It’s a mess out there.  The debt ratings for Greece and Spain were cut again.  Ireland and Portugal are struggling.   From Egypt to Libya to the rest of the Middle East, uncertainty still reigns.

Mortgage rates gave away their gains on the week on Friday to close virtually unchanged on the week.

Here are the past few weeks.  For the week ending:

• February 4th:  Bonds down 156 basis points
• February 11th:  Bonds down 72 basis points
• February 18th:  Bonds up 53 basis points
• February 25th:  Bonds up 97 basis points
• March 4th:  Bonds down 6 basis points
• March 11th: Bonds down 9 basis points

When mortgage bonds go up, mortgage rates go down and vice versa.

Volatile would be an understatement.  These have been weekly swings of .375%, no problem.  It would look like we’ve had relative calm in the past two weeks until you look at the daily trading.  We finished the week where we started, but so do roller coaster rides.  The daily figures were a mess.  Monday through Friday saw -22, -19, +56, +50, and -41 basis points.  (That won’t add up to -9 due to a monthly rollover which is as confusing as it is unimportant for right now.)

Mortgage rates are improving today.   Mortgage rates will get their direction this week from the equity markets.  How precisely that will shake out, who knows?  Crude is lower (good for rates), but some portions of the market will rally as huge disasters require huge rebuilding projects.

Mortgage rate predictions are guesswork, but predicting mortgage costs is not.  We know that FHA MIP (PMI’s cousin) is going up by .25%.  That is a direct increase in mortgage costs.  We’re seeing increases to LLPAs or loan-level price adjustments.  No matter how you slice it up, mortgages are getting more costly.

Housing sales figures had some slowdown, but that occurred during a blizzard that covered an area big enough to win a presidential election.  That’s a lot of people who were shoveling, not shopping.  Your resident blogger and gardener has noted that the 10-day weather forecasts for Chicago have tonight touching 32 degrees and we’re not seeing freezing temperatures overnight again.  Your best time to buy a home is before the tulips break out of the soil.  You’re on borrowed time now.

Do the math with me.  Distressed sales are more than 1/3 of the market and foreclosures/short sales are pretty likely to have some deferred maintenance.  Home supply is down significantly.  If you are buying a move-in ready home, there aren’t that many.   The competition for good homes is going to be tight.  A competing offer raises home prices on that home.

Mortgage rates may dip a little more this week, but they’ll need to go down at least another .25% to offset the increases in mortgage costs that hit later this spring.   Home prices appear to have stabilized and might have some pent-up demand from the aforementioned snowed-in folks from the past two months.  If you’re buying a home in 2011, sooner continues to look better than later.

The report is called the Home Opportunity Index.  It measures what percentage of U.S. homes sold during a quarterly period were affordable to families earning the national median income of $64,400.

Last quarter was almost 74%.  That’s an absurdly high number.  In the past 8 quarters, the Index exceeded 70%.  Prior to 2009, it rarely topped 65% and you can see the housing bubble appearing when you look at 2006-2007.  When 40% of homes are affordable to median wage earners, something’s gotta give.  It did.

Home affordability is a function of really only three things:  home values, mortgage rates and the median income.

Mortgage rates hit all time lows while home prices are still low.  That’s your recipe for record affordability….90-180 days ago.

Like everything else in real estate, this is a local stat.  Indiana, you have Elkhart/Goshen.  A whopping 97% of the homes were affordable to families making the area’s median income.  On the other end of the spectrum, the New York-White Plains, NY-Wayne, NJ tracking area mopped up last place for the 11th consecutive quarter.  Just 25% of the home in the area were affordable to families earning the area’s median income.

You can check out all 225 metro areas on the NAHB website.

Real estate is local.  Mortgage rates move up and down across all markets.  With mortgage rates on the rise and evidence that says home supply could push prices higher, home affordability is on the decline.

Rates are at their lowest levels in almost 4 weeks.

There is not much on the schedule for release this week.  We have consumer confidence today and retail sales on Friday.

This week is all about two things:

• The economic recovery isn’t being “felt” but it is being “seen.”  Friday’s Jobs Report increased the belief that the economy is improving.
• The concern that the economic recovery will stall if energy prices sap too much money from the economy too quickly.

The former will push up mortgage rates.  The latter is interesting.  Rapid inflation is one time where the economy can tank and mortgage rates go up.

The general trend is towards higher rates.   Since last year, we’ve seen rates go from 4.23% in October’s survey to 4.95% in February’s survey.  For the weekly survey of February 10th, we’d hit as high as 5.05%.

It is also a volatile trend.  Freddie Mac releases rates weekly, lenders release them 2-3 times per day.  In the past those Freddie Mac rates were +/- 0.125% from being accurate.  Now, they might be +/- 0.375% off on any given day.

If you’re looking at buying a home in 2011, it might make sense to push your time line up.

Housing supply stats show that there will be less total homes.  With less home supply and an even smaller supply of desirable, move-in ready homes, things could get competitive.   The general housing market has nothing to due with what you pay for a home compared to whether or not there is a multiple-offer situation.

Whether or not mortgage rates go up is irrelevant.  Mortgages are going to cost more.  We have the new Fannie Mae and Freddie Mac LLPA hits plus the increased MIP on FHA loans. Added fees have the same effect as mortgage rates going up.

It’s going to be less expensive to buy for most people now than it will be in just a few months.

Much like Fed meetings, the jobs report is just one of those days that you know will be volatile.  Of note, the jobs report always hits in the morning before rates are out from most investors.  So, unlike Fed meetings, you don’t have the option of locking that day before the release.  Rates could be radically different tomorrow morning.

Look at last month:  It was an awful report, just 36,000 new jobs were added.  However, unemployment ticked to 9.0%, the lowest level in two years.

The unexpected improvement in the unemployment rate led to concerns of inflation.  Concerns of inflation led to mortgage rates jumping 0.375%.

Tomorrow, we’re looking to see job creation of 183,000.  Anything at or above that level will send mortgage rates up and up quickly.  We would need to be significantly below that figure for it to have any influence on making mortgage rates tick lower.

If you’re shopping for a mortgage right now, weigh your risk tolerance.  Say it is equally likely that rates go up .25% or down .125%.  If you’re comfortable with 2:1 odds against you, floating is an option.  If you don’t like that risk, you can’t get today’s rates tomorrow after the report is released.

FHA interest rates and their conventional counterparts hit a 3-week low following four straight weeks of rising interest rates.

It’s great timing for rate shoppers and home buyers. 

We’ve been talking about 30 Year v. 5/1 ARM spreads as well as 30 Year v. 15 Year differences.  Both are historically out of whack.   The current spread between the conforming 30-year and the 5-year ARM is up to 1.15%.  Does this mean rush out and get an ARM?  NO.

It means that the market is forecasting higher mortgage rates in the future.  What it means is “plan ahead.”   This is much bigger than your mortgage rate.   Higher rates end up impacting all goods we consume, all assets that we own, and makes that $20 in your pocket buy less gas from one month to the next.

This week’s mortgage rate predictions are irrlevant.  We’re in a blip.  The rally that we have seen is related to the ongoing protests in Libya and, probably more importantly, how it extends through Bahrain and the rest of the Middle East.   That impacts this week’s rates.  

We’ve covered ”safe haven buying” repeatedly in the past few years.  It has been the single-largest force in keeping interest rates so low.  When chaos hits, like  Greece, Ireland, and now Libya, investors put their money in the safest places possible.  Mortgage bonds are one such place.  When investors seek mortgage bonds, they push up the price, and this pushes down mortgage rates.  

In effect, the very thing that is causing the mortgage rates rally is what will cause the ensuing rise in mortgage rates when this all ends.  It’s why we’re seeing this huge gap between the 30 Year and 5/1 ARM.  Why?

We’ve had inflation concerns in the background the entire time.  Inflation is on the rise.  This week, the key economic event is the Friday jobs report.  If the number comes in above expectations, watch for inflation concerns to spark again and that will drive mortgage rates up.

If you are buying a home, start by buying an umbrella.  It’s going to be a balmy 45 and rainy here on Friday.  It won’t be so balmy on Saturday and Sunday.     Chicago mortgage rates are more than likely to be higher if you decide to wait until 75 degree weather to find that new home. 

HUD has more changes coming for FHA loans.  The MIP factors are going up by 0.25% across the board in April and this directly hits the most common loan program for first time home buyers.

MIP is paid monthly.  It has roughly the same impact as mortgage rates themselves going up by .25%.

Compared to November’s all-time lows, buying power has been reduced by over 10% in just four months.

We’re using 5% as the comparison rate.  Candidly, that’s fairly optimistic.  This could be an even wider gap by the time April rolls around.

We’ve used a $300,000 purchase price to end up with a $289,500 base loan amount.

The mortgage insurance change alone equals $60 per month.  Coupled with about a $120 per month increase due to mortgage rates, we’re seeing a monthly payment that is $180 per month higher.

Over 10 years, that’s a $26k+ difference.

You can still save the .25% in MIP just by securing your loan on or before the close of business April 15th.  As far as mortgage rates go…they’re not going back to 4.3% anytime soon.  It actually looks like 5% may be a distant memory soon enough.

If you’re buying a home, you’re much better off doing it sooner rather than later.

Click the read more button to see the full set of assumptions and tables.

To put it in perspective, that change in rates pushed down home buyer purchasing power by more than 10%.

Rates are rising due to inflation concerns.  This week’s CPI shows a third straight month of increases.  The Cost of Living has hit a record, passing the record set in July of 2008.

Inflation is not the $1.00 difference when a good or service goes from costing $100.00 to $101.00.   Inflation is the reduction in the value of the money buying that actual good.

This is a big deal since we all pay our mortgages with U.S. dollars monthly.  If I promise to pay my lender $1,000 per month for 30 years, the person holding the note is receiving the same payment every month even though the value of that $1,000 is going down.

The only way to compensate is to charge a higher mortgage rate.  We have $600 billion flowing out of the Fed for QE2.  It is, by definition, inflationary.

As mentioned earlier in the week, rates should actually be higher.  If it wasn’t for widespread unrest throughout North Africa and the Middle East, rates would probably be higher.

Unless something massive changes, rates are heading higher over the next few quarters.  Rent will increase.  So will the cost of a candy bar.  You’ll probably see the box of Cheerios get a little smaller for the same price.  All of those things are the result of inflation.

The only number that won’t change is the payment on that mortgage coupon.   If you’re looking at buying a home this year, it might make sense to push up your timeline.

Last week was about a 53 bps recovery.  Today, we’re up about another 50 basis points.  That’s a staggering recovery, yet we’re still down 100+ basis points on the month.  Last week was only the second time this year that rates fell on a week-to-week basis.

Realistically, mortgage rates shouldn’t have fallen.  Food- and oil-related inflation is a major concern, the Producer Price Index hit a 2-year high, and the Philly Fed Manufacturing Index shows strong levels of growth in Q1. 

The sole reason that mortgage rates fell last week and that we’re seeing today’s interest rates improve is geopolitical.   If you want to look at CNN and figure out which way rates are going, use a tip from the folks over at Stratfor:  don’t watch the crowd, watch the military. 

In Egypt, the military wanted the regime to continue.   In Libya, some of these reports and photos are appalling.  Egypt wasn’t chaos.  Libya is in all sorts of chaos.  Chaos pushes money into safe-haven buying.   Today’s mortgage rates are improving for the same reasons that gold improved. 

Where are mortgage rates going? 

Up in general, but we could see a few days with strong rallies.   Probably.  

Last week was a gift.  Rates had zero reason to go down.   Every economic report would have pushed up rates.   We’re seeing lower rates not because we’re in for lower rates, but because there is chaos in the streets that sit atop the world’s oil deposits. 

This week is loaded with housing and rate-influential reports.   Could we see rates dip a little lower?  Possibly.  They are certainly moving lower today.   Things may indeed get worse in Libya and there may be a new Twitter hashtag to rattle us.   At some point, the market will have priced that chaos in.  

There’s also the significance issue.  A revolution and even a civil war in Libya is not at all out of the question.  But it’s a 6.4 million person country.  Cook County has 5.3 million.

This isn’t big enough to hold rates down forever.   Add to it that we’ll eventually have to digest these increasingly strong economic projections.   A strong economy is great for home prices, awful for home mortgage rates.  

If you’re looking at buying in 2011, there’s not much to contain risks of rates going higher.  

Enough about Libya and unrest.  If you’re in an area that is voting today, do it.  That’s sort of what makes us different than a lot of these places.