Mortgage Rate Update for Week Ending 03/18/05

Mortgage Rates Continue to Climb

The Treasury markets have been choppy, with yields rising one day and falling the next. Bond-friendly economic news spurred buying that sent U.S. Treasury prices up and yields, which move in the opposite direction of prices, down. Worrisome reports had the opposite effect, sending yields back up to earlier levels. Soaring oil prices had a mixed impact. While high oil prices are inflationary and likely would erode the value of fixed-rate assets, such increases also could dampen economic growth and act as a substitute for Fed rate hikes. Although yields, which lenders use to set mortgage rates, have been volatile, they are higher than they were a week ago, and mortgage rates have followed.

A vibrant housing market continues to perplex analysts who are waiting for the housing bubble to burst. Housing starts in February hit their best level in 21 years, rising 0.5 percent to an annual rate of 2.2 million units. Although building permits slid 2.7 percent, an upward revision of January permits almost made up the difference. February retail sales rose 0.5 percent, and January sales were adjusted higher. Industrial production climbed 0.3 percent, and capacity utilization rose to 79.4 percent. Leading indicators, which look at the economy three to six months ahead, rose 0.1 percent. The Philly Fed survey, which monitors manufacturing activity in the mid-Atlantic region, took a dive in March. The index plunged to 11.4 from February's 23.9 reading, with the 'prices paid' index tagged with a substantial loss. Conditions in New York rose slightly but were shy of forecasts.

There was a rush for mortgage applications in a rising-rate environment for the week ended March 11. According to the Mortgage Bankers Association, applications to purchase rose 2.5 percent, while refinances climbed 4.2 percent. Rates are up on the majority of mortgage products, with the 30-year fixed-rate mortgage (based on zero discount points) just below 5.75 percent - the first time at that level since Aug. 6, 2004. The 15-year fixed-rate is slightly below 5.25 percent, while the introductory rate on the one-year adjustable-rate mortgage is waffling between 3.5 percent and 3.75 percent.

There are a handful of economic reports that could move the markets, with reports on inflation taking center stage. The producer and consumer price indices, which monitor wholesale and retail prices, respectively, will be key, and the slightest sign of inflation could ignite selling. Existing and new home sales for February also are on tap along with Durable Goods Orders, and weekly jobless claims. The Fed will meet on March 22, which always stirs interest. Although a 25-basis-point increase is widely expected, the focus will be on the language in the accompanying statement, which could tip future moves. Unless the news is supportive of the bond markets, mortgage rates should hold near present levels.

Carolyn SiegelStaff Writercarolyn@interest.com