Fed, Inflation News Good For Mortgage Applicants

March 25th, 2010

Some key economic news and data this week supports low mortgage rates. Mortgage applications dipped less than 2% for the week ended March 12, 2010, as mortgage rates for week were flat. If you are in the market for a refinance mortgage or a purchase mortgage, the economic news for the week was in your favor for continued low mortgage rates. In the news this past week:

Mortgage Applications Dip, While Mortgage Rates Flat

In its Weekly Application Survey, the Mortgage Bankers Association announced that for the week ending March 12, 2010, total mortgage applications fell by almost 2%, with refinance mortgage applications still over 67% of the total applications taken. The Survey also announced that the base contract 30-year mortgage rate dropped to 4.91% from 5.01%, while the average cost rose to 1.3 points from 0.82 points–essentially no net change in mortgage rates for the period March 5 to March 12, 2010.

Mortgage Rates Benefit from Inflation News

The primary pressure for higher mortgage rates will be from inflation. When it appears that inflation is once again a concern for the American economy–that is, a greater concern than stimulating economic growth–the Federal Reserve will increase rates to hold inflation down or slow its growth.

On March 17, the Producer Price Index (PPI) was released. The PPI measures the prices manufacturers are paying for materials. The PPI difference between January and February came in well under expectations and was a negative number, -0.6%, meaning manufacturers paid less for the same goods in February than they did in January. On March 18, the Consumer Price Index (CPI) was released. CPI is the costs of goods purchased by American consumers. The CPI increase in February was flat at 0.00%, indicating neither an increase nor a decrease in prices for consumers. The tame data on costs of goods and inflation is good news for refinancing homeowners and purchase mortgage shoppers.

Unemployment Not Letting Up

The weekly unemployment claims number was also released on Thursday and was lower by 5,000 from the prior week. However, the number of Americans filing first-time unemployment claims is still very large, at 457,000. As high unemployment continues, there is political pressure on the Federal Reserve to keep interest rates low. Continued declines in employment exerts downward pressure on housing prices, too, as fewer Americans qualify for purchase mortgages and more Americans out of jobs will be unable to make their monthly mortgage obligations.

Fed Holds Rates, Stands By Policy

On Tuesday, March 16, the Federal Reserve Board of Governors met. After the meeting, the Fed announced no change in the Fed Funds Rate or their stance of holding “exceptionally low rates for an extended period of time.” The Fed also affirmed its commitment to winding down its program to purchase $1.25 trillion of mortgage-backed securities (MBS). This purchase program by the Fed has been instrumental in keeping mortgage rates very low. However, the Fed left open the possibility that this MBS purchasing program could be revived if the economic situation warrants.

Looking ahead, the consensus opinion is still to take advantage of the low mortgage rates if you are considering a refinance mortgage or a purchase mortgage. There is uncertainty about how rates will react once mortgages hit the secondary market in April without the Federal Reserve there to purchase almost the entire offering.

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