Houston's Rate Sheet

Rate Watch

For the first time in 5 weeks, mortgage rates have fallen. Freddie Mac's weekly survey resulted in a 30-year fixed-rate mortgage (FRM) average of 6.74 percent, down from the previous week's average of 6.79 percent. Other products followed. The average for the 15-year FRM was 6.37 percent, down from the previous week's average of 6.44 percent. The one-year Treasury-indexed ARMs averaged 5.75 percent, also down from the previous week when it averaged 5.83 percent.

In typical form, the mortgage and bond markets thrived in a climate of negativity. First, the markets are still feeling the effects of the previous week's Employment report which showed a lower than expected number of new jobs created. This was good news for bond investors, because as we approach full employment the chance for rising wages enters as a more likely possibility. Since, rising wages can have a huge impact on prices and therefore inflation. So even though less new jobs is bad for workers, it was good news for bond investors.

Secondly, the markets are feeling the effects of the current conflict in the Middle East. Many investors are nervous that this conflict could further escalate into a larger conflict. In times of uncertainty like these, investors shift funds from riskier investments to safer ones. This dynamic is known as a “flight to quality”. Typically, this involves selling stocks and buying bonds, however, gold and certain foreign currencies can be considered safe havens. As expected, world stock markets suffered severe declines, while mortgage rates went down and gold prices soared.

The "flight to quality" is an easy process to predict in times like these. What is difficult to predict is how much farther rates will fall and to what degree the process will reverse itself if the tensions ease. The times are indeed uncertain.

The week ahead will keep investors on their toes. Geopolitical conflicts, inflation data, and Federal Reserve testimony could all potentially have a big impact on the mortgage markets. Developments in the Middle East will continue to have an impact through out the week. Tuesday, the inflation data will begin with the release of the Producer Price Index (PPI), followed by the Consumer Price Index (CPI) on Wednesday. Almost without exception, higher inflation leads to higher interest rates, and PPI and CPI are the most widely watched indicators of inflation. PPI focuses on the increase in prices of “intermediate” goods used by companies to produce finished products, while CPI looks at those finished goods which are sold to consumers. In addition, Industrial Production, a broad measure of business related economic activity, will be released on Monday, and the Housing Starts report is scheduled for Wednesday.

The semi-annual testimony by Fed Chief Bernanke to Congress will take place on Wednesday and Thursday. Bernanke will be expected to present a thorough update on the state of the economy, and he will also be questioned by members of Congress after his speech. Fresh information from Bernanke may render obsolete what would normally be a highly anticipated event, Thursday’s release of the FOMC minutes from the June 29 meeting.

Borrowers will have a difficult time deciding whether to lock rates right now or not. In times like these, it is better safe than sorry. I would recommend locking rates as soon as possible.

posted by Vincent Biondillo @ 8:35 AM