Mortgage Market Watch - May 19, 2008

Mortgage Commentary

Mortgage interest rates ticked slightly higher last week, and we will likely see the same this week. Not much economic news is due out this week, and that which is will likely put inflationary pressures on the market, pushing rates even higher.

In the present environment, it's hard to find any one element of the economy to get enthused about. Most sectors are stumbling along, at best, or continuing to decline. Troubling news seems to be found around virtually every corner, and prospects for a sharp uptick seem limited at the moment.

Rising borrowing costs undermine the rates borrowers will pay. Two issues to monitor: 1) LIBOR reform where U.S. banks have potentially understated their borrowing costs. If this is restated, expect LIBOR to play catch-up, resulting in higher rates, and 2) Liquidity, which the Fed is focused on infusing more and more of. However, less or even low access to liquidity equals higher rates.

Underlying interest rates had been moving higher last week, but were short-circuited by weaker economic news. The overall average for 30-year fixed rate mortgages climbed by three basis points last week as HSH's Fixed-Rate Mortgage Indicator (FRMI) closed the nation's leading survey of mortgage prices at 6.56%. The overall average for Hybrid 5/1 ARMs remained unchanged at 6.16%.

Thirty-year jumbo mortgage rates also remained unchanged last week, so the FRMI's slight increase came from the true conforming loans where the average ticked seven basis points higher to 6.10%. Increases were also noted in the prices of the new "expanded conforming" fixed rates, which moved a tenth of a percent higher.

Inflation is rearing its ugly head. Import prices were up more than 15 percent year-over-year in April, the biggest increase on record. Goldman Sachs is forecasting oil prices averaging $141/bbl this summer, and that is some 10% higher than presently uncomfortable levels. Should that be the case, a more pronounced economic slowdown would likely occur, as even more disposable dollars would be vacuumed from pocketbooks. As we're presently holding a sub 1% GDP growth rate, that would more than likely push us into the red, so here's hoping Goldman Sachs is wrong in their estimation.

This week brings us the release of only three pieces of economic news in addition to the minutes from the last FOMC meeting. Only one of those three can be considered of high importance to the markets and mortgage rates, so we may see a fairly calm week for mortgage rates. If rates do move anywhere in the present climate, it would be upward, but probably not by much. We added three basis points to the FRMI last week, and would expect about the same for this week.

Overall, it may be an interesting week for mortgage rates. We could see little movement in rates if the stock markets remain calm and the week's data doesn't reveal any major surprises. Tuesday's PPI report is the single most important data of the week, but the FOMC minutes may also lead to some volatility in the markets. Also worth noting is an early close in the bond market Friday afternoon ahead of the Memorial Day Holiday Monday. These early closes sometimes lead to additional volatility in bond prices as investors prepare for the long weekend, and trading thins with many traders starting the weekend early.

Interest rates are based on numerous economic, financial and credit based factors that adjust daily. In addition, lenders can vary on qualification criteria from program to program. If you like the rate today, the safe bet is to lock. Even if rates improve, they wouldn't improve enough in the short term to make you cry about it. But if you are an ardent market bear, and accept the risk of negative mortgage headlines, and believe the economy will just get more bad news next week, and you have the money to risk, you may benefit from floating. Just remember, it always seems more painful to have not locked when you should have as opposed to locking and then watching rates get a little better.

Search today's mortgage rates anonymously. And, as always, you can call me at (508) 471-4144 with any questions about mortgage rates and to discuss your best loan options.