by Kevin Whatley (NMLS #113781)

Home affordability improved again Wednesday after the government reported worse-than-expected results for April’s Retail Sales report.

Mortgage rates edged lower for the third consecutive day.

The impetus for the rate rally this week may be a long-awaited stock market correction. After touching multi-year lows in mid-March, the Dow Jones added 30 percent going into last Friday.

It has since lost close to 300 points and as those dollars leave the stock market, they’re finding their way toward bonds.

The demand is pushing bond prices up which, in turn, causes rates to fall.

Yesterday morning, the rally in rates picked up steam on the heels of April’s Retail Sales report. With figures off a half-percent from March and roughly 7 percent from 2008, investors are concerned that consumer spending may not be as strong into the summer months as previously expected.

Consumer spending is important because it comprises two-thirds of the economy and is believed to be the way out of the current recession.

If expectations of a recovery caused mortgage rates to rise recently, it makes sense that a revision of those expectations would cause rates to fall.

Markets are fickle, however, and the slightest bit of “good news” could pump cash back into stocks at the expense of bonds. Until then, however, enjoy the low rates — they may not last long.

For the second month in a row, the country’s foreclosure activity was dominated by a small number of states.

As shown by the latest stats from RealtyTrac.com, more than half of the country’s foreclosure actions from April were concentrated in just 3 states:

1. California
2. Florida
3. Nevada

Those 3 states are home to but 19 percent of the U.S. population.

No matter in which state you live, however, it’s important to understand the far-reaching ramifications of foreclosures.

Although real estate is local, mortgage lending is not. Fannie Mae and Freddie Mac insure loans in all 50 states and when those mortgages go into default, the government entities often take losses.

This is the primary reason both Fannie and Freddie asked for government aid to the tune of $19 billion and $6 billion, respectively, last week. It’s also the reason why loan fees have increased over the last 12 months — another way to shore up balance sheets is to raise consumer charges.

Furthermore, downpayment requirements are larger than before foreclosures proliferated and private mortgage insurance is more expensive, too.

These are important changes to homeowners in all states — not just the 3 named above. In some cases, they can be the difference between a home loan approval and an underwriting turndown.

Search the complete April 2009 foreclosure report for yourself on RealtyTrac’s website.

After a series of increases starting April 30, mortgage rates finally took a dip Monday. It was a welcome surprise for home buyers that went under contract over the weekend.

Same for homeowners looking to pull the refinance trigger.

Versus mortgage rates on Friday afternoon, many lenders were already showing lower rates Monday morning before a late-afternoon rate sheet reprice even lower.

The drop in rates lowered annual mortgage payments by roughly $180 per $100,000 borrowed.

Rate dips like this aren’t expected, of course, bringing us to the one of the most important axioms of shopping for a mortgage rate: You can’t shop for good luck. This is because mortgage rates are inherently unpredictable.

• On some days, rates are higher
• On some days, rates are lower
• On some days, rates are unchanged

Occasionally, there are days when rates are all three.

Monday’s rate dip, though — while sharp — may not last. Early this morning, markets were pressuring mortgage rates to rise and lenders are often quick to pass rate hikes on to consumers.

With a little bit of luck, you’ll get your rate locked in before changes for the worse.

Mortgage markets hit their worst levels since March last week, sending mortgage rates higher for the second week in a row.

Today’s conforming mortgage rates are much higher than from the registered low point of April 30, 2009.

There are a few reasons why mortgage rates were up last week.

• Stress test results weren’t as bad as originally feared
• The pace of job loss appears to be slowing
• The Dow Jones Industrial Average gained another 4 percent

Separately, bullet points like these can move markets and change rates. Together, though, they’re a force.

The combination of events reinforces Wall Street’s belief that the U.S. economy is on the mend. Even Fed Chairman Ben Bernanke remarked in his testimony to Congress that the economy should “turn up later this year”.

As a result, this week, markets will be tuned in to inflation-related data.

Oil prices have been rising steadily since January and are up roughly 30 percent year-to-date. Because of this, Thursday and Friday’s Producer Price Index and Consumer Price Index, respectively, will be closely watched. Both are a sort of “Cost of Living” measurement and are, therefore, susceptible to spiraling energy costs.

If either reading comes in higher-than-expected, look for inflation fears to ignite on Wall Street and mortgage rates to rise.

Similarly, if Friday’s Consumer Sentiment Index reveals a more confident American consumer, mortgage rates are likely to rise in that scenario, too. This is because a confident consumer tends to spend more, thereby hastening the recession’s end.

And, lastly, it’s worth noting that six members of the Federal Reserve will be delivering prepared speeches this week, including Chairman Bernanke. When Fed officials speak, the markets can move quickly.

If you’re still shopping for a mortgage rate, consider locking one in soon. Rates have been trending higher and there’s little reason for them to fall.

The economy shed 539,000 jobs in April, raising the 6-month total to nearly 4 million jobs lost.

And while the April data may look bad, it’s actually 10% better than what was expected.

As a result, it’s turning into a bad day to be shopping for mortgage rates.

After bottoming out early last week, conforming, 30-year fixed rate mortgages have risen in cost by as much as three-quarters of a percent. Today’s good-for-the-economy report may push costs higher still.

Now, it may seem odd to categorize 539-thousand lost jobs as “good-for-the-economy”, but it’s important to remember that on Wall Street, expectations are everything.

Investors are constantly buying and selling securities based on what they think will happen in the future. And, up until this morning, there was an expectation that 600-thousand jobs had been lost in April.

As it turns out — relative — the actual job loss data wasn’t so bad.

Now, markets are making adjustments and re-forming expectations of what’s ahead for the economy. They’re preparing for things like higher levels of consumer spending in the months ahead, and fewer home foreclosures nationwide. Both outcomes would help to spur the economy from recession.

This helps explain the stock market’s early rally, too.

For now, mortgage markets remain sensitive to whiffs of an economic recovery. In general, if there’s good news for the country, it going to be bad news for mortgage rates.

Mortgage rates are off slightly in advance of the weekend.

The retail price of gasoline is rising nationwide, now up 30 percent since the New Year.

It’s a similar run-up to what we’ve seen for retail gas prices in each of the last 5 Spring Seasons.

For people trying to time the mortgage market’s bottom, clues about the future of mortgage rates may be at the local gas station.

Rising gas prices are indicative of the rising cost of energy and, indeed, crude oil is closing in on its 2009 highpoint. As these energy costs grow, so do inflationary pressures on the U.S. economy.

Inflation, of course, is awful for mortgage rates. When it’s present, mortgage markets deteriorate and rates tend to rise — often sharply and with little advance warning.

So, for today’s homebuyers-in-process and would-be refinancers, prices at the pump may foreshadow bad news for the future of housing affordability. Even a modest, quarter-percent increase would have a palpable effect on payments, adding $372 in annual costs to a $200,000 home loan.

Since last week, gas prices are already up by 10 cents per gallon.

Both mortgage guidelines and the economy have tightened since 2006, bringing more attention to “joint homeowners” — non-spousal partners that buy and share a home as roommates.

The practice is not new, but, anecdotally, co-purchasing is becoming more common.

In the video above — filmed two years ago but still on-target today — real estate expert Barbara Corcoran provides good advice for co-purchasing partners. Like any business relationship, it’s important to plan ahead.

• Hire an attorney to draft contracts and agreements
• Have a plan for when one or both parties wants to move or sell
• Consider life insurance policies on each other

The over-riding theme for co-purchasing arrangements is to be prepared. Done right, however, they can create two proud homeowners where there would have otherwise been none.

For the second consecutive month, the number of homes under contract to sell increased — further evidence that housing markets may have already bottomed.

As reported by an industry trade association, the Pending Home Sales Index rose by 3-plus percent last month.

A “pending” home is one that’s under contract but has yet to close. This is one reason why the Pending Home Sales Index is an imperfect statistic.

Just because a home is under contract doesn’t mean it will actually sell. A lot can go wrong between the date of agreement and the date of closing. Deals fall apart all the time. But, when the number of pending contracts rises, we can infer that buy-side demand for homes is strong.

It’s likely that the number of homes under contract is being influenced by a combination of low mortgage rates, relatively inexpensive homes, and various tax credits for certain homebuyers. Overall, it’s spurring demand and that’s part of what’s captured by the Pending Home Sales Index.

So long as the demand for homes outpaces its supply, home prices are expected to rise.

Mortgage markets faced a broad sell-off last week, sparked by the Federal Reserve and consumer sentiment.

This caused mortgage rates to spike from Wednesday to Friday and it caused the “lowest rates of all-time” to seem like an opportunity lost.

It’s the first time in 4 weeks that mortgage rates rose overall.

Last week was a strange week, to say the least. Aside from the large docket of economic data, there was also:

• A Federal Reserve meeting
• 160 of the S&P 500 firms reporting earnings
• A global public health emergency

It all combined to make for a volatile week in mortgages and the biggest losers were the people that hadn’t yet locked a mortgage rates. Based on the current market, each quarter-percent that mortgage rates rose added $32 per month per $100,00 borrowed.

This week, the market should be similarly jumpy.

Early in the week, there’s not much data to sway markets, nor is there much in the way of public policy. Therefore, expect external factors like the Swine Flu to dictate the market’s path. If the outbreak’s intensity grows, look for Safe Haven to lower rates much like it did last Monday.

Also, be aware and listen for Stress Test rumors.

Thursday, the government is expected to release its bank Stress Test results. However, history shows that markets often make large movements before news is ever official — mostly on rumors. As a result, expect mortgage markets to carve out wide ranges on Tuesday and Wednesday in advance of the reports, making it very hard to “time” low mortgage rates.

And lastly, Friday brings us April’s employment data. There’s nothing the report can show us that we don’t already know so the biggest risk here is that employment is not as bad as we all expect it to be.

If that’s the case, stock markets will rally and mortgage rates will rise.

Like always, mortgage markets can change in an instant — especially when there’s outside influences on “normal” trading like we’re seeing with Swine Flu and the Stress Test. If you’re offered a rate and it fits your budget, consider locking right away. It may not last long.

The Case-Shiller Index is a popular reporting tool for the nation’s home prices. Each month, researchers measure home values in 20 large cities, compile their findings, and then publish them to the public.

The Case-Shiller Index is not a perfect measurement by any means. It gives more weight to expensive homes than inexpensive ones, for example, and its sample set includes just 37 states. But that doesn’t diminish its importance to the housing sector.

Because the Case-Shiller Index comes from the private sector, it’s an excellent counter for the U.S. government’s home value reporting tool — the House Price Index.

In this current market, the Case-Shiller Index tends to report housing in a more negative light than does the government. This doesn’t make either method more accurate, it just provides a helpful point/counter-point.

And that’s why February’s Case-Shiller Index is so important.

Despite reporting falling values in each of its 20 tracked cities, the Case-Shiller Index showed values falling with a lesser speed and intensity than in months prior.

It’s a small victory, but if the Case-Shiller Index shows that home prices are starting to mend, you have to pay attention — especially because the index is on a 2-month delay and doesn’t account for Spring Buyers or the $8,000 first-time homebuyer tax credit.

One month doesn’t make a trend, but if often-negative Case-Shiller Index turns in similar numbers for March, it could be the signal that housing has bottomed.