The Inflation Calculator Checks Whether 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 hearsthat "CPI is rising", it's not always clear what it means. The tendency, therefore, is toignore 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 Calculatorat 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. householdearning $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.
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 inflationtends 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 gallonnationwide and has fallen over 13 consecutive days.
Does Your Hometown Rank On Money Magazine's Top 100 Places To Live in 2008?
Move to Plymouth, Minnesota, says Money Magazine in its 2008 100 Best Places To Live survey.
According to the report, the Twin Cities satellite has all of the makings of a desirable home town:
§ Affordable homes
§ Excellent schools
§ Low crime
§ Lots of jobs
§ Abundant "outdoor life"
The top 5 cities as listed by Money Magazine are the aforementioned Plymouth, Fort Collins (CO), Naperville (IL), Irvine (CA), and Franklin Township (NJ).
The 100 Best Places To Live survey is also sortable by metrics, including housing affordability, job growth potential, and cleanest air.
On the wave of a two-day rally, mortgage rates improved last week overall. This despite a Friday reversal that had caused rates to tick higher just before weekend house-hunting began.
And, like so many other weeks this year, last week's mortgage market activity was defined by its quick-moving interest rates.
At least one major mortgage lender issued 11 separate rates sheets between -- an average of more than 2 per day.
Now, as an activemortgage rate shopper, you can't predict mortgage rate volatility but you can be prepared for it.
Start by knowing which mortgage product is the best fit for your long- and short-term financial goals and then be ready to pounce ona "good rate" because the ratesexpire as soon as that next rate sheet gets issued.
Another effective way to prepare for shopping is to watch for data that can influence the market's opinion of the U.S. economy. This week, there's a lot of it -- startingwith Tuesday's Consumer Confidence report. When confidence levels are high, economists expect Americans to spend more, propelling the economy forward towards inflation.
Inflation makes mortgage rates rise.
Then, on Thursday, the Employment Cost Index data is released. This will be a closely-watched figure this month because it should show if American workers are pressuring employers for raises in light of higher gas and food prices. If wages are up, it will be considered inflationarybecause businesses eventually pass that cost back to consumers.
Again, bad for mortgage rates.
And lastly, on Friday, the jobs reportwill be released. American businesses have shed jobs in each of the last 6 months, and June is expected to show the same. The jobs report's influence on mortgage rates is enormous so expect big rate swings Friday, either up or down.
Overall this week, considering the weight of the data, it may be prudent to finish-up rate shopping as soon as possible and get locked in with your lender. As the week progresses and the data's import grows, the markets should get less and less stable.
A mortgage rate lock is essential to ensure you actually receive the interest rate you are quoted by a bank or broker. Often times you will you be presented with a rate quote, but it means very little until it’s actually secured by a bank or lender.
When you lock in an interest rate, you secure that rate and the terms associated, assuming your loan qualifies under said lender or bank terms. By locking a loan, you secure the interest rate along with the loan program, which carries certain terms. These include the index the program is tied to, the prepayment penalty if any, and the initial, periodic, and lifetime caps.
You must also choose a lock term, which can range from 7 days to 90 days, or even longer. The most common lock term is 15-30 days, which is the average time it takes for a loan to close. Either way, you will always have the opportunity to extend your rate lock at a small cost if the process gets delayed, which it often will!
Some borrowers may choose to lock in a rate at the initial time of the loan application, before the loan is even submitted. This is known as a pre-lock, and ensures the interest rate is set before the loan is even underwritten. It can be helpful if the DTI is close to the maximum, so if there are any interest rate fluctuations, the DTI won’t be exceeded. Others may lock a loan at the last minute, effectively gambling on the hopes of rates improving later in the loan process.
Either way it’s important to stay on top of your rate lock, and make sure you have the rate and terms in writing. Never assume a broker or bank has locked your interest rate. They may say your rate is this or that, or that it’s locked, but in actuality they’re floating your rate in the hopes of getting a better rebate, or you’ve been misquoted, and they’re praying the rate will come down to what they originally quoted you. I’ve seen this a million times. Brokers will go into panic mode if they failed to lock a rate, often times after quoting their borrower a guaranteed rate. They’ll call the lender each day to see how rates have moved, and nervously push on day after day, waiting for the day rates fall to the level they were quoted. Sometimes brokers will settle for a lower rate with less rebate, but often they’ll simply tell the borrower the rate is higher for some reason, and the borrower will just accept it because they’ve spent so much time working on the loan and just want to get the deal done. Some brokers may even change the original terms they quoted you with to get a lower rate. Such as raising the margin, adding a prepayment penalty, or changing indexes or caps.
All that said, make sure you know exactly what you’re getting when it comes to the rate, term, and lock on your interest rate. Any mistakes here will directly lead to higher monthly costs, and headache if you fail to jump on a good rate early on. Sure you can gamble, but if you’re happy with an interest rate, might as well not take chances. And always get your lock confirmation in writing from the bank or broker before you move on with the deal!
Sometimes, the hardest part about news is knowing where to find it.
In its filing with the SEC last week, Freddie Mac stated that it will "pursue increases" to its middleman fee. This would likely make mortgages more expensive for every conforming borrower in the country.
The exact verbiage from thefiling is extremely opaque and unless a person knew what things like "delivery fees" were, or "bulk and flow transactions", he'd be inclined to skip right over the offending passage, tucked away on Page 72 in a paragraph labeled Business Outlook.
But, if we paraphrase the passage and simplify it for laypersons, it reads something like the following:
We didn't charge enough fees in 2007 to account for the massive number of defaults. We don't plan to make that mistake again in 2008.
Strangely, in the entire 1,394-page filing, this passage is the only mention of "future default costs" leading to more loan charges. In other words, it's easy to see why this story didn't get picked up by the major news outlets.
To the media, the major angle in Freddie Mac's filing was that it registered to sell $10billion worth of securities. For everyday Americans, though, the major story was a different one -- mortgage fees may never be as low as they are today.
Therefore, if you know that you'll need a new, conforming home loan soon -- for either a home purchase or a refinance -- consider moving up your timeframe. Whether rates rise or fall, it's likely you'll paya more money to borrow money only because you waited.
The implied fee increase would be the third this fiscal year, following increases in December 2007 and in April 2008.
After falling 7 cents per gallon over the last 7 days, gas prices are being pressured higher today as Hurricane Dolly barrels through the Gulf of Mexico.
The first landfall hurricane of the season is expected to flood the southern Texas coast and cause minor disruptions to the nation's oil supplies.
Versus Hurricane Katrinain 2005, Dolly's impact on oil supplies is expected to be small but that doesn't stop traders from bidding up oil prices "just in case" their expectations are wrong.
For instance, oil prices rose almost 2 percent Monday as Dolly drifted into the Gulf. Oil prices then receded as the storm's path was better defined.
Regardless, when hurricanes form in the Gulf of Mexico, it's going to be bad news for home buyers.
Because the Gulf of Mexico is stocked with oil refineries and shipping ports, when specific areas are hit by heavy rains and power outages, supply and demandtakes over, pushing oil prices higher. This causes gasoline prices to rise and that is considered an inflationary pressure on the economy.
Inflation, of course, causes mortgage rates to rise so when hurricanes are brewing, it generally means that housing is about to get less affordable for Americans.
This week, mortgage rates are up by about 0.125 percent overall so far -- roughly $8 monthly per $100,000 borrowed.
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 devaluemortgage 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 -- byday'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 of 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 onlya 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.
For the first time in its history, the FHAchanged its funding fees and mortgage insurance structure this week. FHA-insured home loans are now subject to a risk-based pricing adjustment, as shown by the table above.
Because of risk-based pricing,FHA home loans are now more expensive for borrowers with less-than-ideal credit profiles, and less expensive borrowers with perfect ones.
Prior to the changes, most FHA borrowers paid an up-front fee of 1.500 percent, plus on-going annual mortgage insurance payments equal to one-half-percent on the amount borrowed.
FHA-insured mortgages have grown in popularity this year because, while the guidelines of other mortgage products have tightened, FHA program guidelines have remained loose. FHA allows 3 percent downpayments on purchases,for example, and allows "cash out" refinances to 95 percent.
Fannie Mae and Freddie Mac do not.
Another day, another piece of inflationary data.
June's Consumer Price Index showed a 5 percent year-over-year increasein 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 strengthin 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.
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 somortgage rates end up increasing in order to attract new investors.
Another reason why mortgage rates arehigher 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.
Mortgage rates fell slightly in a week that included a bank failure, more oil price spikes, and questions about the health of the nations' mortgage market.
Rates would have fallen more if not for a late-Friday sell-off that added 0.125 percent to most products.
As financial markets fell under stress, most people missed the strong points that emerged about the U.S. economy last week:
And, also worth noting: homes under contract slipped but remained above the lowest levels of the year, suggesting a potential housing floor.
But, thebiggest story of last week was thestock-price collapse and subsequent pressure on Fannie Mae and Freddie Mac. It should be the biggest story of this week, too.
So far, Fannie and Freddie's issues appear to be more psychologicalin nature than fundamental, but to an already roiled market, negative perception can quickly become reality. This is one of the biggest reasons why both the Federal Reserve and the U.S. Treasury made public statements Sunday in support of Fannie and Freddie, and in advance of the Asian markets' opening.
Other events that may move markets this week include Retail Sales data on Tuesday, consumer inflation data on Wednesday and Ben Bernanke's two-day testimony to Congress which takes place over both Tuesday and Wednesday.
It's unclear in which direction mortgage rates will go, but because the markets are on-edge, expect rate movements to be sharp and quick. In other words, if you're in the market for a mortgage this week and you see a rate and payment you like, don't mess around with it -- just get it locked.
According to RealtyTrac, the rate of foreclosures across the U.S. is slowing. Versus May, June foreclosures fell at a 3 percent clip.
25 states showed improvement month-over-month, led by many of the same areas that had fueled foreclosure activity in 2007.
A sampling of RealtyTrac's data includes:
§ California : Foreclosures down 4.54 percent
§ Georgia : Foreclosures down 14.91 percent
§ Arizona : Foreclosures down 0.07 percent
§ Michigan : Foreclosures down 6.00 percent
§ Illinois : Foreclosures down 15.65 percent
However, the improving nature of the data is not what is making news this morning. Instead, the press is reporting that foreclosures are up by half since last year and that bank seizures have tripled.
And while the annual data may be accurate, that doesn't mean that it's necessarily relevant to home buyers and home sellers across the country.
This is because people buying and selling homes don't usually boast an "annual" mentality; when someone's an active participant in the real estate market, the mentality is "right now".
In other words, annual data fits an economist, but month-to-month data fits you.
June's foreclosure data may be the start of a trend, or it may be a blip. It's really too soon to tell. But the RealtyTrac data reinforces what real estate professionals already know -- that markets all over the country are showing signs of life.
"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.
A noon-hour, mortgage-bond rally rendered homes more affordable for Americans Tuesday. It was the second straight day on which this happened.
On both days, the action was swift.
The speed at which Monday's and Tuesday's respective rallies tore through mortgage markets illustrates how deep the uncertainty that surrounds the U.S. economy really is.
One reason why the market swings so quickly is that, lately,traders are tending to follow the herd.
As a mortgage rate shopper, it's outstanding when the herd is moving in your favor. However, when the herd moves in the opposite direction, the impact on your monthly housing cost can be huge.
Volatility has been the common theme for mortgage rates in 2008 and it's likely to remain a factor until the nation's economic picture gets a little bit more clear.
Some experts are sayingthat may happen in 2009. Therefore, you should be prepared for rapid mortgage rate movement and act accordingly when you see a rate-and-payment combination that makes sense for your household budget.
The payment you see in the morning is likely to be gone by the afternoon.
It's a terrific time to buy a home, but not because homes happen to affordable.
It's a terrific time to buy because the variety of mortgage products available to home buyers looks poised to shrink.
Monday, Alt-A mortgage lender IndyMac Bankstopped accepting mortgage applications and it's likely that other Alt-A lenders will likely follow suit.
Alt-A loans are ones in which borrowers can't (or won't) verify one of two major underwriting criteria:
§ Evidence of income
§ Evidence of assets
Since the Credit Crunch began last July, Alt-A mortgages have been a steady source of funds for"in-between" borrowers -- those that are not quite prime, and not quite sub-prime. IndyMac was among the largest lenders of its type and had outlasted many of its peers.
Its position as a market leader and subsequent exit from lending means that the remaining Alt-A lenders will likely make one of two choices in the coming weeks:
1. Raise rates and fees because of greater Alt-A mortgage risk, or
2. Follow IndyMac's lead and exit mortgage lending altogether
Both outcomes would be harsh for home buyers of all types because when any large banktakes mortgage-related losses like IndyMac just did, it tends to create major risk aversion in the market.
Risk aversion impacts everyone -- even the "good" borrowers.
Banks have been nervous about lending for several months and so they'd rather pass on an "average" mortgage application rather than risk getting stuck with a potentially "bad" one. IndyMac's exit may cause fewer mortgages to get approved.
In other words, buyers eligible for financing today may be ineligible tomorrow.
Therefore, if you're a home buyer and you know your credit profile is less-than-ideal, consider writing a purchase contract sooner rather than later. Your mortgage options may be thinning, and the ones you have may be getting more expensive.
Looking Back And Looking Ahead : July 7, 2008
Last week was fairly uneventful in the mortgage markets, with rates slightly edging lower across the board and without much data to influencetrading.
Even Thursday morning's hotly-anticipated jobs report was met with lukewarm interest; many traders had already left for the weekend.
Mortgage rates just drifted -- a little up and little down,but mostly unchanged.
Mortgage insiders may have found last week to be boring, but for active home buyers,the semi-lullwas a welcome break from the up-and-downsthat have gripped the markets since January.
It's been three consecutive weeks without a substantial increase to mortgage rates.
This week, rates aren't expected to be as calm because Fed Chairman Ben Bernanke is taking two heavy topics and making public speeches about them.
The first speech is to the FDIC on Tuesday. The speech will focus on mortgage lending.The second is to House Financial Services Committee on Thursday and it will cover financial market regulation. In both speeches, expect Bernanke is expected to address inflation and the health of the U.S. banking system.
These two subjects are closely linked to mortgage rates so watch for rate movement during, and after, the speeches.
§ If Bernanke says inflation is moderating, mortgage rates should fall
§ If Bernanke says the financial system is stabilizing, mortgage rates should rise
From a data perspective, there's not much doing other than Friday's Consumer Confidence survey. Confidence surveys don't have a direct impact on the economy, but markets are watching them more closely. A strong reading could benefit the stock market which should, in turn, cause mortgage rates to rise.
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 reportis 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 becausejob losses reduce the likelihood of inflation in the U.S. economy.
Inflation isconsidered by many -- Ben Bernanke included -- to be among the top threats to the U.S. economy -- it devalues thedollar andleads 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.
In the summer of 2005, sub-prime mortgage lending was at its peak. Rates were relatively low and lending guidelines were relatively loose.
At the time, the "standard" sub-prime mortgage product was the 3/27 ARM.
The 3/27 had a few basic traits:
§ A fixed, 3-year "starter rate"
§ Every six months thereafter, the mortgage rate changed
§ The formula by which it changed was (4.999 percent + the 6-month LIBOR rate)
If the loan was interest only, it usually converted to principal + interest at the first adjustment, too.
Because the summer of 2005 was the peak of sub-prime lending, it makes sense that the summer of 2008 is the peak of sub-prime adjusting.
For homeowners with adjustingsub-prime loans, there is some (relative) good news out there.
Today, the 6-month LIBOR hovers near 3.15 percent, meaning that an adjusted mortgage rate will be in the neighborhood of 8.15 percent.
This is versus the rate of 10.30 percent that sub-prime borrowers faced last summer when LIBOR was much higher than it is today.
Adjustments of any size canstrain a household budget, though,so if you're a sub-prime borrower and your pending adjustment will cause financial strife, be proactive -- talk to your lender before you miss a payment.
Lenders are often more willing to talk with "current" borrowers than with delinquent ones.
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 billsthat 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 newsbecause 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 correlatedto 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