Mortgage Times

[Adam in CO]

Mortgage Market News for the week ending May 23, 2008

Events This Week:

Inflation Higher
Leading Indicators Flat
Existing Sales Lower
Manufacturing Mixed

Events Next Week:

Tues 5/27
New Home Sales
Confidence
Wed 5/28
Durable Orders
Thurs 5/29
GDP
Fri 5/30
Core PCE
Chicago PMI
Sentiment

Fed Raises Inflation Outlook

This week, mortgage investors focused on the Fed, inflation, and oil prices. The week started off on a positive note, and mortgage rates fell on Monday and Tuesday. Even higher than expected levels of core inflation in Tuesday's Producer Price Index had little impact. The atmosphere changed quickly on Wednesday, though, after the release of the FOMC minutes from the April 30 Fed meeting. In the minutes, the Fed lowered its forecast for economic growth in 2008, while raising the expected level of inflation. Also notable, Fed officials ruled out further rate cuts unless the outlook for the economy turns significantly worse. The Fed's heightened inflation projections were bad news for mortgage markets, and rates ended the week a little higher.

Investors closely watched the continued climb in energy prices during the week. Rising energy prices are particularly bad for the stock market, while the impact on mortgage markets is less clear. In one sense, they act similar to a tax increase, since they result in less disposable income, and economic growth slows. An economist at a major investment bank pegged the added cost this year to US consumers and businesses at $300 billion, more than double the $130 billion in tax rebates being issued by the government. Normally a decline in economic activity reduces future inflationary pressures and is good for mortgage markets. In this case, however, higher energy prices are seen as adding to inflation by more than a slowing economy would reduce it.

In the housing sector, this week's data was close to the expectations of investors. April Existing Home Sales fell slightly from March, while inventories of unsold homes rose to the highest level since June 1985. Separately, OFHEO, a government agency, announced that US home prices fell 3% during the first quarter compared to the same period one year ago. Prices fell in 43 states. Analysts suggested that the recent difficulty in obtaining jumbo mortgages has led to a smaller proportion of sales of more expensive homes, which has skewed the housing data somewhat lower.

Also Notable:

• The Senate put forward its version of a $300 billion housing rescue deal
• Treasury Secretary Paulson stated that a second stimulus plan is not called for at the current time
• Fannie and Freddie executives testified that they have aggressively purchased jumbo loans in recent weeks
• Oil prices reached record levels near $135 per barrel, up over 35% this year

Average 30 yr fixed rate:
Last week:+0.08%
This week:+0.09%

Stocks (weekly):
Dow:12,514-387
NASDAQ:2,439-68

Week Ahead

After a holiday on Monday, it will be a busy week. New Home Sales and Consumer Confidence will come out on Tuesday. Durable Orders, an important indicator of economic activity, will be released on Wednesday. Thursday will see the first revisions to first quarter Gross Domestic Product (GDP), the broadest measure of economic activity. A 5-year Treasury auction will also take place that day. The week will end with a big day on Friday. Core PCE, the Fed's preferred inflation indicator, will be released, along with Personal Income, Chicago PMI, and Consumer Sentiment.

admin@corefinancegroup.com.