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Rates ended last week even, with 30yr fixed loans settling at 4.875% after a wild ride. Bond traders face tough choices right now: sell (rates rise) because rising oil and commodities are causing inflation? Or buy (rates drop) because bonds are a safe haven from turmoil in Libya?

The tough choices are compounded when Libyan turmoil is actually the reason for rising oil. Libyan rebels are currently winning a war for that country's key oil fields, and even though Libya only produces 2% of global oil supply, the North Africa & Middle East region (see map)controls 35% of the world's oil, and popular uprisings are spreading toward the Middle East, which controls 30% of that total. With this as a backdrop, let's recap last week and preview next week.

Recap Last Week: Feb 28-Mar 4
Last week began with a confirmation that ...

Before presenting rate predictions for 2011, it's worth noting that all forecasts are subject to the whims of highly volatile rate markets. What follows is an explanation of how rate markets work, how rates have behaved since the financial crisis began in 2007, then the outlook for this year.

All rates discussed are 30yr fixed rates on single family home loans up to $417,000, and assume at least 20% down payments. Rates are lower for bigger down payments. Rates are higher for condos and loan amounts above $417,000.


How Rate Markets Work
Home mortgage rates are derived daily from yields on mortgage bonds. Here's what that means: A bond is like a loan. A bond investor is the lender and a bond issuer like Fannie Mae is the borrower. The investor pays Fannie Mae a certain price for the bond then receives an annual interest payment (called a yield or rate) on that bond they own. As mortgage bond prices trade up and down each day, that yield moves inversely. So if economic news is bad, bonds get bought, prices rise, and yields (or rates) drop. And if economic news is good, bonds sell, prices fall, and rates rise. All U.S. lenders update mortgage rates throughout each day based on whether mortgage bonds are trading up or down on the day's economic data. ...

Zero-point rates on 30yr fixed Conforming loans (up to $729k) begin the week back at record lows, and one-point rates on Jumbo loans (above $729k) are steady in the low- to mid-5% range. The European debt crisis flared up again last week and Friday's jobs report was drastically lower than expected. The result was that global investors continued to be net buyers of Treasury and mortgage bonds as a safe haven, and when mortgage bond prices rise on these buying rallies, rates drop.

RECORD LOW RATES TO START WEEK

As of market close Friday mortgage rates were again at their lowest levels since 1971. Attached is a chart showing this.

The WeeklyBasis rate lock bias continues this week - mortgage bond levels make it unlikely rates can drop further, and this is the time for borrowers to lock record low rates....

The federal home-buyers' tax credit has been extended through April 30, 2010, with a 60-day extension if a binding contract is in place prior to the deadline. First-time home buyers will continue to be eligible for a tax credit of up to $8,000, while existing homeowners will now be eligible for a credit of up to $6,500. To qualify for the $6,500 credit, existing homeowners must have lived in their current residences for at least five years. The bill also increases the qualifying income limits to $125,000 for single tax filers and $225,000 for joint filers. The purchase price of the home is capped at $800,000.

Taxpayers can claim the credit on purchases completed in 2010 on their 2009 income tax returns. Home buyers do not have to repay the credit provided the home remains their primary residence for 36 months after purchase. This is a dollar for dollar credit against taxes due, not a deduction against income. How the credit may apply to you should be carefully verified with your accountant....