As we get closer to Labor Day, volume on Wall Street is dwindling as market players get a head start on their long weekend.

Today could be a difficult day to shop for mortgage rates. Expect volatility.

This is because mortgage rates are based on the price of mortgage bonds and, on Wall Street, bonds trade a lot like stocks.

There has to be a buyer and a seller at a specific price to make a deal.

With so many traders on vacation today, though, there are fewer opportunities to match buyers and sellers. This can cause mortgage prices rise or fall faster than on a “normal” day, directly leading to mortgage rate volatility.

For a light-volume trading day, there is a lot of information for markets to digest, including:

• The weather reports on Tropical Storm/Hurricane Gustav
• Reports that inflation is rising
• Reports that Consumer Spending is slowing
• Ongoing political tension between the U.S. and Russia

By themselves, each of these points can move markets. Together, however — and aided by Labor Day — they can move markets a lot.

Mortgage bond pricing is fluid, changing every minute of every day. Today, those changes will be exaggerated and, as an example, in the first 30 minutes of trading, mortgage rate pricing swung from rate improvement to rate deterioration in a flash.

Three years to the week after Hurricane Katrina caused $81.2 million in damages, Tropical Storm Gustav is charting a similar Gulf of Mexico path.

Memories of Katrina are making oil traders nervous. The 2005 storm shut down 30 platforms and 9 refineries. And, this week, oil prices are up nearly 4 percent on fears that the market, once again, may be disrupted by storm.

Mortgage rates are edging higher on the news.

The link between oil prices and mortgage rates is not a direct one, but it’s worth paying attention to.

Rising oil prices strain business and consumer budgets, creating inflationary pressures on the economy. And at no time was this relationship more evident than in May and June of this year. As oil prices reached new, all-time highs almost daily, Americans felt the impact each time they opened their wallets — the Cost of Living inflation gauge reached a 17-year high in July 2008.

Inflation is the enemy of mortgage rates so as inflation rises, mortgage rates tend to rise, too.

And this is one reason why mortgage rates are ticking higher this morning — there is an overriding fear that Gustav will strengthen into a full-fledged Hurricane before making landfall, causing damage to oil refineries and shipping ports around the Gulf of Mexico.

Damage reduces oil supplies and that causes oil prices to rise. It’s basic supply and demand.

Gustav is expected to make landfall Monday or Tuesday. If the storm continues on its path, we may see mortgage rates continue to trend higher. If the storm dissipates, rates should reverse.

According to the June 2008 Case-Shiller Home Price Index, home prices in 15 of the 20 largest U.S. real estate markets either improved, or showed growth from the month prior.

This is the fourth straight month in which that happened which means that a national housing recovery may already be underway.

Now, it’s worth stating that all real estate is local and that there’s no such thing as a “national real estate market”, but for home buyers looking to to maximize their negotiation power to get the best possible “deal”, spotting trends like this before the media does is a good thing.

So far, only Bloomberg and a few others have chosen to highlight the positives from the otherwise-negative Case-Shiller report. By contrast, most publishers are focusing on annual home price figures which show a hefty drop of 15.9 percent.

We shouldn’t dismiss annual trends because they’re helpful in the theoretical sense, but for real, live home buyers trying to identify trends and market bottoms, it’s the month-to-month data that matters most.

After looking at 4 consecutive months of Case-Shiller data, the month-to-month data appears to show that home prices have stabilized in most major markets. And, in some, they’ve already started to recover from their lows.

Source
U.S. House-Price Slide Eases, S&P/Case-Shiller Shows
Courtney Schlisserman
Bloomberg.com, August 26, 2008

When a homeowner buys a new home, he has 3 options of what to do with his current residence:

1. Sell the home, paying off the mortgage in full
2. Keep the home as a second/vacation home
3. Convert the home to an investment property

The most common action plan is the first one — sell the home and pay off the mortgage. However, with home prices poised to rebound, some savvy homeowners are trying to avoid “selling low”.

Unfortunately — as of August 1, 2008 — waiting out the market won’t be so easy.

Burned by foreclosures and wary of risk, Fannie Mae issued new conforming mortgage guidelines that specifically apply to home buyers planning to convert an existing primary residence into a second home or investment property.

Among the highlights of Fannie Mae’s changes:

Selling the primary residence
If the new home being purchased closes prior to the existing home’s sale, both payments must be used to qualify the buyer for the new mortgage.

Converting to a second home
If the home has less than 30 percent equity in it, the home buyer must show 6 months of PITI reserves for both properties to qualify for the new mortgage.

Converting to an investment property
If the home has less than 30 percent equity, its rental income may not be used to help the buyer qualify for the new mortgage.

If it seems like mortgage rules are getting strict, that’s because they are. And they’re expected to get tougher, too. With each foreclosure and high-profile bank collapse, mortgage lenders tighten up their guidelines just a bit, freezing out the “fringe” borrower from access to mortgage money.

Mortgage rates may rise through 2009, or they may fall. We don’t know. But what we do know is that borrowing money to buy a home will be tougher.

If you plan to buy a home in the next 12 months, consider moving up your timeframe or — at least — planning ahead. Understanding the mortgage rules and how they can change may be the difference between getting approved for a home loan, or getting turned down.