Mortgage Rate Update for Week Ending 09-16-05

Mortgage Rates on the Rise

It's been a volatile week in the bond pits what with falling energy prices, mixed economic reports and concerns about the Sept. 20 meeting of the Fed. U.S. Treasury securities fell one day and rallied the next in a rapidly changing economic environment. Reports showing benign inflation on both the retail and wholesale levels, however, supported both stocks and bonds. Treasury yields, which move in the opposite direction of prices, are higher than they were a week ago, and mortgage rates, which are based on yields, are beginning to creep up.

Oil prices, which bond traders believe will slow the economy, fell this week, and were one of the negatives affecting Treasuries. Advance Retail Sales for August added pressure. Although headlines said sales fell 2.1 percent, when a steep decline in auto sales was excluded, sales rose by a healthy 1 percent. This evoked visions of a spending consumer who would strengthen the economy. But Thursday's regional manufacturing indexes from New York and Philadelphia spurred a huge sell-off in Treasuries -- and yields soared. The Philly Fed index plunged to 2.2 in September from 17 in August, but the prices paid' components within both indexes rose sharply, awakening fears of inflation. The University of Michigan's preliminary consumer sentiment survey plummeted to 76.9 in September from 89.1, but Treasuries were unruffled, as their focus is now on the Fed.

The Producer Price Index rose 0.6 percent in August, and the core rate, which excludes volatile energy and food prices, was flat. No signs of inflation at the wholesale level led to the week's biggest rally in the bond markets. The Consumer Price Index for August also was friendly, rising by an expected 0.5 percent. The core edged up 0.1 percent, which was in line with forecasts. Although this news was welcome, it was negated by the news from Philadelphia. First-time unemployment claims for the week ended Sept. 9 reflected the impact of Katrina. Claims rose by 71,000 a 10-year high coming in at 398,000.

Mortgage applications were mixed for the week ended Sept 9, according to the Mortgage Bankers Association. Applications to purchase rose 2.9 percent, while refis slid 6.7 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) neared 5.625 percent, while the 15-year fixed-rate is above 5.125 percent. The introductory rate on the volatile one-year ARM held at 3.75 percent.

Tuesday's Fed meeting will be the biggest influence for the week - not for the expected 25-basis-point rate hike, but for clues as to what the Fed plans for the last two meetings of the year. Fed funds futures point to a pause at one of those meetings. Economic reports will be scarce, with Tuesday and Thursday the only days featuring news. Housing Starts and Building Permits for August, the first look into the housing industry for that month, are due Tuesday, while first-time jobless claims for the week ended September 16 and the Index of Leading Economic Indicators (LEI) for August are due Tuesday. LEI looks at the economy three to six months ahead. Sky-high yields should send mortgage rates up over the weekend, but if the Fed suggests it may skip a rate hike, mortgage rates would likely recede.

Carolyn Siegel

carolyn@interest.com