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.

Keep An Eye on the Weather Channel for Mortgage Rate Direction

Almost exactly three years after Hurricane Katrina caused $81.2 million in damage, Tropical Storm Gustav is charting a similar Gulf of Mexico path.

Memories of Katrina are making oil traders nervous. The 2005 storm shut down 30 platforms and 9 refineries. And, this week, oil prices are up nearly 4 percent on fears that the market, once again, may be disrupted by storm.

Mortgage rates are edging higher on the news.

The link between oil prices and mortgage rates is not a direct one, but it's one worth keeping an eye on.

Rising oil prices strain business and consumer budgets, creating inflationary pressures on the economy. And at no time was this relationship more evident than in May and June of this year.

As oil prices reached new, all-time highs almost daily, Americans felt the impact each time they opened their wallets -- the Cost of Living inflation gauge reached a 17-year high in July 2008.

Inflation is the enemy of mortgage rates so as inflation rises, mortgage rates tend to rise, too.

And this is one reason why mortgage rates are ticking higher this morning -- there is an overriding fear that Gustav will strengthen into a full-fledged Hurricane before making landfall, causing damage to oil refineries and shipping ports around the Gulf of Mexico.

Damage reduces oil supplies and that causes oil prices to rise. It's basic supply and demand.

Gustav is expected to make landfall Monday or Tuesday. If the storm continues on its path, we may see mortgage rates continue to trend higher. If the storm dissipates, rates should reverse.