Interest rates had been in an ugly trend from October until just a few weeks ago. We’d seen rates rise by nearly a full 1.00%.

With the spring buying market already heating up, home affordability had definitely taken a hit over the past 4-5 months. However, it probably still made sense to buy with the long-term mortgage rate projections just making today’s mortgage rates more attractive than those of the future.

That was until today’s mortgage rates decided to improve. I’m not a huge fan of the Freddie Mac PMMS report. It is woefully delayed, publishing Thursday rates that are tallied from Monday to Wednesday. This week’s conforming rates held at 4.88%. There isn’t a direct equivalent tool for tracking FHA interest rates, but they’ve been slightly lower.

What’s notable is what’s not in the report. Namely, the trading from Wednesday and Thursday. If you had a mortgage quote from Tuesday for a rate of x.xx% paying 1 point, the market has rallied by just over a full point in the past two days. That same rate quote of x.xx% and a point should now be x.xx% and no points.

Perfect timing for home buyers that are hitting the streets in the early part of spring.

Home affordability reached an all-time high in 2010′s last quarter. Unfortunately for home buyers , it’s been a different story since, however.

As mortgage rates cratered, and with home values soft, the Home Opportunity Index reached its highest level in 20 years. The index is published by the National Association of Home Builders. 

Close to 74 percent of the new and existing homes sold between October-December 2010 were affordable to families earning the national median income of $64,400. It’s the 8th straight quarter in which the Home Affordability Index surpassed 70 percent.

Prior to 2009, the HOI rarely topped 65 percent.

That said, though, as with everything in real estate, home affordability is a local event. For example, take the Elkhart/Goshen area of northern Indiana. 97 percent of homes sold there last quarter were affordable to families making the area’s median income. 

This level of affordability is likely related to state capital Indianapolis, a perennial top-scorer itself.

For the second straight quarter — and the 22nd time dating back to 2006 — Indianapolis led all major metropolitan areas with a 93.5 affordability rating.

Meanwhile, on the opposite end of the home affordability spectrum, the “Least Affordable Major City” title went to the New York-White Plains, NY-Wayne, NJ area for the 11th consecutive quarter. Just 25.5 percent of homes were affordable to households earning the area median income.

It’s a a 6-point improvement from Q2 2010, however.

The rankings for all 225 metro areas are viewable on the NAHB website but regardless of where you live, it’s important to remember that rising mortgage rates this year have made homes less affordable in all markets across the United States. We won’t see a repeat record in this quarter’s HOI once it’s calculated and published.

Home buyers have lost 10% of their purchasing power since November, and mortgage rates look poised to rise even more.

If your plans call for buying a home later this year, consider moving up your time frame. The long-term costs of homeownership are rising, and affordability, therefore, is falling.

Homes are significantly more affordable today because of these low FHA loan rates.  We’ve been hovering around 5% for quite some time.

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.

It’s been a crazy few weeks with mortgage rates charging all the way to all-time lows and then suffering a pretty ugly sell-off last week.

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.