This Labor Day Weekend Brings It's Own Set Of Challenges to the Mortgage Market

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 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.

The Inflation Calculator Checks Whether Your Income Is Keeping Pace With The "Cost of Life"

The phrase "Consumer Price Index" can be intimidating and unclear to Americans. It's an economic term, after all, and not a part of everyday American language.

It even has its own abbreviation to add to the confusion -- CPI.

So, when a layperson hears that "CPI is rising", it's not always clear what it means. The tendency, therefore, is to ignore the news.

This is one reason CPI is commonly substituted with the more down-home expression of "Cost of Living".

In contrast to the term "CPI", the phrase "Cost of Living" is a lot more clear. When people hear that the Cost of Living is rising, instinctively, they get it. And now they can see how it works in numbers, courtesy of the Bureau of Labor Statistics.

The Inflation Calculator at the government Web site helps a person compare household income to the changing Cost of Living between any two years since 1913. For example, a U.S. household earning $48,201 in 2007 would have to increase that income to $50,868 just to keep up with "life".

CPI touched a 17-year high in June, jumping 5.000 percent year-over-year. Without a 5.000 percent increase an income, a household falls behind.

Mortgage Rates Surge On Highest Cost of Living Index since 1991

Another day, another piece of inflationary data.

June's Consumer Price Index showed a 5 percent year-over-year increase in what is now the largest annual Cost of Living increase for Americans in 17 years.

This is bad news for both home buyers and homeowners in want of a new mortgage because rising costs are inflationary and inflation causes mortgage rates to move higher.

Predictably, mortgage rates jumped Wednesday morning after the CPI data was released and they edged higher throughout the rest of the day.

This morning, mortgage rates are higher again on unexpected strength in housing starts and building permits across the country.

On most mortgage products, rates are now higher by 0.250 or more since Tuesday. This is equivalent to $192 in extra mortgage

T-Minus 2 Weeks Until The Fed Hikes The Fed Funds Rate?

Members of the Federal Reserve turned up the inflation chatter since late-May and mortgage rates are suffering.

Even worse, it's creating a confusion among home buyers because lender pricing is expiring multiple times daily.

As a general rule, inflation is bad for mortgage rates because it cause the dollar to lose its value. When the dollar loses its value, mortgages repayments their lose value, too -- after all, we all write our checks against U.S.-based bank accounts.

So, when inflation is present, mortgage rates almost have to increase in order to compensate for devaluation.

With the frequency that Fed members are addressing inflation head-on, traders speculate that Ben Bernanke & Co could increase the Fed Funds Rate as early as its next meeting, June 24.

This may help stabilize mortgage rates, but it would cause credit card and home equity credit line to payments to rise.