Mortgage Market Update Monday, February 1, 2010
Last week was highlighted by several big events that caused a ton of volatility in the markets. On Wednesday, the Fed policy statement was released and there were two key announcements that are important for mortgage rates.
For one, the Fed annouced that they will in fact end the MBS purchase program in March as expected. There was wide-spread speculation that they may extend this program which has been a key driver in keeping mortgage rates low for over a year, so this announcement is big news and should be a strong factor for home owners to get off the fence and lock in a great rate while the getting is still good.
The other key announcement was that the Fed stated they would keep interest rates low for an extended period. The effect of this could be hard on mortgage rates because the rate the Fed is referring to is the Federal Funds Rate, the overnight rate that banks charge each other for short term borrowing. This does not have a direct effect on mortgage rates and can in fact lead to higher mortgage rate ultimately because of the threat of inflation.
Although the week saw many other key announcements, the other biggie was the release of 4th quarter GDP which showed the largest increase in over a year at 5.7% (see chart). However, be careful when looking at this number because this release is only the estimated GDP and will be revised once final numbers are calculated. It is not uncommon ffor GDP to be revised down, and with unemployment still extremely high, and consumer spending still very low, it would not be a suprise if this number is revised lower. To give perspective, 3Q numbers were revised down 2.2% once the final numbers were released.
The net effect of all of this action in the markets is that mortgage rates ended the week at about the same level they began at.
This Week
There are several very important reports in store for the week which will have an impact on mortgage rates. Today, the Personal Consumption Expenditure figures will be released. PCE is an important measure of inflation. Inflation is the arch-enemy of mortgage rates as inflation erodes the value of long term investments such as 30 year mortgage-backed treausries. A hot inflation number could cause a steep sell-off this afternoon (higher rates).
The end of the week will bring the monthly employment reports. Poor employment numbers are a positive for mortgage rates as is most any negative economic data or announcements. Stronger employment could weigh heavily on mortgage rates. It is interesting all of the commentary by President Obama on jobs creation in the state of the union address last week amidst double-digit unemployment. Yes, it does take time for job creation efforst to trickle down to actual job creation, but the clock is ticking, and how long we can continue to spend in order to get out of the recession and create jobs is debatable.
Despite continued low rates, the prudent stance and what I am recommending to my clients is to lock in their rate sooner rather than later. It's not a matter of if, but when, rates will go up.
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