

Normally, blowout inflation like this would be terrible for mortgage rates but mortgage markets are actually improved since Tuesday's data release.

Usually, a rocketing PPI would create an inflation expectation on Wall Street which would, in turn, cause mortgage rates to rise.

Yesterday, however, that's not what happened.

Upon the PPI release, Wall Street looked at the 9.8 percent number and simply shrugged it off. "Of course PPI is high," traders thought. "Did you see how high energy costs were last month?"

Traders know that in July, oil prices reached an all-time high of $147.27 per barrel and, since then, crude is down more than 20 percent. Because of this, Wall Street has now turned its attention to the August PPI data, thinking it will much more calm than July's.

In other words, instead of fearing inflation, traders believe the worst of it is over, providing an unexpected boost to home buyers in need of mortgages. As inflation expectations fall, mortgage rates are following suit.

Looking Back And Looking Ahead: August 18, 2008

Mortgage rates overcame a terrible Monday last week, climbing back to unchanged by Friday. And like most weeks this year, rates were volatile.

Most interesting about last week, though, was that there a ton of news that should have dragged mortgage rates down, but it didn't seem to happen.

1. A popular inflation measure reached a 17-year high
2. A petropolitical war erupted in Eastern Europe
3. Whispers of more credit problems surfaced on Wall Street

Instead, a soaring U.S. dollar attracted global funds to Wall Street and a renewed demand for all things denominated in U.S. dollars, helping drive up prices in the mortgage bond market.

When mortgage bond prices move higher, mortgage rates move lower.

Like last week, the path of the dollar will likely determine in which direction mortgage rates move between today and Friday. If the dollar increases in value, mortgage rates should fall. And conversely, if the dollar decreases in value, mortgage rates should rise.

Of all the economic data hitting the wires this week, the only one of major importance is the Producer Price Index -- a "Cost of Living" reading for American businesses.

Normally, we'd pay attention to the inflation-predicting PPI because inflation causes mortgage rates to rise. This month, however, we're ignoring it. Oil prices have fallen 20-plus percent since July highs and the PPI reading from last month doesn't reflect the "current marketplace".

So, in the absence of hard data, mortgage rates should move with momentum this week. To follow along at home, keep your eyes on Bloomberg and stay close to your loan officer.
It's during weeks like this that rates can really move.

(Image courtesy: The Wall Street Journal Online)

How Russia Invading Georgia Can Affect Your Mortgage Rates Here

The connection between the world's political events and mortgage rates here at home is not always clear, but Russia's invasion of Georgia provides a strong working lesson.

Georgia is a former Soviet republic on the eastern shores of the Black Sea. Oil pipelines within its territory supply about 1 percent of the world's daily oil needs, mostly to ports in Western Europe.

Last week, Russia bombed Georgia's oil and natural gas transport systems. None of the bombs struck the pipelines, but several exploded close to it. Pipeline part-owner BP shut down two of its oil lines as a precaution, but Russia is reported to have struck one of BP's other pipelines this morning.

The cost of oil is generally based on the normal economics of supply and demand so when oil supplies are threatened, damaged, or shutdown -- because of war, weather or otherwise -- oil prices respond by moving higher.

Higher oil prices, of course, are considered inflationary and that causes mortgage rates to rise here in the United States. High oil prices, for example, are one reason why mortgage rates spiked throughout June and July of this year. And as oil prices have settled, rates have calmed a bit, too.

It's easy to ignore politics and news when it's not happening in your own country, let alone your own hometown. But that doesn't make it any less important.

When you're buying a home, or thinking of refinancing one, you'll likely need a mortgage and the rate you pay on that mortgage will be influenced by every geopolitical event in the world.

Especially when the event involves oil.


Source Russia-Georgia conflict raises worries over oil and gas pipelines Elizabeth Douglass Los Angeles Times, August 13, 2008
(Image courtesy: LA Times)

Looking Back And Looking Ahead: August 11, 2008

In a week packed with mortgage news and economic data, mortgage rates swung hard in both directions last week before settling into the weekend slightly higher across the board.

Adjustable-rate mortgages worsened more than their fixed-rate counterparts and both broke a two-week streak in which mortgage rates had improved.

But, if we look at all of the big stories of last week, there was a dramatic overweight of news that is usually "good for rates".

Those stories included:

--The Federal Reserve saying that inflation should moderate soon
--Oil prices falling 20 percent from July's highs
--Home buyers propping up home sales levels
--Foreign investors wanting to buy long-term U.S. debt
--The U.S. dollar strengthening versus foreign currencies

In the end, it turned out that the news was so good, investors decided to jump back into the stock market, propelling the Dow Jones 3.6 percent to a 6-week high. This fevered trading action drew investor money away from the bond market -- including bonds of the mortgage-backed variety -- and that pressured mortgage rates higher.

And, of course, it didn't help rates when the two biggest insurers of mortgage-backed debt posted large quarterly losses and warned of more delinquencies ahead.

Turning our attention to this week, make note that it is back-heavy on data. Therefore, expect the positive momentum of Thursday and Friday to carry through Monday and possibly Tuesday.

By Wednesday, however all bets are off -- that's when July's Retail Sales data is released. Furthermore, Retail Sales is backed up Thursday by the Consumer Price Index, a Cost of Living measurement.

Both data points are correlated with inflation so higher-than-expected readings may cause mortgage rates to rise.

Regardless, given that mortgage rates are now moving more in a hour than they used to in a day, be prepared to get your mortgage rate quotes quickly and be ready to act on them.

Just 90 minutes later, the quote could be expired.

(Image courtesy: Press of Atlantic City)

Understanding The Federal Reserve's Comments

For the second consecutive meeting, the Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent.

In its press release, the Federal Reserve addresses inflation, saying that it "has been high", fingering energy and commodity costs as culprits. The Fed does expects inflation to moderate later this year, however.

Regarding recession, the Fed addressed softening labor markets and tightening credit, and said that high energy prices may slow down economic activity in the months ahead.

The key comment, repeated from the June statement, was this:

Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Translated, it reads:

The Federal Reserve expects that its policy changes to-date will help the markets find balance and order.

In other words, the Fed is biased towards a Fed Funds rate pause at its September 16, 2008, meeting barring new developments.

Stock markets are reacting favorably to the FOMC statement, bouncing higher after the 2:15 PM ET release. This movement is pulling money away from mortgage bonds and, as a result, rates are at their worst levels of the day.


SourceParsing the Fed Statement
The Wall Street Journal Online August 5, 2008
http://online.wsj.com/internal/mdc/info-fedparse0808.html

How Falling Gas Prices May Increase Your Home Purchasing Power

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)

The Inflation Calculator Checks To See If Your Income Is Keeping Pace With The "Cost Of Life"

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.

Looking Back And Looking Ahead: July 21, 2008

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.

Mortgage Rates Spike On Highest Cost Of Living Index Since 1991

Another day, another piece of inflationary data.

June's Consumer Price Index showed a 5 percent year-over-year increase in what is now the largest annual Cost of Living increase for Americans in 17 years.

This is bad news for both home buyers and homeowners in want of a new mortgage because rising costs are inflationary and inflation causes mortgage rates to move higher.

Predictably, mortgage rates jumped Wednesday morning after the CPI data was released and they edged higher throughout the rest of the day.

This morning, mortgage rates are higher again on unexpected strength in housing starts and building permits across the country.

On most mortgage products, rates are now higher by 0.250 or more since Tuesday. This is equivalent to $192 in extra mortgage payments per year per $100,000 borrowed.

(Image courtesy: The New York Times)

Fannie And Freddie Are Yesterday's News, Says The Market

Mortgage markets have turned their attention back to the U.S. economy this morning, causing yesterday's rate improvements to unwind a bit.

Rates had fallen Monday after the Federal Reserve and U.S. Treasury's joint announcement in support of Fannie Mae and Freddie Mac. Today, it's the data that is taking center stage.
Most notably, the U.S. Dollar is trading at an all-time low versus the Euro and other currencies.

This is a negative for active home buyers because American homeowners repay their mortgage interest in U.S. dollars.

When the dollar loses value, so does the value of those interest payments so mortgage rates end up increasing in order to attract new investors.

Another reason why mortgage rates are higher this morning is that June's Producer Price Index registered much higher than was expected, posting its largest one-month gain since November 2007.

PPI is a lot like the Cost of Living index, except that it measures operating costs for businesses instead. When business costs are increasing, they are often passed onto consumers and this is why rising PPI is thought to be inflationary and inflation -- like a weakening dollar -- pressures mortgage rates to rise.

So, while Monday's rate improvements haven't completely erased, today's action reminds us that mortgage markets wait for no one and yesterday's mortgage rates rarely carry forward.

Especially when inflation is in the mix.

(Image courtesy: The Wall Street Journal)

How Is The Economy Doing? It Depends Who You Ask

"Economic uncertainty" is turning into a 2008 buzzword and there's good reasons why.

On the one hand, there are precursors to inflation in the economy:

Rising oil costs
Rising food prices
Higher Cost of Living

On the other hand, there are precursors to recession in the economy, too:

Mounting job losses
Less access to credit and/or loans
Falling consumer confidence data

The pie chart at right illustrates just how uncertain the "experts" are about the state of the U.S. economy. They're evenly split, right down the middle.

This isn't good news or bad news for Americans, per se, but it does legitimize the idea that the economy's future direction is in doubt. This is one of the biggest reasons why there's been no clear direction for mortgage rates or stock markets since the start of the year.

Until the picture gets more clear, we can expect the volatility to continue.


(Image courtesy: Wall Street Journal)

How Job Losses In The Economy Are Helping Home Affordability

On the first Friday of each month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.

More commonly, it's called the "jobs report".

The jobs report is a sector-by-sector look into the U.S. economy and whether businesses are hiring -- or firing -- workers. This is one of the reasons why its release is so hotly anticipated each month -- the jobs report can reveal a lot about the state of the U.S. economy.

Last month, the economy shed 62,000 jobs.

Now, many people will assume that job losses like this are terrible for the U.S. economy.

Sometimes, that's true.

This month, it's not.

Given the ongoing tug-o-war between inflation and recession, markets are somewhat pleased with the June job loss figures because job losses reduce the likelihood of inflation in the U.S. economy.

Inflation is considered by many -- Ben Bernanke included -- to be among the top threats to the U.S. economy -- it devalues the dollar and leads to increases in the Cost of Living.

Inflation also threatens home affordability because mortgage rates tend to rise when inflation is present.
June's job losses -- while bad for those impacted -- is helping to relieve inflationary pressures on the economy and that is boosting markets performance this morning. Stocks are slightly up, and mortgage rates are slightly down.


(Image courtesy: The Wall Street Journal)

Why Mortgage Rates Could Fall Because of Midwestern Farmers

As flood waters ran through Iowa and other Midwestern states, the nation's corn supply was thought to be in danger.

Prices spiked in the wake of the floods, adding to the already-peaking grocery bills that many Americans are now bearing.

But yesterday, in a surprise report, the Agriculture Department said that many farmers had over-planted corn earlier in the season in order to cash in on corn's rising market value.

The abundance of planting is offsetting a portion of the flood damage and this year's harvest is now predicted to be the second highest on record.

For Americans in need of a home loan, this is terrific news because more corn supply means lower food prices and that puts a hold on at least one source of inflation.

Inflation is the enemy of mortgage rates.

The revised outlook for this year's corn supply is now so much better than it was yesterday that the price of a corn bushel fell by 30 cents at the Chicago Board of Trade -- the maximum allowable amount by rule.
Now, rapid movements in the price of corn may not seem relevant to everyday life, but even the smallest of details about the economy can trickle down and impact you as a homeowner.

The strength of the housing market may be correlated to consumer confidence and consumer confidence is definitely tied to the Cost of Living. And the same goes for the mortgage market -- it's all related to inflation.

With a surprise crop of extra corn, things may look just a little bit better.

Source Corn Crop Largely Intact, Despite Floods
Scott Kilman
The Wall Street Journal, July 1, 2008

The Midwest Flooding And Its Impact On Your Home Mortgage

Flooding in the Midwest has displaced thousands of families and caused billions of dollars in damages.

It may also cause mortgage rates to rise.

As the extent of the damage becomes more clear, prices for grain and livestock are soaring. For example, a host of dietary staples are suddenly more expensive at the supermarket, including:

Meat
Pork
Chicken
Dairy
Eggs

Rising food prices are considered inflationary and inflation tends to make mortgage rates rise.

But of all the foods that are increasing in price, it's corn whose price is rising the most -- up 70 percent so far since January. This is mostly because flood waters damaged up to 3 million acres of harvest in Iowa, our top-producing state.

Corn, of course, is a primary feed for livestock, so rising prices make it more expensive for farmers to raise hogs, cows and chickens. These higher costs get passed along to consumers and contribute to a higher Cost of Living around the country.

After facing (and adjusting) to rising gasoline prices, Americans are facing higher costs again -- this time at the supermarket. And if food prices don't recede with the flood waters, Americans may find that they're getting hit in a third place -- right in their mortgage rates.


Source Hog Farmers Face a Perfect Storm Ilan Brandt, Joe Barrett The Wall Street Journal, June 20, 2008
(Image courtesy: The Wall Street Journal Online)

Looking Back And Looking Ahead: June 16,2008

Mortgage rates moved higher last week on lingering concerns about inflation, the fourth straight week in which rates rose.

Mortgage rates are now as high as they've been since October 2007.

Because inflation devalues mortgage bonds, market players are quick to unload them when signs of inflation are present.

Last week, there were several such signs:
1. The American Consumer is spending undettered despite economic uncertainty
2. The Cost of Living is rising faster than expected
3. The Federal Reserve reports that some business are passing higher costs on to consumers

Hence, the higher mortgage rates.

This week, only Tuesday registers as a "big data day" with reports on housing, productivity, and Producer Price Index -- the "Business Cost of Living" report.

There will be four members of the Federal Reserve speaking, though, and that will add some volatility to the market. Fed Chairman Bernanke is among the speakers, addressing Congress
this morning at 10:00 A.M. ET.

So, expect mortgage rates to continue to jump and dip this week, taking their cues from inflation. More inflation means higher rates and a slowing economy should cause rates to retreat.

(Image Courtesy: LA Times)

What Happens When Ben Bernanke Says "Inflation" 55 Times In 5 Pages Of Text

Mortgage rates are a big deal when you're buying a home.

With even the slighest uptick in rates, 30 years of mortgage payments can get substantially more expensive and one of the most substantial threats to mortgage rates is an economic event called inflation.

Inflation's influence on mortgage rates is so large that markets can get jarred on just the mention of it and that's exactly what happened Wednesday when Fed Chairman Ben Bernanke uttered "inflation" 55 times in a 5-page speech at Harvard.

The speech started at 2:45 P.M. ET and by 2:53 P.M., the damage was done.

Market players interpreted Bernanke's remarks to mean that inflation may be worse that previously expected and mortgage rates moved up by 0.125 percent, or $8 per $100,000 borrowed.

This equates to $2,880 in extra payments over 30 years.

If you're actively shopping for a home loan and rapid rate movements make you nervous, consider locking in your mortgage rate today; rates have been especially jumpy all year and don't look to smooth out anytime soon.

(Image courtesy: ABC News)

How Far Will Your Salary Go In A Different City?

Just like real estate markets differ from town to town, so does the Cost of Living.

Courtesy of CNNMoney, this helpful calculator measures the change in living expenses a person would face when moving between any two major cities in America.

The key expenses compared are:

Groceries
Housing
Utilities
Transportation
Healthcare

The comparison data is provided by C2ER which, on its own Web site, charges $4.95 for each city-to-city comparison.

At CNNMoney.com, the exact same C2ER data is licensed and available for free.

Looking Back and Looking Ahead: April 21, 2008

The S&P 500 added 4.3 percent last week -- more than during all of 2007 -- in what was a good week for the economy and a bad week for mortgage rate shoppers.

After Friday's close, mortgage rates were higher by as much as 0.375% versus the Friday prior.

This reversed a trend of falling rates for Americans.

In recent weeks, mortgage rates had been falling as investors fled risky stocks and parked their money in the bond markets.

A trading pattern such as this one is sometimes called "Flight to Quality" and it creates a high demand for all types of bonds. When bond demand is high, bond prices increase and that drives

bonds' relative rates of return down.

Over this past week, however, the Flight to Quality unwound.

Investors saw opportunities for stock market gains and funded stock purchases by selling bonds that they had amassed over the weeks prior. This created an imbalance of bond supply versus bond demand and that caused bond prices to fall.

Naturally, the corresponding rates of return on the bonds rose.

And so, because mortgage rates are really just "rates of return" on mortgage-backed bonds, we can understand why mortgage rates suffered last week as the stock markets were gaining.

It wasn't anything fundamentally bad in the bond market as much as it was the attraction of stock market gains.

This week, there won't be much economic data to cross the wires but 160 companies in the S&P 500 will report their earnings. This could have a broad impact on mortgage rates, similar to last week.

If corporate earnings are stronger-than-expected, expect mortgage rates to continue higher as additional monies flow into stocks at the expense of bond markets.