Mortgage Rate Update for Week Ending 05/20/05

Mortgage Rates Trend Down

Strong rallies in U.S. Treasury securities, based on waning fears of inflation, weak economic reports and safe-haven buying, kept the yield on the benchmark 10-year note, which lenders use as a guide to set rates, near its lowest level in three months. Although tame readings on inflation indexes were key in lowering Treasury yields, which move in the opposite direction of prices, bonds also benefited from risk-aversion buying due to concerns about losses on trades made by hedge funds. These factors resulted in low yields that allowed lenders to edge rates down on some mortgage products and keep them low on others. Although the April Producer Price Index came in above expectations - rising 0.6 percent -- and the rate minus food and energy prices rose 0.3 percent, the report showed intermediate prices and the cost of crude goods slowing. This is a positive sign for controlling inflation down the line. The Consumer Price Index, which looks at inflation at the retail level, climbed 0.5 percent, but the core rate was unchanged from March and gave Treasuries a huge boost. With inflation concerns moving to the back burner, traders are convinced the Fed will continue its "measured pace" rate-hike program.

Housing starts rebounded in April, soaring 11 percent to an annual rate of 2.04 million units. This was a big relief after the 17.6-percent decline posted in March. And building permits rose 5.3 percent to an annual rate of 2.13 million. Industrial Production in April supported bonds, falling by an expected 0.2 percent. A sharp drop in first-time unemployment claims put minor pressure on Treasuries. Claims were down 20,000 to 321,000, but the more influential four-week average that smoothes volatility rose by 5,000-plus to 329,750. Manufacturing indexes from New York and Philadelphia both took a dive in May, coming in well below expectations. Mortgage applications slid during the week ended May 13 in spite of low mortgage rates, according to the Mortgage Bankers Association. Applications to purchase were down 10.8 percent, and refinancings slid 10.0 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) fell to 5.50 percent, while the 15-year fixed-rate edged down to 5.00 percent. The introductory rate on the one-year adjustable-rate mortgage remains at 3.50 percent. A number of market-moving economic reports are slated for the week of May 23, including New and Existing Home Sales, and Durable Goods Orders for April. A revised reading on first-quarter Gross Domestic Product also is due, along with a consumer sentiment survey from the University of Michigan. But the Personal Income/Outlays release -- a look at consumer spending in April -- could be of greater significance, as it contains one of the Fed's favored inflation indicators. If reports come in on target, it is possible that mortgage rates will hold near newly lowered levels.