As a consumer, it’s very easy to be misled by newspaper headlines. Today provides a great example.

“Sales of Existing Homes Up 3.9% For The Biggest Monthly Gains In Three Years”

What was not mentioned in the headline was that total inventory rose by 5.9%, adding more supply than for which there is demand.

More supply usually pushes prices down and last month was no exception. The median sale price was down 1.3% from February 2006.

This is the second time this week that real estate headlines were misleading.

Monday, you probably saw this headline in your preferred news source: “9% Jump in New Home Construction“. The headline was followed by an article highlighting strength in the housing sector because more homes are being built.

Missing from the articles, though, was that the Housing Starts survey’s Margin of Error was 10.2%.

Without getting into the math behind it, if Margin of Error exceeds the measurement, the data measured is worthless. The headline could have read “1.2% Drop In New Home Construction” and that would have been “true”, too.

(Author’s Note: If you want to know more about how Margin of Error works, check Google and find an answer that suits you. Or, just trust me on it.)

Housing may be strong or housing may be weak. But, most likely, housing is both of these things. It all depends on your particular street because all real estate is local. Either way, look deeper than the headlines — there’s always more to the story.

Ben Bernanke and the Federal Open Market Committee spoke with ambiguity yesterday in electing to keep the Fed Funds Rate at 5.250%.

So far, mortgage rates have benefited.

A major goal of the Fed is to manage the expectations of markets. Therefore, what the Fed does is sometimes not as important as what it says.

In yesterday’s announcement, the Fed expressed concern that inflation is not slowing as expected, but also added verbiage that its next move may be to drop the FFR. Previously, the Fed discussed the need for “additional firming” of policy (read: rate hike); that language was removed entirely.

A lower Fed Funds Rate means that money is “cheaper” which tends to be good for consumers and business. Mortgage rates moved lower on the possibility.

This afternoon, the Fed adjourns after a two-day meeting and it is widely expected that they will leave the Fed Funds Rate unchanged at 5.250%.

So, what is the Fed Funds Rate and why does it matter to everyday people?

The Fed Funds Rate matters to you and me because it is used to calculate Prime Rate, a popular consumer interest rate used for credit cards and home equity lines of credit.

And why is it called “Prime Rate”?

That’s because banks are smart.

Banks know that if Prime Rate was called something like “Consumer Loan Interest Rate”, we would all have our guard up. Instead, it’s named “Prime Rate” and that makes us feel warm and fuzzy. “Prime” is a strong word with a positive connotation.

It’s important understand, though, that when the Fed makes changes to the FFR, it directly impacts Prime Rate; the two move in lock-step.

Prime Rate is always 3.000% higher than the Fed Funds Rate.

For example, in June 2004, the FFR was 1.000% and Prime Rate was 4.000%. Since that date, however, the two have increased to today’s levels of 5.250% and 8.250%, respectively.

Because of the increase, credit card balance-carrying Americans have faced a 4.00% APR increase and homeowners with home equity lines of credit have watched their HELOCs more than double in payment.

The Fed is widely expected to leave the Fed Funds Rate unchanged today, but may provide clues about the future path of the benchmark rate. Any hints that the FFR will be lowered should provide a boost to the housing market.

Of course, the opposite is true, too. If the Fed cites economic strength and that FFR may have to be increased, it should have a detrimental effect on housing.

Mortgage rates are somewhat restrained today as the Fed begins its two-day meeting.

As reported by the Census Bureau, Housing Starts — defined as the number of units for which construction began — surprised to the high-side, despite a cold February.

The 9% increase over January showed relative strength, but when compared to February 2006, the number of starts is down 28.5% year-over-year.

This data points to an overall slowing in the housing market.

Supporting the slowdown, Building Permits are also down. That data point registered a 2.5% decline versus last month, and a 28.5% decline versus February 2006.

Market mentality is that the FOMC will look at today’s housing data as indicative of a general housing slowdown, and that is generally good for mortgage rates.

Traders will stop short of placing heavy bets, though, so until tomorrow afternoon’s FOMC press release, expect general malaise and flatness in mortgage rates.