When is the best time to buy a home?  If housing prices were to jump a whopping 5% in just a few months, it wouldn’t be as expensive as getting a 6% rate instead of a 5% rate.

Example:  If a home jumped from $100,000 to $105,000, the payment would go up somewhere around $25-30.  If the home priced stayed steady at $100,000, but rates jumped from 5% to 6%, the increase in payment would be more than double at just over $60 extra dollars per month.

The FHA mortgage rates, not prices, have been driving this affordability.

So, when’s it going to end?

Watch inflation.   Mortgage rates are highly responsive to inflation.

By definition, inflation is when a currency loses its value; when what used to cost $2.00 now costs $2.15. As consumers, we perceive inflation as goods becoming more expensive.  However, it’s not that goods are more expensive, per se. It’s that the dollars used to buy them are worth less.

This is a big deal to mortgage rates because mortgage bonds are denominated, bought, and sold in U.S. dollars.  As the dollar loses value to inflation, therefore, so does the value of every mortgage bond in existence. When bonds lose their value, investors don’t want them and bond prices fall.  Mortgage rates move opposite of bond prices.

Prices down, rates up.

In today’s market, the relationship between inflation and mortgage rates is helping home buyers. The Cost of Living made its smallest annual gain in 6 years last month and the Fed has repeatedly said that inflation will stay low for some time. The combination is driving investors to buy mortgage bonds which, in turn, is suppresses rates.

So long as it lasts, the cost of homeownership will remain relatively low. Combined with the expiring tax credit, these FHA interest rates have never been lower.

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We are now overbought according to every technical signal so the market could move quickly if it reverses.

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Investors have pulled out of the stock market with the Dow now below 10,000 and at a 3-month low.

The FHA loan rate is back to 5% after ticking up yesterday, but many lenders did not re-price rates late in the day.  Below 5% is a possibility when the market opens tomorrow.

However, the Non-Farm Payrolls report hits first thing.  We’ll have an update tomorrow, but this report has the potential to help this rally challenge all-time lows or it could push rates back up significantly with a strong reading.

How’s that for a prediction?  The market is so uncertain that we’ll try and report on it, not predict it.

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The S&P dropped 4% in its worst week since October.  As money left stocks, it went into bonds, and pushed FHA loan rates lower.

Since a very ugly December, mortgage bonds have made up half of the losses and it is helping with home affordability and has opened the window on another surge of refinancing activity.

This week is loaded with news and could push rates back up in a blink.

Today, the December Existing Home Sales report came in and it was very weak.  This is because of a combination of factors including:

1. The initial tax credit expiration date of November 30, 2009
2. Sharply rising mortgage rates throughout the month of December
3. A general slowdown from the holidays and from the weather

Home sales are down 16%, but there are a lot of reasons.

Later this week, we’ll see the Case-Shiller Index – a measure of home prices nationwide — and the New Home Sales report. The Case-Shiller Index has registered mild home price improvement over the past 8 months and its latest report is expected to show the same.  New Home Sales should be similarly strong.

But, the biggest news of the week is the first Federal Open Market Committee meeting of 2010.

The Fed meets Tuesday and Wednesday this week and Wall Street will be watching closely.  The Fed is not expected to change the Fed Funds Rate from its current target range of 0.000-0.250 percent, so, instead, markets will watching for the Fed’s post-meeting press release.

As always, what the Fed says is almost more important than what they do. If the Fed says the economy is growing and everything is going as expected, mortgage rates should rise.  On the flip side, if the Fed says there are still significant risks, rates could drop a little lower.

Rates will be volatile all week, but once the Fed’s press release hits the wires, it’s anyone’s guess what will happen.

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We’re starting to get some direction this week.  The FHA 30 Year Fixed rate has moved back to 5% and is now developing a fairly clear trend towards lower rates…for now.

The reason for the move this week has been that the economic news simply wasn’t that great.  The Retail Sales showed we aren’t buying very much and the low inflation data today indicates we’re not growing very fast right now.

2010 FHA Mortgage Rate Predictions

I don’t believe that the data we’ve seen is enough to forecast rates going lower for the entire year.  Things simply weren’t as great as they appeared in December and they’re not as bad as they appeared in the past 48 hours.

To get the best rate in 2010, you need to lock in your rate before the average person starts to think the economy is recovering.  There was great news in housing for nearly all of last year, the jobs market isn’t better–but it’s not worse, and the stock market has come back a lot since the lows.

Still, people aren’t confident.  The “trick” to getting a great FHA loan rate or buying at the lowest price is simply doing it before CNN broadcasts that housing has recovered.   Consumer Confidence is low and the Retails Sales reports confirm it.

When confidence levels soar, so do home prices and mortgage rates.

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FHA interest rates have been under pretty heavy selling pressure for the past month.  What this has done is drive the benchmark 30 year fixed rate up to about 5% today.

What we’re looking at is the graph of the Fannie Mae 4.5% bond, but the Ginnie Mae’s that drive the FHA loan rate have followed the same path.  This is the price of the bond, the rate moves in the opposite direction.  So, in this graph, red is bad for mortgage rates and green is good.

It’s very clear that this month has been dominated by bad movement in terms of mortgage rates.

The 2010 FHA mortgage rate predictions point towards a continued trend towards higher rates.  I’ve seen argument for rates ranging from 5.5% to 6.5%.  The case being made for the 6.5% folks is technically sound reasoning, but I think it presses the edge of the high side.  Similarly, that 5.5% guess is probably low.  These estimates foreast the FHA interest rate rising anywhere from .5% to 1.5%.  It is probably safe to split the difference and become prepared for a 6% rate environment and about a 1% increase from today’s levels.

What does that mean for a home buyer?  Get moving and get moving quickly.  The home supply is rapidly selling off.  That, more than any other single factor, influences home prices.

They’re not getting cheaper.  If home prices are going to be the same or higher and mortgage rates are going to be higher, possibly much higher, the housing payment for the exact same home could be 10% higher by March.

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We’ve had every piece of bad news that mortgages could hear:

1. The economy is rebounding.  We’re seeing expansion in nearly every key metric.
2. Housing is on a roll.  This also has negative signals for the FHA interest rates.
3. Inflation is starting to creep up.  Inflation equals higher rates.

Still, after all of this bad news and after losing 11 of the last 15 trading sessions, the FHA mortgage rate is still at 5%.  That’s surprisingly great news.

We’re still looking at an odd scenario where the rate is 5% for FHA vs Conventional rates at 5% as well.  That conventional rate requires a 740 FICO for the best rate.  For a buyer with a 700 FICO score, it is actually cheaper to get the FHA loan.  That’s significantly different than just a few years ago.

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The FHA loan rate has shown surprising resilience and has now fought back since Monday to get back below 5%.

For first time home buyers who have a seller credit of closing costs to help reduce their down payment, the current discount rates for FHA loans don’t look too bad.

We’ve been seeing home buyers with 2 points to spare secure rates into the mid-4%’s.  It’s a crazy market and home affordability is incredible at these rates.

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It is hard to keep in context how low mortgage rates are.  We went up .25% and are still below 5%.  That’s great news today.  It’s scary news into the future.

The economic data continues to point towards a slowly rising economy with sporadic pockets of bad news.   Every time that the Federal Reserve says “inflation,” rates go up .125%.

Today’s mortgage rates still sit more than 1% away from their ‘normal’ levels.  If you are looking at refinancing an FHA loan, this is a great time for it.  If you are looking at buying a home, today’s FHA interest rates make it much more affordable than it would be in a year.

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Recently, we’ve been using the 4.5% coupon.  With rates dropping so rapidly, we’re switching over to the 4.0% coupon as that is more closely related to the security that lenders are using to set FHA interest rates.

Mortgage bonds are flat to open today.  It could get a little dicey as fears over the Dubai debacle are subsiding.  With the high quantity of securities bought during this recent flight to safety, we could have a situation where the FHA loan rate could correct pretty quickly.

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