My hope is to shed a little light on why mortgage rates go up/down and to better equip you to see through all of the smoke and form your own opinion as to "how mortgage rates are doing."

Inflation (rising prices) is ARCH-ENEMY #1 to mortgage rates:

Inflation UP = Mortgage Rates UP

Inflation DOWN = Mortgage Rates DOWN

The reason for this is pretty simple:  Inflation makes the interest rate that is fixed for 30 years worth less as time goes by.  Here is another way to think about it:  My lender will be able to buy less "things" in the future with my same 'ole 6% monthly mortgage payment because "things" will cost more in the future (INFLATION).

When outlook is for higher inflation, NEW MORTGAGES (long-term debt securities) have to be issued with higher interest rates (coupon rates) to keep investors buying these types of invesmtents.  Otherwise, investors would take their dollars and invest in other things that would provide better value.  There are many factors that affect demand for mortgage bonds or mortgage backed securities, but inflation is THE one with the biggest impact.

So, how can we tell what inflation is doing?  There are 3 indices reported monthly that indicate what direction "prices" are heading:

1. Producer Price Index (PPI)
2. Consumer Price Index (CPI)
3. Personal Consumption Expenditure (PCE)

Each index has it's own idiosyncrasies and each measure "prices" differently and at different "levels".  Don't let them "Bush-Whack" you (I am a conservative by the way), just remember that if the indices are up, then mortgage rates are up.

Just this morning, PPI was reported much higher for March than forecasted.  As a result, mortgage backed securities are taking a significant hit this morning/afternoon in the bond market.  Lenders will, or already have, increased their rates.  Hopefully you locked your rates yesterday!

Expect conventional 30-yr fixed mortgage rates to hover around 6% throughout the remainder of this year.  However, keep your eyes on the indices,  with the weak dollar and Fed's current focus on stimulating our economy, inflation could rise out of control very quickly!

Today, more than ever before, global economic forces are dictating the direction of "prices."  China and India (CHINDIA) economies are developing quickly and account for approx 33% of world's population.  Their ever-growing consumption of resources are causing many "prices" to increase while our economy is contracting.  Historically, when our economy is on the injured list, inflation slows to the pace of our demand.  This is not happening right now.  Oil, food and other commodities are still seeing price increases even though we are in a recession.  To avoid a book, I will save this discussion for a future blog...