Rates dip as prices hold

January 14th, 2011

When mortgage rates jumped in early November, and continued to climb through December, inflation concerns were the primary factor. This week's economic news that impacts mortgage rates included price data for December. Will this news affect the calculations you make in the mortgage calculators for your new home loan or mortgage refinance?

Retail sales fizzle

After strong sales in November 2010 had retailers excited about the 2010 holiday shopping season, December 2010 sales as reported by the Commerce Department showed an increase of only 0.6 percent from the previous month. It was "only" because the strong sales reported in November, especially the "Black Friday" post-Thanksgiving, generated strong expectations for much higher retail numbers in December.

As December wore on retail sales fizzled whether due to severe weather in much of the nation or bargain hunters running out of bargains. As with "Cash for Clunkers" and the IRS homebuyer tax credit, retail buyers in December needed some incentives to buy.

Mortgage rates react to consumer spending

Consumer spending accounts for approximately 70 percent of the United States economy. Higher retail sales indicates consumers are spending money. Higher retail sales on a consistent basis is an indication that economic growth is occurring, or about to occur, and typically higher mortgage rates will follow.

If you have been using a refinance calculator to determine your monthly savings with a refinance mortgage keeping an eye on retail sales will give you an idea of where mortgage rates should be heading.

Inflation in hiding

Two key indexes that impact interest rate markets are the Producer Price Index (PPI) and the Consumer Price Index (CPI). These measure the increase, or decrease, in prices paid by wholesalers (PPI) and consumers (CPI) over a "basket of goods and services." Each index is then broken down further from the main price number and the "core" index. The core value strips out energy and food costs due to their volatility which can cause exaggerated movements in PPI or CPI.

For December 2010 energy costs increased 4.6 percent from the prior month; as a result PPI increased 1.1 percent and CPI increased 0.5 percent. The core rates, however, with the December 2010 energy prices stripped out, increased significantly less; the PPI core index rose only 0.2 percent and core CPI rose 0.1 percent. The Labor Department report stated the core year-to-year CPI rose only 0.8 percent; far lower than the 1.7 to 2.0 percent inflation targeted by the Federal Reserve.

Due to the core inflation rate being less than half of the Fed's targeted rate, there is no reason to expect the Fed will abandoned its QE2 asset purchase program. Two months ago when the Fed announced QE2 mortgage rates jumped as critics feared the program would result in uncontrollable inflation. As seen by the CPI data from December that fear is far from materializing.

If you have been using a prequalification calculator to determine your purchasing power for a new home loan low inflation is a big benefit to you; higher inflation means higher mortgage rates, the low CPI number means you can rely on relatively stable and lower mortgage rates in the near future.

Rates continue to decline

On Thursday Freddie Mac released its Weekly Mortgage Market Survey of mortgage rates. Released every week for almost 40 years, the Weekly Mortgage Market Survey provides the average rate and cost for the benchmark 30-year fixed-rate mortgage. For the week ending Jan. 13, 2011, the rate was 4.71 percent at a cost of 0.8 origination points, down from 4.77 percent the week before. This is the second week in a row, and the third out of the past four weeks, that the rate has declined.

After the large increase in mortgage rates from early November 2010 through most of December 2010 rates the past few weeks have declined. Is this the start of another long slow decline in rates, or is it a pause in further rate increases? The inflation data this week suggest that perhaps it is the former. If you are using mortgage calculators do not wait to convert your results into a mortgage application, take advantage of this recent dip in 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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