The sounds of the market retraction after the expiration of the Tax Credit are described in the headline. The number of contracts to purchase dropped 39% from April to May, and declined 27% against May of 2009.  What happened is obvious, but bears a bit of further explanation.

Better Understanding

In the months of February, March and April of 2010, the considerable benefit of the Tax Credit was well understood by the segment of the market that was in a position to take advantage of the opportunity.  While there were some folks that used the opportunity to sell and move up, the bulk of the buying market was first time buyers. The first time buyer segment rand as fast as they could to benefit, in many cases advancing an anticipated home purchase by as much as a an entire year or more.  In other words, there won’t be as many first time buyers available to the market as might have been the case in a “normal” market.  Of course, we really do not know what a normal market looks like at this time.  Looking back, we probably have not seen normal for the better part of a decade.  The buying frenzy that so destroyed markets like Phoenix, Las Vegas, and much of Florida was influenced by monetary factors, not housing demand factors. While the Denver area market did not “heat up” like the aforementioned markets, Denver suffers from the the national backlash of frozen (or at least very cold) mortgage money and reactionary over regulation that accompanies economic downturns.

The Future

Some folks will buy and some folks will sell.  there is always a real estate market. The market many not be as brisk as everyone concerned would like, but in a city the size of Denver, the market will have activity.  The difficulty is not so much the desire to buy, but rather a combination of tight money, consumer apprehension, employment concerns, and overreaching regulatory issues.  The financial services industry has not come to grips with the collapse of the market in 2007-2008, the regulators are running rampant, now creating regulations that conflict with previous regulations in their attempt to appease the voting public, and high unemployment and Federal debt continues to drag the economy.

Our new “normal” in the housing market will be defined by the next two years, as the political landscape changes, mortgage money will become available from other sources besides the banking industry, and unemployment is slowly reduced.

Homes are more affordable across the nation as the housing market emerges from a slow winter season with mortgage rates still near 5 percent.

Soft housing and low rates are an excellent combination for home buyers but whereas home values rise with a gradual pace, mortgage rates change in an instant.  It’s something worth watching.

Each 0.25% increase to conventional or FHA rates adds approximately $16 per month for each $100,000 borrowed. Mortgage rate volatility can change your household budget.

If you’re trying to gauge whether rates will be rising or falling, one keyword for which to listen is “inflation”. Mortgage rates are highly responsive to inflation.

By definition, inflation is when a currency loses its value; when what used to cost $2.00 now costs $2.15. As consumers, we perceive inflation as goods becoming more expensive.  However, it’s not that goods are more expensive, per se. It’s that the dollars used to buy them are worth less.

This is a big deal to mortgage rates because mortgage bonds are denominated, bought, and sold in U.S. dollars.  As the dollar loses value to inflation, therefore, so does the value of every mortgage bond in existence. When bonds lose their value, investors don’t want them and bond prices fall.  Mortgage rates move opposite of bond prices.

Prices down, rates up.

In today’s market, the relationship between inflation and mortgage rates is helping home buyers. The Cost of Living made its smallest annual gain in 6 years last month and the Fed has repeatedly said that inflation will stay low for some time. The combination is driving investors to buy mortgage bonds which, in turn, is suppresses rates.

So long as it lasts, the cost of homeownership will remain relatively low. Combined with the expiring tax credit, the timing to buy a Littleton home may be as good as it gets.

The Federal Open Market Committee (FOMC) adjourned from a scheduled 1-day meeting last week , its second of the year.

The FOMC has held the Fed Funds Rate in a target range of 0.000-0.250 percent since December 16, 2008, and the voting members of the Fed are expected to vote “no change” again today.

However, no change in the Fed Funds Rate doesn’t necessarily mean no change in mortgage rates.  This is because the Fed Funds Rate is a different interest rate from the rates Denver home buyers get from a loan officer.

• Fed Funds Rate : Short-term rate at which banks borrow from each other
• Mortgage Rate : Long-term rate of interest a homeowner pays on a mortgage

Mortgage rates are more responsive to what the Fed says as compared to what the Fed does.

After each FOMC meeting, Fed Chairman Ben Bernanke & Co issue a formal press release to the markets.  At roughly 400 words, the statement is a brief commentary on the strengths, weaknesses, and threats for the U.S. economy.

Wall Street watches the statement with great interest and this is why mortgage rates are often volatile on the days of an FOMC adjournment. One mention of a word like “inflation” and traders rush to dump their mortgage bond positions.

Inflation is the enemy of mortgage rates.

After the Fed’s last meeting in January, it told us that the economy had “weakened further”, led by steep declines both in housing and employment. Global demand was off, too.  The negative tone of the Fed’s statement caused mortgage rates to fall to near an all-time low.

This month, expect a less gloomy message.

Since January, there’s been a modest rebound in housing, employment appears more stable, and Retail Sales just posted huge gains.  If the Fed alludes to improvement in any or all three, mortgage rates will likely reverse and zoom higher.

We can’t know what the Fed today will say so if you’re floating a mortgage rate and wondering whether to lock, the safe approach would be to do it today, prior to 2:15 PM ET.

You can’t get your mortgage rates from the newspaper. Last week proved it.  Again.

Friday morning, headlines in Colorado and around the country read that mortgage rates were down 0.04 percent, on average, since the week prior.

A sampling of said headlines includes:

• US Mortgage Rates Drop For 2nd Straight Week (Reuters)
• Mortgage Rates On 30-year US Loans Fall To 4.93% (Business Week)
• 30-Year Fixed Mortgage Rate Falls Farther Below 5% (Marketwatch)

The story behind the headline was sourced from the Freddie Mac Primary Mortgage Market Survey, am industry-wide mortgage rate poll of more than 100 lenders.  The PMMS has reported mortgage rate data to markets since 1971 and is the largest of its kind.

Unfortunately, Denver rate shoppers can’t rely on it.

See, unlike governments and private-sector firms, when consumers are in need mortgage rate information, they need the information delivered in real-time; for making decisions on-the-spot.  Consumers need to know what rates are doing right now.

The Freddie Mac survey can’t offer that.

According to Freddie Mac, the survey’s methodology is to collect mortgage rates from lenders between Monday and Wednesday and to publish that data Thursday morning.  The survey results are an average of all reported mortgage rates. The problem is that mortgage rates change all day, every day.  The PMMS results are skewed, therefore, by methodology.

And, meanwhile, the issue was compounded last week because mortgage rates shot higher Wednesday afternoon — after the survey had “closed”.  The market deterioration ran into Thursday, too — again, unable to be captured by Freddie Mac’s PMMS.

Although the newspapers reported mortgage rates down last week, they weren’t.  Conforming mortgage rates were higher by at least 1/8 percent, or roughly $11 per $100,000 borrowed per month.  In some cases, rates were up by even more.

Newspapers and websites can give a lot of good information, but pricing is far too fluid to rely on a reporter. When you need to know what mortgage rates are doing in real-time, make sure you’re talking to a loan officer.  Otherwise, you may just be getting yesterday’s news.

Mortgage markets reeled Wednesday after the Federal Reserve released the minutes from its January 26-27, 2010 meeting. Mortgage rates in Colorado are now at their highest levels since the start of the year.

The Fed Minutes is a follow-up document, delivered 3 weeks after an official FOMC meeting. It’s a companion piece to the post-meeting press release, detailing the debates and discussions that shaped our central bankers’ policy decisions.

The Minutes is a terrific look into the Fed’s collective mind and, yesterday, Wall Street didn’t like what it saw.  Specifically, the report disclosed that:

1. The Fed plans to break support for mortgage markets after March 31, 2010
2. Raising the Fed Funds Rate will be a key part of the Fed’s strategy to tighten monetary policy
3. The fundamentals behind consumer spending strengthened modestly

Furthermore, the Fed Minutes said that there is a growing risk of “higher medium-term inflation”. Inflation, of course, is awful for mortgage rates.

Overall, the Fed’s economic optimism appeared stronger after its January meeting as compared to its December one.  A stronger economy should lead to better job growth and higher home prices throughout 2010.

Mortgage rates were up yesterday but they remain historically low. And many analysts think that after March 31, 2010, rates will rise even more.  Therefore, if you’re buying a home in the near-term, or know you’ll need a new mortgage, consider moving up your time frame.

Every 1/8 percent makes a difference in your household budget.

The Federal Open Market Committee ends a scheduled, 2-day meeting today in Washington. It’s the first of 8 scheduled meetings for the policy-setting group in 2010.

The group adjourns at 2:15 PM ET.

As is customary, upon adjournment, the Fed will issue a press release to the markets recapping its views of the country’s current economic condition, and the outlook for the near-term future.

The post-meeting statements from the Fed are brief but comprehensive. And Wall Street eats them up.  Every word, sentence and phrase is carefully dissected in the hope of gaining an investment edge over other active traders.

It’s for this reason that mortgage rates tend to be jittery on days the FOMC adjourns. Wall Street is frantically re-balancing its bets.

Today should be no different.

The FOMC is expected to leave the Fed Funds Rate within its target range of 0.000-0.250 percent — the lowest it’s been in history.  However, it’s what the Fed says Wednesday that will matter more than what it does.

After the Fed’s last meeting in December, it made several observations:

1. The jobs market is getting “less worse”
2. The housing sector is making improvements
3. Financial markets are stabilizing further

The economy is gradually improving, the Fed told us, but there are still risks to the economy ahead.  Furthermore, inflation remains in check.

As compared to December’s press release, today’s FOMC statement will be closely watched. If the Fed changes its verbiage in any way that alludes to strong growth and/or inflation in 2010, expect mortgage rates in Denver to rise as Wall Street moves its money from bonds to stocks.

Conversely, reference to slower growth in 2010 should lead rates lower.

We can’t know what the Fed will say so if you’re floating a mortgage rate right now or wondering whether the time is right to lock, the safe approach would be to lock prior to 2:15 PM ET Wednesday. After that, what happens to rates is anyone’s guess.

Mortgage rates are dropping this morning on weaker-than-expected Retail Sales data from December. Lower rates means more bang for your home-buying buck.

Excluding motor vehicles and parts, December’s “ex-auto” sales receipts were down roughly $500 million from November. Analysts had expected receipts to grow.

The relevance of Retail Sales to home affordability isn’t obvious, but it’s definitely logical.

Retail Sales is directly related to consumer spending and consumer spending accounts for the majority of the U.S. economy. When consumer spending slows, the economy often does, too. It leads investors to seek out “safe” investments.

It’s the reason why stock markets often drop on weak economic data — stocks are among the riskiest investment classes available.

Conversely, the best place to find safety is in the market of government-backed bonds.  This world includes products like U.S. Treasuries and many of the mortgage-backed bonds that help set mortgage rates for people in Denver.  Weak economic data puts mortgage bonds in demand.

For rate shopper, this is good news.  More demand for mortgage bonds causes mortgage rates to fall.  Mortgage rates are lower this morning because Wall Street is shedding some risk.

December’s Retail Sales report closes out a year of generally-weak data.  2009 marks just the second time that Retail Sales fell year-over-year since the government started tracking it 40 years ago.  The other year was 2008.

For home buyers around the country, though, today may represent an opportune time to lock a mortgage rate.  Housing data is still improving and other economic indicators are showing strength.  Soon, Wall Street will shift from a “safe” mentality and move toward risk.

When it does, mortgage rates will rise.

Despite the headlines, it’s important to remember that December’s jobs report wasn’t all bad news.

Sure, the economy shed 85,000 jobs last month and the Unemployment Rate failed to dip below 10%, but for home buyers and rate shoppers in Denver , the news was just fine.

The soft employment data led mortgage rates lower, making homes more affordable for buyers.

There is two sides to every economic coin.

Since early-2008, the U.S workforce has been closely tied to home financing. As the economy slowed and jobs were lost, Wall Streeters pulled money from the risky stock markets and moved it to of the relative safety of bond markets, instead.

Safe haven buying led mortgage bond prices higher which, in turn, caused rates to fall. Mortgage rates fell to 6 all-time lows in 2009. In a related statistic, 4.2 million jobs were lost last year.

And this is why Friday’s non-farm payrolls report was so good for buyers.

See, in November, the economy added new jobs for the first time since 2007, housing looked strong, consumer confidence was growing.  The safe haven buying reversed and mortgage rates took off.  Analysts believed the nation’s economic turnaround was complete.

But now, after December’s jobs report returned to the red, Wall Street is forced to rethink its position. Safe haven buying is back and mortgage rates are lower because of it.

Over the next few months, expect a lot of this back-and-forth action in rates. In general, positive news for the economy will be met with higher mortgage rates and negative economic news will be met with lower mortgage rates.  There will be exceptions, but the general rule should hold.

Mortgage pricing worsened Monday, driving Colorado 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 for shoppers in Denver 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.