Monday, March 24, 2008

Rate Watch

Fed cuts rates in volatile week and mortgage rates move downward

Last week, the mortgage market was extremely volatile. Mortgage rates moved up and down with the ebb and flow of shifting economic optimism. On Tuesday, the Fed held back a bit deciding to cut overnight rates by 75 basis points, rather than 100 basis points that was expected. Inflation could have been a reason for the pull back. The Producer Price Index (PPI), which was released earlier that morning, showed a .5% increase in prices paid to US producers for their goods. Despite inflation and the Fed's conservative rate cut, the stock market reacted very well. However, the stock market began to backslide on Wednesday and Thursday, as poor Jobless numbers and a poor Philadelphia Manufacturing survey reminded investors that the economy might not be on the rebound yet. However, a debate regarding whether we have hit an economic bottom has begun, which I imagine is better than no debate at all.

Mortgage rates were prushed down, after it was announced on Wednesday that the Office of Federal Housing Enterprise Oversight would lift special capital restrictions that have been put in place for both Fannie Mae and Freddie Mac. This action will allow Fannie and Freddie to buy additional mortgage bonds, which will pump $200 Billion into the mortgage market. This anticipated increase in demand was very good news for bonds and mortgage rates, which immediately improved on the news.

After an up and down week, mortgage rates finally finished down. Bankrate.com’s overnight average for the 30-year fixed rate mortgage fell to 5.62 percent, down from last week’s average of 5.89 percent. The 15-year fixed rate mortgage also finished down. The popular refinance product averaged 5.09 percent, down from last Monday’s 5.22 percent. Adjustable Rate Mortgage (ARM) rates moved in the opposite direction. The popular 5-year ARM program averaged 5.73 percent, up from last week’s 5.70 percent.

The week ahead will more than likely continue to be volatile. Monday and Wednesday will provide us with readings on Existing and New Home Sales respectively. These reports will have added significance, as investor try to find a bottom in the housing market. The Durable Goods Orders report, which measures the sales performance of goods like cars, boats, and large appliances which have a long usage life, will be released on Wednesday. If any of these reports show signs of a further weakening economic picture, then mortgage rates will probably continue to fall. However, if the economic picture becomes more positive, mortgage rates could rise quite quickly.

The other big economic report to watch is the Personal Consumption Expenditures (PCE) price index to be released on Friday. As we’ve stated before, the PCE Price Index is the Fed’s favorite measure of inflation, and inflation eats away at the value of bonds. So if the PCE Price index comes in high, mortgage rates will most certainly rise and many will question the wisdom in further rate cuts. All-in-all it could prove to be another volatile week.

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