Inflation Watch

Inflations Impact on the Rise or Fall of Home Loan Rates

Homes are more affordable across Northwest Indiana as the housing market emerges from a slow winter season with mortgage rates still near 5 percent.

Soft housing and low rates are an excellent combination for home buyers but whereas home values rise with a gradual pace, mortgage rates change in an instant.  It’s something worth watching.

Each 0.25% increase to conventional or FHA rates adds approximately $16 per month for each $100,000 borrowed. Mortgage rate volatility can change your household budget.

If you’re trying to gauge whether rates will be rising or falling, one keyword for which to listen is “inflation”. Mortgage rates are highly responsive to inflation.

By definition, inflation is when a currency loses its value; when what used to cost $2.00 now costs $2.15. As consumers, we perceive inflation as goods becoming more expensive.  However, it’s not that goods are more expensive, per se. It’s that the dollars used to buy them are worth less.

This is a big deal to mortgage rates because mortgage bonds are denominated, bought, and sold in U.S. dollars.  As the dollar loses value to inflation, therefore, so does the value of every mortgage bond in existence. When bonds lose their value, investors don’t want them and bond prices fall.  Mortgage rates move opposite of bond prices. 

Prices down, rates up.

In today’s market, the relationship between inflation and mortgage rates is helping home buyers. The Cost of Living made its smallest annual gain in 6 years last month and the Fed has repeatedly said that inflation will stay low for some time. The combination is driving investors to buy mortgage bonds which, in turn, is suppresses rates.

So long as it lasts, the cost of homeownership will remain relatively low in Chesterton, Crown Point, Highland, Munster, Portage, Saint John, Schererville and Valparaiso. Combined with the expiring tax credit, the timing to buy a home may be as good as it gets.

Contact James K Barath in Northwest Indiana to Qualify for Your FREE FHA Home Loan Approval Today!

Inflation Watch

Want To Know Why Mortgage Rates Are Up Over 1.125 Percent In 10 Days?

Since Memorial Day, conforming mortgage rates have jumped by more than 1.125 percent, adding thousands of dollars to the annual cost of homeownership.

To the casual observer, the moves may seem random. There’s a reason this is happening, however.

It starts with inflation.

As an economic force, inflation erodes the value of the U.S. Dollar. Left unchecked, it drives up the Cost of Living as each dollar “buys less” at the supermarket, gas station, or anywhere else.

But with respect to mortgage rates, inflation’s impact is more immediate. Because inflation devalues the dollar over the long-term, it renders long-term mortgage bonds a less attractive investment for traders.

If bond investors are repaid in U.S. Dollars, after all, it would make the investment worth less if the dollar is in an inflationary freefall.

Therefore, in situations when inflation is likely to present, we find that traders often sell out of their mortgage bond positions which, in turn, drives down the bond prices. Then, because bond yields move in the opposite direction of bond prices, rising rates are the inevitable result.

Lately, Wall Street is fearing inflation for a number of reasons:

1. Job losses are slowing, adding to consumer spending expectations
2. Gas prices have risen 41 days in a row
3. The federal government is increasing the money supply

These 3 factors — plus a few others — are all coming to a head around the same time and traders are getting defensive with their portfolios. As a result, they’re selling their mortgage bond positions and it’s driving mortgage rates higher.

Rates may continue to trek toward 7 percent through July and August, or they may retreat toward 5 percent. We can’t know for sure. What we can know, though, is that volatility in rates should continue until the economic picture gets more clear. That could be next week, or next year.

For now, be ready to lock at a moment’s notice. Mortgage rates are changing quickly.

Inflation Watch

What’s Ahead For Mortgage Rates This Week: May 11th

Mortgage markets hit their worst levels since March last week, sending mortgage rates higher for the second week in a row.

Today’s conforming mortgage rates are much higher than from the registered low point of April 30, 2009.

There are a few reasons why mortgage rates were up last week.

* Stress test results weren’t as bad as originally feared
* The pace of job loss appears to be slowing
* The Dow Jones Industrial Average gained another 4 percent

Separately, bullet points like these can move markets and change rates. Together, though, they’re a force.

The combination of events reinforces Wall Street’s belief that the U.S. economy is on the mend. Even Fed Chairman Ben Bernanke remarked in his testimony to Congress that the economy should “turn up later this year”.

As a result, this week, markets will be tuned in to inflation-related data.

Oil prices have been rising steadily since January and are up roughly 30 percent year-to-date. Because of this, Thursday and Friday’s Producer Price Index and Consumer Price Index, respectively, will be closely watched. Both are a sort of “Cost of Living” measurement and are, therefore, susceptible to spiraling energy costs.

If either reading comes in higher-than-expected, look for inflation fears to ignite on Wall Street and mortgage rates to rise.

Similarly, if Friday’s Consumer Sentiment Index reveals a more confident American consumer, mortgage rates are likely to rise in that scenario, too. This is because a confident consumer tends to spend more, thereby hastening the recession’s end.

And, lastly, it’s worth noting that six members of the Federal Reserve will be delivering prepared speeches this week, including Chairman Bernanke. When Fed officials speak, the markets can move quickly.

If you’re still shopping for a mortgage rate, consider locking one in soon. Rates have been trending higher and there’s little reason for them to fall.

Inflation Watch

Your Local Gas Station May Have Clues About Tomorrow’s Mortgage Rates

The retail price of gasoline is rising nationwide, now up 30 percent since the New Year.

It’s a similar run-up to what we’ve seen for retail gas prices in each of the last 5 Spring Seasons.

For people trying to time the mortgage market’s bottom, clues about the future of mortgage rates may be at the local gas station.

Rising gas prices are indicative of the rising cost of energy and, indeed, crude oil is closing in on its 2009 highpoint. As these energy costs grow, so do inflationary pressures on the U.S. economy.

Inflation, of course, is awful for mortgage rates. When it’s present, mortgage markets deteriorate and rates tend to rise — often sharply and with little advance warning.

So, for today’s homebuyers-in-process and would-be refinancers, prices at the pump may foreshadow bad news for the future of housing affordability. Even a modest, quarter-percent increase would have a palpable effect on payments, adding $372 in annual costs to a $200,000 home loan.

Since last week, gas prices are already up by 10 cents per gallon.