Houston's Rate Sheet

Mortgage Rates hit 2 year high

Following continued concerns over rising global interest rates, bond investors continued to push mortgage rates even higher than last week. According to Freddie Mac's weekly survey, the average on 30-year fixed rate mortgages was up 13 basis points to 6.37 percent. This is the highest average Freddie has reported since September 5, 2003. The average for a 15-year fixed-rate mortgage rose to 6 percent, the highest level since July 2002 and an increase from 5.89 percent last week. One-year Treasury-indexed ARMs averaged 5.45 percent this week up from last week when it averaged 5.34 percent.

As you may recall, Europe decided to raise interest rates last week. This week it was the Bank of Japan's turn. For the first time since 2001, Japan's central bank decided to raise their benchmark rate above zero. This forced many investors and fund managers to re-evaluate their portfolios. In order to keep these investors from dumping US Treasuries for more attractive Japanese and European bonds, sellers of treasuries were forced to sell at higher yields (i.e. interest rates). Because Mortgage-backed securities dealers have to compete as well, rising yields resulted in higher mortgage interest rates.

On Friday, the US government announced the creation of 243K new jobs. This was a little stronger than Wall Street expected, but it was within the margin of error. The report also revealed a more confidant work force. As job growth rose, the unemployment rate rose from the previous month's 4.7 percent to 4.8 percent. This is good news because the unemployment study only considers those actively looking for a job as unemployed. If job growth and rising unemployment are growing at the same time, then those individuals who gave up on finding work must have re-started their search. This is good for the economy and real estate professionals, because the gainfully employed tend to buy houses. However, it is not good for the prospects for inflation. Strong job growth can lead to a higher inflation rate, which would lead to higher interest rates. This gives the Fed another excuse to kick in another rate hike to offset inflation.

Beginning with Tuesday's release of Retail Sales, this week's economic calendar will feature a broad range of economic events. The Retail Sales report measures the level of consumer purchases, which represents 70% of economic activity. The biggest possible market mover will be the Consumer Price Index (CPI) to be released on Thursday. This is the most watched measurement of inflation, and inflation is the arch enemy of interest rates. Also on Thursday, we'll get to see the affect of rising interest rates when the Housing Starts report is released. On Friday Industrial Production data shifts the focus to output by businesses.

I don’t expect rates to move in the dramatic fashion we saw last week. Borrowers should be vigilant of the market, and lock rates when possible. Rates will probably go up, but I expect it to be a modest.

posted by Vincent Biondillo @ 9:00 AM