Mortgage Times

[Adam in CO]

Mortgage Market News for the week ending February 22, 2008

Events This Week:

Inflation Higher
Jobless Claims Flat
Manufacturing Weak
Housing Starts Up

Events Next Week:

Mon 2/25
Existing Home Sales

Tues 2/26
PPI

Wed 2/27
Durable Orders
New Home Sales

Thur 2/28
GDP

Fri 2/29
Core PCE
Chicago PMI

A Roller Coaster Ride for Mortgage Rates

The short week turned out to be one of the most volatile in recent years. Early in the week, mortgage rates surged to the highest levels of the year, before they turned around and recovered nearly to their starting level, leaving only a small rise for the week. With the Fed cutting rates and pumping liquidity into the economy, and the government implementing fiscal stimulus programs, mortgage investors became increasingly worried that the stimulus would lead to higher inflation, which is negative for mortgage markets. The major inflation data released during the week amplified those concerns, as the January Core Consumer Price Index rose at a 2.5% annual rate, which was higher than the consensus estimate.

Perhaps contrary to what one would expect, the recent Fed rate cuts have led to higher mortgage rates as opposed to lower mortgage rates. To understand why, it's important to understand that the Fed only controls short term interest rates. When they cut rates, it generally has the effect of increasing bank lending and consumer spending, which leads to more economic activity. Long term rates, such as 30-year mortgage rates, are determined by trading in financial markets and are highly impacted by expectations for future inflation. To a mortgage investor, a Fed rate cut increases the risk of higher future inflation, and that has been the dominant sentiment in recent weeks. This explains why 30-year mortgage rates have jumped 0.75% since the Fed's aggressive January 22 rate cut.

In the housing sector, the news was mixed. January Housing Starts rose slightly from December, while Building Permits, a leading indicator of future activity, fell to the lowest level since November 1991. The National Association of Home Builders (NAHB) Housing Market Index showed a small increase. According to the NAHB, builders have been attempting to reduce the inventory of homes on the market, and there has been an increase in the flow of prospective buyers.

• Also Notable:
• The Fed revised its 2008 economic growth projections lower and its inflation projections higher
• For January, retailers posted their worst monthly sales results in nearly five years
• The Philly Fed business activity index fell to a seven-year low
• Oil prices climbed to record levels above $100 per barrel, up from $70 p/b in the middle of August

Average 30 yr fixed rate:
Last week:+0.24%
This week:+0.05%

Stocks (weekly):
Dow:12,218-116
NASDAQ:2,278-40

Week Ahead

The economic calendar will be packed with major reports next week, but the biggest economic news may be Fed Chief Bernanke's semi-annual testimony before Congress scheduled for Wednesday and Thursday. Important economic data will come out every day as well, beginning with Existing Home Sales on Monday. The Producer Price Index (PPI) will be released on Tuesday, along with Consumer Confidence. Almost without exception, higher inflation leads to higher interest rates, and PPI focuses on the increase in prices of "intermediate" goods used by companies to produce finished products. Durable Orders, an important indicator of economic activity, and New Home Sales will come out on Wednesday. The first revision to Gross Domestic Product (GDP), the broadest measure of economic activity, is on tap for Thursday. Wrapping up a busy week will be Core PCE, the Fed's preferred inflation measure, along with Personal Income, Chicago PMI, and Consumer Sentiment.

admin@corefinancegroup.com

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