by Kevin Whatley (NMLS #113781)

The Consumer Price Index came in higher than expected this morning, registering a 0.371% increase. Excluding volatile gas and food prices, CPI grew by 0.241%. The latter figure is called “Core CPI”.

CPI is sometimes referred to as the “Cost of Living Index” because it measures how consumers are impacting by changing prices of energy, housing, transportation, food and beverage, apparel, entertainment and medical services.

When CPI moves higher, it generally “weakens” the value of a dollar because that dollar buys less. This is an inflationary cycle and generally leads to higher mortgage rates.

While both CPI figures are slightly higher than expectations, markets are taking the news in stride. Mortgage rates are only slightly off their best levels of the week, mostly on Friday-related profit-taking.

Home shoppers know to consider the impact that a new home will have on their household budget and that is called keeping your eye on the ball.

Unfortunately, most shoppers are keeping their eye on the wrong ball.

The proper way to answer the “How Much Home Can I Afford” question is to think in terms of monthly payment and not in terms of a home’s listed sale price.

When a shopper considers affordability in terms of purchase price, he negates the monthly payment impact of:

• Real estate taxes
• Condo/management fees
• Homeowner’s insurance
• Mortgage insurance (if applicable)
• Downpayment

A hypothetical $300,000 home could have a combined payment as low as $1,800 or as high as $3,000, depending on the factors listed above.

In addition, mortgage rates change daily, so that can swing the payments either direction, too.

A smarter way to answer “How Much Home Can I Afford” is to determine a target monthly payment and then work backwards.

This way, each home is considered for its overall holding costs (i.e. mortgage, taxes, related fees) instead of its sticker price.

The Mortgage Bankers Association released a report yesterday detailing how mortgage-holding homeowners are meeting their obligations.

The statistics were a major factor in the Wall Street sell-off yesterday as investors increasingly grow nervous that sub-prime mortgage defaults will spill over into other credit markets and take the economy with it.

The report stated that fourth quarter sub-prime mortgage delinquency rates increased to 14.44% from 13.22%.

This is a 9% jump.

But (as we should always do with statistics), let’s go a little deeper.

The report also listed data on non-sub-prime loans. The delinquency rates on these “other” mortgages was even worse! Delinquencies rose from 3.06% to 3.39%.

This is a 10.78% jump.

You would never know it without looking deeper into the numbers, but conforming ARMs went delinquent in Q4 with more vigor than sub-prime ARMs.

Either way, so long as markets are worrying about credit markets, it will siphon money out of stocks and into bonds. Added demand for bonds usually helps to keep mortgage rates low so there may be silver living here after all.

For the budget-aware, buying a new home involves calculating how new PITI payments will impact the household budget.

For in-town moves, the math is fairly simple — consider your existing budget and replace your old housing cost with your new housing cost.

For non-local moves, however, the budgeting grows more complicated because each city has a distinct Cost of Living.

Bankrate.com makes an interesting calculator available that — while not perfect — does a fairly good job of helping a home buyer plan for a new life in a new town, complete with estimated heating bills and grocery tabs.

The mounting pressure on sub-prime lenders sparked talk of a recession as economists wonder how the housing market will be impacted.

Many sub-prime lenders discontinued 100% financing programs this past week and a few of the biggest names — New Century and Fremont — stopped taking applications altogether.

These changes pushed mortgage rates lower through market close Thursday. Upon Friday’s open, however, the Non-Farm Payrolls report revealed enough employment and wage strength to make markets reconsider their long-term perspective.

Mortgage rates snapped back quickly and erased much of the week’s gains.

This week is back-end heavy with data which should generate more volatility as the week goes on.

Most important to watch for: Thursday’s Producer Price Index (PPI) and Friday’s Consumer Price Index (CPI). Both are widely watched for clues about economic growth prospects.

Mortgage rates are moving higher this morning after the 8:30 EST release of February’s jobs report.

The 97,000 new jobs created was in-line with the 95,000 expectation, but January’s numbers were revised higher by 35,000 to 146,000.

In addition, the report showed a slight drop in unemployment and an increase in average hourly earnings.

If we put it all together, it looks like this:

1. More jobs created
2. Fewer people leaving the workforce
3. More income for everyone involved

Separately, these items often lead to higher levels of consumer spending. Together, they may be a lock.

More spending creates more growth and that is why mortgage rates are higher today.

The snowballing in sub-prime lending is becoming an avalanche.

Effective today, many lenders have discontinued 100% financing programs and other “piggyback” scenarios. These types of loans represented the widest doors to homeownership for Americans in recent years.

There are several reasons why a home loan applicant may be considered “sub-prime”, but the most common reason is because of the applicant’s credit score.

As mortgage lenders continue to tighten their parameters of to whom they will and will not lend, it becomes more important for people to practice strong credit and debt management skills.

myFICO.com features an educational area on the “art” of credit scoring. Regardless of your experience, you’ll be sure to learn something. Also, don’t forget that you can get a free copy of your credit report once annually.

Turbulence in the sub-prime lending market forced several big name lenders to shut their doors to business in recent weeks.

In a healthy sub-prime environment, institutional investors buy mortgages in large bundles called “pools” from sub-prime lenders.

The current environment is not healthy, however. Loans are defaulting more quickly than in the past and investors are requiring that the sub-prime lenders “buy back” the bad loans instead of including them in the loan pools.

Unlike a traditional bank, sub-prime lenders don’t typically have a deposit base from which to make loans; the lenders often use a bank-issued credit line which carries an interest charge for every dollar used.

As a result, the bad loans sit on the books while the lender is forced to pay interest on them. To add an additional challenge — just like you and I have limits on our credit lines, so do sub-prime lenders.

So, with enough bad loans hanging around, the lender may be paying interest on the loans nobody wants and may be maxed out on their credit line. This can generate a tremendous loss for the lender who may have no choice but to sell the bad loans for cents on the dollar and/or exit the business altogether.

This is a simplification, of course, but if the default trend continues, more sub-prime lenders will find themselves in a similar pinch in the coming months.

Many of us are knee-deep in paperwork from our banks, our advisors and lenders as we prepare for the April 17, 2007 tax deadline.

Yes, I said April 17, 2007.

April 15 is a Sunday and April 16 is Emancipation Day, a legal holiday in the District of Columbia. So, this year, we all have two extra days to get our federal taxes filed.

If you purchased a home in 2006, you may be entitled to a few extra tax deductions, courtesy of the IRS. Some of the deductions for which you and your accountant should be on the lookout include:

1. Interest on a primary mortgage
2. Home improvement loan interest
3. Discount Points
4. Property taxes
5. Capital gains exclusion
6. Home-based business deductions
7. Selling costs and capital improvement
8. Moving costs
9. Mortgage interest tax credit
10. Energy tax credits

If you are not currently working with a tax professional and need a recommendation, call or email me anytime. It would be my pleasure to help you.

Two weeks ago, the tone on Wall Street was overwhelmingly positive and the glass was half-full. Last week, however, that all changed.

The week began with former Fed Chairman Alan Greenspan’s remarking that a 2007 recession may be looming, and it ended with Dow posting its worst one week loss in more than four years.

The glass is now half-empty.

Two weeks ago, market bears could barely be heard above the bulls. The roles are now firmly reversed and that is good news for mortgage rates.

Remember, rates generally fall when the economy sputters.

The economic calendar is sparse this week until Friday’s jobs report. Until then, expect extreme volatility as market psychology dictates the market (and mortgage rate) movement.