The Lowest Mortgage Rates Ever to Start Off a New Year

January 7, 2011 by · Leave a Comment 

During 2010, mortgage rates dropped to record low levels, before moving higher over the final two months of the year. The primary reason for the recent increase in mortgage rates has been stronger economic growth, and the reports released last week showed the growth continuing. The Chicago PMI Manufacturing Index jumped to the highest level since 1988, far exceeding the consensus forecast. Pending Home Sales, a leading indicator for the housing market, also beat the consensus with an increase of 4%. In addition, Weekly Jobless Claims (as shown in the graph below) also unexpectedly fell below 400k to the lowest level since July 2008.

This strong economic news is encouraging and, hopefully, will only get stronger throughout the year. Keep in mind, however, that good economic news means bad news for mortgage rates. Fortunately, last week, two strong Treasury auctions offset the positive economic news and mortgage rates ended the week nearly unchanged. Despite the recent surge in rates, mortgage rates will start 2011 at the lowest level to begin any year in decades. In fact, only the start of 2009 rivals 2011, and mortgage rates in all other previous years of our generation were at least .5% higher than level where they are starting off in 2011!

Mortgage Rates Higher

December 21, 2010 by · Leave a Comment 

It has been a wild few weeks for mortgage rates. The benchmark Conforming 30 year fixed rate is now back up to the late Spring / early Summer level of 4.75%. The recent rise in rates is mostly attributable to the following:

1. Strong economic growth data. Most of the data released over the last two weeks has exceeded the expert’s expectations causing several economists to raise their forecast for GDP in 2011. In particular, last week’s Retail Sales and Manufacturing Sector data surpassed the consensus estimates. The PPI inflation data was also stronger than expected. Faster economic growth generally produces higher future inflation expectations, which leads to higher bond yields and higher mortgage rates.

2. The new tax package. While an extension of the Bush era tax rates was widely anticipated, the final deal is significantly bigger than expected as it includes a one year payroll tax reduction and an extension of unemployment benefits for the long-term unemployed. Bigger is not always better when it comes to rates. In addition, it is anticipated that the new package will increase the budget deficit. An increase in the budget deficit means the government must issue more Treasury securities to pay for the spending. As the supply of Treasuries goes up, yields must rise to attract additional investors, so mortgage rates must rise as well. Finally, it is believed that the plan will boost economic growth, which would potentially lead to the threat of inflation. Of course, inflation is never good for mortgage rates. Also worth noting, this additional fiscal stimulus will make it less likely that the Fed will add more monetary stimulus. With the Fed focused on high unemployment and low inflation, it is doubtful that the Fed will make any more moves in the near future.