Rates Steady Awaiting Fed Statement and More Inflation Data

Mortgage backed securities opened the trading day yesterday much lower due to higher than expected inflation data. Once the bad news set in though, the trading action bounced around as market participants await the Fed statement due out today. There were several reports of scattered reprices from lenders with some improving rate sheet rebate while others worsened.

Today is Fed statement day. At the conclusion of the two day conference where our nation’s monetary policy is set, the Federal Open Market Committee releases a statement outlining any changes to the Fed Fund rate and they give an economic outlook. This report is the single biggest potential market mover as the fed fund rate has an impact on all other rates. It is widely accepted that the Fed will maintain the current Fed Fund rate of 0 to .25% but market participants will look for any changes to the verbiage regarding maintaining the current rate for an “extended period”. Additionally, they will thoroughly review the statement for the Fed’s outlook on economic growth. The statement will be released at 2:15pm eastern time.

We do have some more economic data hitting the newswire this morning. First out is the weekly Mortgage Bankers’ Associations application index which tracks the weekly change in the amount of mortgage applications at major lenders. An increasing trend suggests more home purchases which would lead to other purchases such as furniture, appliances, etc.. which is positive for our overall economic activity. An increasing trend in refinance activity is also positive for the economy since consumers would be refinancing to lower rates and lower payments giving them additional cash to spend into the economy. The report indicated that purchase activity declined last week by 0.1% while the refinance activity posted a 0.9% increase thanks to near record low mortgage rates.

Next is another reading on the housing sector with the release of Housing Starts. This data totals the number of new homes which construction has begun on an annualized pace. An increasing trend of new construction is positive for the economy as it would lead to more construction jobs, increased buying of flooring, cabinetry, and other items to build the home. As a general rule, positive economic news is not good for mortgage rates. The report showed that new home construction rose slightly less than expected by 8.9% to an annualized pace of 574,000. Offsetting the slightly worse housing starts numbers was Building Permits which posted the highest level since November 2008 to an annualized pace of 584,000 beating expectations of only 570,000. Building permits are more relevant than housing starts since they look forward while housing starts looks backward. To show you how far housing has fallen, during the height of the housing boom new home construction in January 2006 was on an annualized pace of over 2.2million!

Lastly, we got another reading on inflation with the Consumer Price Index. This data measures the average monthly price change of a fixed basket of goods and services purchased by consumers. Yesterday’s PPI(measures inflation on the producer level) indicated producer prices increasing much more than expected causing many to believe today’s CPI report would show higher inflation. Well, the report shows that producers are having a difficult time passing along higher prices to their customers. The overall CPI came in right on expectations with a monthly increase of 0.4% while the core rate which strips out food and energy due to their volatility, came in lower than expected at 0.0%. The flat reading on the core rate was the first month without an increase since December 2008. On a year over year basis, the overall CPI is up 1.9% while the core rate is up 1.7% matching last month’s number. Despite yesterday’s higher PPI numbers, this report continues to show inflation to be of no concern today which should allow the Fed to maintain the current Fed Fund rate for the foreseeable future.

Reports from fellow mortgage professionals indicate mortgage rates to be unchanged from yesterday. The par 30 year conventional rate mortgage remains in the 4.875% to 5.125% range for well qualified consumers with a couple lenders still offering 4.75%. To secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee. If you are looking to access home equity, you should expect either additional fees or a higher interest rate.

The future direction of mortgage rates will be determined later today with the release of the Fed statement. I can guarantee you that one of three things will occur. Mortgage rates will improve, stay the same or get worse. A rosy outlook for economic growth will pressure rates higher but a more cautious outlook on growth could help rates to improve. Additionally, any indication of a change to the wording of the fed fund rate staying low for an “extended period” will also move rates. If it is implied that the fed fund rate will be raised sooner than later, mortgage rates will rise. Lastly, the outlook for inflation can move rates. Hopefully the statement continues to say that inflation is of no concern for the foreseeable future.

If you are a risk taker, floating could pay off. My opinion is the Fed statement will at worse hold rates steady later today. With double digit unemployment, I cannot see how the Fed will paint a rosy picture for future economic growth. I also believe that they will say that inflation remains in check and the wording of the low fed fund rate will not change. If you cannot afford to be wrong meaning accept a higher rate if wrong, lock before the statement. I would like to hear from you. What do you think the Fed statement will say and what result will it have on mortgage rates?

I would like to congratulate Ben Bernanke on winning Time Magazine’s Person of the Year Award.