Weekly mortgage rate update for 3-24-06

Mortgage rates unchanged

Mixed economic news -- more bad than good for bonds -- sent prices of U.S. Treasury securities down and yields, which move in the opposite direction, up. But a couple of rebounds allowed Treasuries to make up losses. The bottom line: Yields, which mortgage lenders use to set rates, are close to where they were one week ago, allowing mortgage rates to remain steady.

Treasuries rallied prior to a highly anticipated speech by new Fed chairman Ben Bernanke, as traders hoped for clues about the Fed's rate-hike intentions. But he offered no reason to believe the Fed would halt rate hikes after the March 28 meeting. Disappointment and concerns about inflation spurred selling and erased earlier gains, leaving yields at higher levels.

The producer price index, or PPI, plunged 1.4 percent in February -- the steepest decline in almost three years. This was chalked up to sharp decreases in the prices of food and energy -- down 2.7 percent and 4.7 percent, respectively. But the PPI core, which eliminates volatile food and energy prices, rose by a stronger-than-expected 0.3 percent, and this is the component the Fed watches. Signs of inflation at the wholesale level brought out sellers and it could influence the Fed to raise rates in order to rein in rising prices. Inflation erodes the value of fixed-rate assets.

Surprisingly strong existing home sales in February added pressure. Sales climbed 5.2 percent to an annual rate of 6.91 million units -- the biggest percentage gain in two years. The median home price rose 10.6 percent to $209,000, and inventories of unsold homes also climbed. But new home sales came in much lower than expected, falling 10.5 percent to an annual rate of 1.08 million units -- the fewest since May 2003. At the same time, inventories of unsold homes hit record highs. This spurred a mini-rally in Treasuries.

First-time unemployment claims for the week ended March 18 fell by 11,000 to 302,000 -- the first decline in four weeks. But the more closely watched four-week average, which eliminates peaks and valleys, rose to 305,000. Durable goods orders in February rose 2.6 percent, but when transportation was excluded, orders fell 1.3 percent.

Mortgage applications for the week ended March 17 slid to their lowest levels of the year, according to the Mortgage Bankers Association. Purchase applications were down 2.3 percent, while refis fell 0.6 percent. The rate on the 30-year fixed-rate mortgage (based on zero discount points) held at just under 6.125 percent, while the 15-year fixed-rate mortgage is below 5.75 percent. The rate on the five-year, adjustable-rate mortgage remained above 5.625 percent.

The Fed meeting and data on manufacturing, consumer sentiment and personal consumption expenditures -- the Fed's favorite inflation indicators -- are coming up and could move the markets. But what the Fed says about future interest rate hikes will likely have the biggest impact. If inflation remains in the shadows, Treasuries should hold steady, allowing mortgage rates to do the same.

Carolyn Siegel

carolyn@interest.com