Mortgage rates remain above 5 percent as consumer prices rise

February 18th, 2011

There is a relationship between prices you pay in the store and the rate on your new home loan or refinance mortgage. This week two key indexes on prices were released that show where rates could be headed in the near future. If you are using mortgage calculators to plan your new home loan or mortgage refinance, the economic data released this week could have some bearing on your plans.

Mortgage rates a bit lower

On Thursday Freddie Mac released its weekly Primary Mortgage Market Survey that compiles mortgage rates from across the country from Monday through Wednesday. On Feb. 17, 2011, the PMMS rate was 5.0 percent at a cost of 0.7 origination points for a 30-year fixed rate mortgage, down slightly from the 5.05 percent rate the previous week. Last week the benchmark 30-year rate exceeded the five-percent mark for the first time since early May, this week the rate could not get back below the five-percent mark.

Preceding the PMMS release is the release on Wednesdays from the Mortgage Bankers Association of the Weekly Mortgage Applications Survey. This survey measures the number of residential mortgage applications taken the prior week. For the week ending Feb. 11, 2011, the number of applications dropped 9.5 percent from the prior week. The refinance index dropped 11.4 percent from the prior week and was the lowest refinance index since July 3, 2009, when the Freddie Mac PMMS rate for the 30-year fixed rate was 5.32 percent at 0.7 origination points.

Refinance calculators are seeing lower interest rates input compared to July 2009, but the number of applications for refinance mortgages are about the same.

Prices rising

This week the Labor Department released two import economic data reports, the Producer Price Index which measures the prices manufactures pay for goods and services to make their finished products, and the Consumer Price Index which measures what you pay for goods and services at retail stores and outlets. The PPI and CPI reports are key gauges of inflation in the economy and are of particular interest to the Federal Reserve Board of Governors who strongly influence lending interest rates and have a target rate of inflation of 2 percent.

On Wednesday the PPI release from the Labor Department showed that wholesale prices rose 0.8 percent from December 2010 to January 2011, following a rise of 0.9 percent from November 2010 to December 2010. The January increase was the seventh month in a row the PPI has shown an increase in prices. Year to year the index is 3.6 percent higher than January 2010, significantly higher than the Fed’s target for consumer inflation.

The price increases for consumers as seen in the CPI data was much tamer, increasing 0.4 percent in January, and only 0.2 percent when energy and food items were taken out of the index. From January 2010 to January 2011 the CPI has risen 1.6 percent, approaching the Fed’s target inflation number. Of particular note to most consumers is the increase in “food at home,” or what you are spending in the grocery store, this increase in this index in January was the highest in two years.

Higher prices often mean higher interest rates

If prices for manufacturers and wholesalers keep going up eventually they must pass those price increases on to their customers (retail stores) who sell their products to the consumer, which is you. Of great concern to economic recovery is what happens if you choose not to pay the higher prices and go longer without replacing shoes, buying a new toaster or going out to dinner?

Higher prices tend to lead the Fed to raise interest rates to curb inflation; however what will happen to interest rates if prices rise but sales decline? With a labor market that still has over 400,000 new unemployment claims being filed weekly and approximately 14 million still out of work, can the economy sustain higher prices, high unemployment and higher interest rates?

Use the mortgage calculators to plan for your new home loan or mortgage refinance; as you do so keep an eye on what is happening in the economy that will impact your mortgage rates.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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