Houston's Rate Sheet

Rate Watch

With the New Year, the market has given us lower interest rates and a gloomier economic picture. The decline in mortgage rates stemmed from weak readings of economic data. Most notably the Employment Report’s poor numbers. On Friday of last week, the Employment Report showed an unemployment rate at 5%, up from November’s 4.7%. This is a significant dip in employment. On the inflation front, average hourly earnings rose 0.4 percent in December. The December reading in wages was slightly above the consensus forecast of 0.3 percent. This poses a dilemma for the Fed. In the event of declining economic growth, the Fed will move to cut interest rates. Thereby increasing borrowing opportunities, which helps to spur economic activity. In the event of rising inflation, the Fed will raise interest rates in order to slow economic activity and thereby curb inflation. In this current dynamic of falling economic growth and rising inflation, the Fed’s options are not as cut and dry. If they cut rates, it could cause inflation to grow out of control. If they raise interest rates, the prospects on an economic recession are almost guaranteed.

Today, Bankrate.com reported an overnight average of 5.57 percent on the 30-year fixed rate mortgage, down an astonishing 27 basis points from last Monday’s 5.84 percent. Other products followed. The 15-year fixed rate mortgage fell to 5.11 percent, down from last Monday’s 5.38 percent, and the 5-year Adjustable Rate Mortgage fell to 5.36 percent, down from 5.55 percent.

This week will be a real test for the markets. Since many traders are on vacation during the holidays, trading volume tends to be much lower. When lower trading volumes exist, movements in the market tend to be exaggerated. As the traders return to full time schedules, it could prove to push rates higher. However, at their current levels, these lower rates provide a perfect opportunity to purchase or refinance.

This week’s economic calendar will be fairly light. On Tuesday, the Pending Home Sales Index will provide us with some insight into the near term health of the real estate market. On Thursday, Ben Bernanke will give a speech on the current economic challenges. Also, there will be several speeches given by other members of the Fed Board of Governors. With the small amount of economic data in the US, there will probably be more focus oversees. On Thursday, the Bank of England and the European Central Bank will release their policy decisions regarding their respective key interest rates. These decision could have an impact on our mortgage rates as the market moves to compete.

posted by Vincent Biondillo @ 3:37 PM