Mortgage Market Update Monday December 15 th 2008


Mortgage backed securities (MBS) have opened higher this morning and are at the best levels of the year, which means we should see about the best rates of the year as well.
The week ahead does include some key economic reports which could move the markets.

Monday

• NY Empire State Index, economist's expecting -27.0. This report is a survey of manufacturers across New York which measures the strength of manufacturing. Actual reading came in at -25.8.
• Industrial Production, economists' expecting -0.5%. This report measures the change in the production of the nations industries.

Tuesday

• Housing starts, economists' expecting 730,000 after last months 791,000
• Core Consumer Price Index, economists' expecting 0.1% increase after last months -0.1% decrease. This report measures inflation at the consumer level excluding food and energy. Higher inflation leads to higher rates.
• Consumer Price Index, economists' expecting a -1.3% drop after last months -1.0% drop.
• FOMC Meeting on interest rates, economists expecting a 50 bp cut to the fed fund rate. Remember, a cut to the fed fund rate does not equal a cut to mortgage rates.

Thursday

• Jobless claims, economists' expecting 575,000 after last weeks 573,000 Leading Indicators, economists' expecting -0.5%.

• Philadelphia Fed Index, economists expecting -40.0. This report measures strength of manufacturing in the Philadelphia area.

As a general rule, weaker then expected economic data is a positive for mortgage backed securities and lower mortgage rates.

Things appear to be ripe for floating today but a concern for me would be the fed meeting which concludes tomorrow with their decision on interest rates.

It does appear a cut is in the bag; however, the concern being each time this year we have had a cut mortgage backed securities have sold off and mortgage rates have increased.

One item that is different this time is the Treasury is starting to buy mortgage backed securities which is helping to keep MBSs prices high and mortgage rates low.

If you can lock today at a sub 5% rate, that would be very hard to pass up. Can rates go lower? Sure, but they could move much higher and that is always the risk when playing the lock/float game. Since rates are at historic lows, locking is never a bad idea.

If you are happy with the rate and payment quoted to you, locking will take all risk out of the equation. In times like these, things can change very quickly.

One headline could pop up and we see a huge sell off leading to higher rates. Two other items that bring me some concern is the dollar is weakening and oil is starting to rise. With a weaker dollar, commodities such as oil which are traded in dollars, go up in price which could spark inflation.

Already this morning oil has touched the $50 per barrel level after closing one day last week at $40 per barrel. As said many times before, our biggest enemy to lower rates is inflation.

Cheers,
Ian R Bennett
Mortgage Banker