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Jeff Underwood, The Street Economist
The Ugly Truth About Money

One month after the federal homebuyer tax credit’s official expiration, the New Home Sales report turned in its worst showing ever.

In May 2010, for the first time in 11 months, the inventory of unsold new homes crossed the 8-month marker, posting an 8.5 month supply overall.

Additionally, new homes sales volume fell to 300,000 units nationwide — a drop of 32% and its lowest level since the Commerce Department started tracking data in 1963.

Now, universally, the press is referring to the May New Home Sales report as “poor“. A closer look, however, shows that may not be the case.

For one, we have to keep New Home Sales in perspective as a percentage of overall home sales. Yes, there were just 300,000 new homes sold in May, but there were also 5.66 million “existing” homes sold.

New Home Sales, therefore, accounted for just 5 percent of the total housing market — a very small percentage.

Another reason why the weak New Home Sales data isn’t so awful is that, when New Home Sales stall, it actually benefits home buyers. Excess supply puts a strain on sellers which, in turn, gives buyers a tremendous amount of leverage in negotiation.

When home inventories are high, builders are more apt to appease their customers in hopes of making a sale. For home buyers, this can result in buying a better product at a lower price.

Especially with builder confidence plummeting.

Since February 2009, housing has shown steady gains. There’s been both peaks and valleys across units, inventories, and prices, but overall, the market is improving. May’s New Home Sales data shows how now may an opportune time to “buy new”.

Today, in its first meeting in 5 weeks, the Federal Open Market Committee voted 9-to-1 to leave the Fed Funds Rate unchanged.

The Fed Fund Rate remains within its target range of 0.000-0.250 percent.

In its press release, the FOMC said that, since April, “the economic recovery is proceeding” and that the jobs market “is improving gradually”. Business spending “has risen significantly”, too, with the exception of commercial real estate.

Today’s statement is the 8th straight press release in which the Fed shows optimism for the U.S. economy, dating back to June 2009. Since that time, the Fed has terminated all of the programs it created to support the economy through the economic crisis.

The recession is widely believed to be over.

And, although the Fed’s statement acknowledged economic growth, it did highlight lingering threats, too.

1. Employers are still reluctant to hire new workers
2. European debt concerns could spill-over to the U.S.
3. Bank lending is contracting

Also, as expected, the Fed re-affirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period”, citing that “inflation has trended lower” recently.

Mortgage market reaction has been positive thus far. Mortgage rates in are slightly improved post-FOMC.

The FOMC’s next scheduled meeting is August 10, 2010.

Existing Home Sales dropped in May for the first time in 3 months but still managed to post its second-highest since November 2009, buoyed by the expiring federal tax credit program.

An “existing home” is a home that cannot be considered new construction; a resale of an existing home. Existing Home Sales fell 2.2 percent in May.

The press is calling the drop in sales “unexpected” and disappointing, but a deeper look at the data shows the news isn’t as bad as it first appears.

First, on a regional basis, sales were mostly solid. Only the Northeast region posted a loss. The West even managed a gain.

• Northeast : -18.3 percent
• Midwest : 0.0 percent
• South : +0.5 percent
• West : +4.9 percent

Second, the supply of homes for sale dropped to 8.3 in May and, because home prices are based on supply and demand, this is a positive for pricing.

By comparison, in 2008, the average existing home inventory was 10.4 months.

And, lastly, in May, first-time home buyers represented 46 percent of all buyers. The number was likely buoyed by the tax credit program but that doesn’t damper the fact that first-time buyers provide a support floor for the housing market.

First-time buyers enable “existing owners” to move-up to bigger homes, which, in turn, trickles up to the mid-size and jumbo markets.

Analysts expected more from May’s numbers and that may explain why the reaction to the data is generally negative. However, in many cities, home resales did just fine.

The Federal Open Market Committee begins a 2-day meeting today, its fourth scheduled meeting of the year, and fifth overall.

The FOMC is the monetary policy-setting part of the government and its primary tool for that purpose is the Fed Funds Rate.

The Fed Funds Rate is the dictated rate at which banks borrow money from each other and, since December 16, 2008, the Federal Reserve has voted to keep the benchmark rate within a target range of 0.000-0.250 percent.

This is the lowest Fed Funds Rate in history. A rate near zero-point-zero percent renders borrowing by business and consumers cheap which, in turn, promotes investment and growth.

There’s no expectation for the Fed to change the Fed Funds Rate after it adjourns tomorrow, but that doesn’t mean consumers should expect mortgage rates to remain unchanged, too.

To the contrary, mortgage rates tend to be volatile when the FOMC is meeting. This is because the FOMC issues a press release after each meeting and in that press release, it comments on the economy’s unique threats, strengths and weaknesses.

When the FOMC speaks, Wall Street listens.

The words of the Chairman Ben Bernanke’s press release will be dissected and analyzed. A single mention of higher-than-expected inflation levels, or better-than-expected growth, and traders will rush to dump their bond positions in favor of equities.

This has a negative effect on mortgage rates.

Conversely, if the Fed is dour on the economy, mortgage rates may fall.

We can’t know for sure what the Fed will say or do tomorrow afternoon so if you’re floating a mortgage rate and wondering whether to lock, the safe choice is to lock prior to 2:15 PM ET Wednesday.

Mortgage markets improved last week on weaker-than-expected jobless figures, ongoing troubles in Europe, and a tame reading on domestic inflation.

As a result, conforming mortgage rates fell last week, drawing loads of new refinance applications.

For a brief moment Thursday afternoon, mortgage bond prices pierced a key support level, dropping rates to their best levels of the year.

It didn’t last long, however. By Friday morning, pricing was worsening on profit-taking and in preparation for this week — a week that promises to be heavy on both data and rhetoric.

To mortgage markets, this can be a dangerous combination.

The biggest news of the week is the Federal Reserve’s 2-day meeting, scheduled for Tuesday and Wednesday in Washington D.C.

The Fed is expected to hold the Fed Funds Rate in its target range near 0.000-0.250 percent. It won’t be what the Fed does at its meeting that will matter to rates, though. It will be what the Fed says — about jobs, about growth, about inflation — in its post-meeting press release.

Remarks that reflect well upon the economy should lead mortgage rates higher. Remarks viewed as negative should lead mortgage rates down.

There’s key data due for release next week, too:

• Tuesday : Existing Home Sales and Home Price Index
• Wednesday : New Home Sales
• Thursday : Continuing Jobless Claims
• Friday : GDP and Consumer Sentiment

Mortgage rates remained relatively tame last week. This week, volatility should return.

If you’re shopping for a mortgage, rates remain very low but could reverse quickly. Your biggest risk is tied to the Fed’s adjournment Wednesday afternoon.

As its June 30, 2010 closing deadline approaches, the federal home buyer tax credit is back in the news.

Unfortunately, the headlines are misleading.

Contrary to what you may have read (or heard), the federal home buyer tax credit has not been extended past June 30, 2010. At least not yet. And here’s why there’s confusion.

Look at these headlines from earlier this week:

• Senate Extends Date On Home-Buying Tax Credit (Philadelphia Inquirer)
• U.S. Senate Approves Extension Of Home Buyer Tax Credit (NASDAQ)
• Senate Approves Home Tax Credit Extension (Reuters)

Now, nothing above is factually incorrect, but each neglects a key piece of the country’s law-making process — it takes more than the Senate to pass a law. For a bill to become a law, it must pass the Senate and the House of Representatives and then it must be ratified by the President.

To date, we’ve only cleared just one of those 3 steps.

This means that the federal home buyer tax credit has not been formally extended. As of now, it’s still in discussion. Ultimately, though, if the extension does pass, it’s expected to extend the closing date deadline for home buyers beyond the original June 30, 2010 date into September 2010.

Homeowners must still have been in contract as of April 30, 2010 to claim up to $8,000 in federal tax credits.

Single-family housing starts plummeted to a one-year low in May, just 30 days after soaring to a 20-month high. It’s no wonder home builders are confused.

Against a revised April figure, Housing Starts fell 97,000 units in May, a figure representing almost one-fifth of the total market size.

It’s the worst showing for Housing Starts since May 2009, a surprise to builders and economists alike.

Furthermore, single-family Building Permits plunged in May, too — down 10 percent from April. A permit is a certification from local government that authorizes home construction.

Housing permits are a precursor to Housing Starts with 82% of homes starting construction within 60 days of permit-issuance. Fewer permits, therefore, directly reduces the number of new homes coming to market in the coming months.

For home buyers , this should create a sense of urgency.

Home prices are based on supply and demand and supply appears to be falling about the same time that economists predict a surge in home demand. It could spell rising home prices and a complete loss of negotiation power with home sellers.

For now, though, home affordability remains high with properties cheap and mortgage rates near all-time lows. If you plan to buy a home later this year, the May 2010 Housing Starts data may be a reason to move up your timeframe a bit.

If you plan to finance your home with a conforming interest only mortgage, get your loan application submitted no later than this Friday, June 18.

Starting next week, Fannie Mae is clamping down on the popular loan product.

An “interest only” mortgage is exactly what its name implies — a mortgage for which the monthly payments consist entirely of interest with no principal reduction. Because there’s no amortization, payments are less costly on a month-to-month basis.

For example, assuming principal + interest payments at 5 percent, a $250,000 mortgage carries a monthly payment of $1,342. The payment on a comparable interest only mortgage, however, drops to $1,042.

That’s a payment difference of $300 and the size of the cost savings, not surprisingly, is the biggest reason why Fannie Mae is making its changes.

In its official announcement, Fannie Mae says it wants the give the interest only option to “borrowers who are in a position to choose it as a financial management tool” rather than allowing homeowners use it as an affordability tool for their budgets.

Going forward, there are new minimum standards for interest only home loans.

• Applicants must have a 720 credit score or better
• Applicants must have at least 24 months of reserves
• The property type may not be a 2-unit, 3-unit or 4-unit
• The property must be a primary residence, or vacation home

Furthermore, only purchase and rate-and-term refinances are eligible. Cash out refinances are prohibited.

Interest only home loans aren’t for everyone, but if you plan to finance with a Fannie Mae mortgage and interest only is your preference, get your loan application submitted as soon as possible. Starting Monday, approvals will be tougher to come by.

Mortgage markets posted four good days last week and one awful one. Unfortunately for rate shoppers , that one bad day outweighed the gains of the other four and mortgage rates worsened on the week overall.

Despite re-touching all-time lows on Tuesday and Wednesday, Conforming and FHA mortgage rates moved higher on the week.

There wasn’t much domestic data on which for mortgage markets to move so rates took their cues from global economic activity. Strong data from Japan and China, plus an improving outlook from the Eurozone, sparked optimism among Wall Street investors. Cash poured into the stock market and it happened at the expense of bonds — including the mortgage-backed ones.

It’s the primary reasons rates rose and not even the worst Retail Sales report in 8 months could undue the damage.

Often, weak Retail Sales data causes mortgage rates to fall. Last week, however, that wasn’t the case.

This week, there’s cause for rates to rise again with Wednesday emerging as a “data day”.

First, at 8:30 AM ET, the government releases two key housing statistics and one major gauge for inflation — Housing Starts, Building Permits and Producer Price Index, respectively. Strength in any or all three should lead mortgage rates higher.

Then, at 5:45 PM ET, Fed Chairman Ben Bernanke makes a public speech and anytime Bernanke speaks, mortgage rates can move.

Mortgage rates remain unnaturally low and a lot of Americans have taken advantage already. If you’re a homeowner and you’ve wondered whether or not a refinance makes sense, talk to your loan officer straight away. Low rates like this can’t last forever so lock one in while you can.