0 Paying More For Most Everything

Today’s must read piece is the WSJ discussion of Inflation:

“The pace of consumer price increases in the U.S. is quickening after being dormant for months. But a tug of war between the prices of goods and the prices of services, playing out beneath the surface, could keep inflation from becoming the worry it is in China, Europe and many emerging markets.”

Prices rose 1.6% in January 2011 vs 2010 — the biggest increase in eight months. The key has been commodities — gasoline, cotton, wheat, coffee, and oil are all higher.

Labor, on the other hand is not. Wages are flat, unemployment is stubbornly high, and hence, prices for Services are flat to lower. That is keeping a lid on inflation.

Hence, the dueling deflation versus hyper-inflation commentaries:

“Soaring commodities costs world-wide are pushing up prices for many goods, while a slowly recuperating U.S. economy, soft housing market and a persistently high unemployment rate are holding down prices for U.S. services.
Goods prices were up 2.2% from a year earlier, paced by jumps in food and energy prices, according to the Labor Department’s January consumer-price index, and are rising faster than they did before the recession. But services prices were up only 1.2% from a year earlier, far below the 3.4% inflation rate registered for services between 2000 and 2008.
The opposing pull of prices for goods and services could have a big effect on the course of U.S. inflation. Federal Reserve Chairman Ben Bernanke is betting that rising prices for goods like gas and food will not spread into the broader economy. He and many private forecasters do not expect the U.S. to see the kind of rising inflation now plaguing China, India and other parts of the world.
Goods inflation has outstripped services inflation for long stretches since mid-2007, something that hadn’t happened since the 1970s. For most of the last 30 years, goods prices had been held down, in part, by cheap imports from low-wage countries like China. But recently, China and other developing markets have become huge consumers of commodities, which is putting upward pressure on American prices for many globally traded goods.”

Well worth reading in its entirety. Inflation must be managed carefully by governments and central banks. I fully expect this will continue to impact mortgage rates especially long term fixed jumbo loans. We have seen them move from 4.875%(best level ever) in the summer to about 5.50% now. 

Detail: Paying More For Most Everything

0 Fannie and Freddie Baked in the Cake

Jumbo Mortgage markets have turned their attention back to the U.S. economy this morning, causing yesterday's rate improvements to unwind a bit.
Rates had fallen Monday after the Federal Reserve and U.S. Treasury's joint announcement in support of Fannie Mae and Freddie Mac. Today, it's the data that is taking center stage.
Most notably, the U.S. Dollar is trading at an all-time low versus the Euro and other currencies.
This is a negative for active home buyers because American homeowners repay their mortgage interest in U.S. dollars. When the dollar loses value, so does the value of those interest payments so mortgage rates end up increasing in order to attract new investors.
Another reason why mortgage rates are higher this morning is that June's Producer Price Index registered much higher than was expected, posting its largest one-month gain since November 2007.
PPI is a lot like the Cost of Living index, except that it measures operating costs for businesses instead. When business costs are increasing, they are often passed onto consumers and this is why rising PPI is thought to be inflationary and inflation -- like a weakening dollar -- pressures mortgage rates to rise.
So, while Monday's rate improvements haven't completely erased, today's action reminds us that mortgage markets wait for no one and yesterday's mortgage rates rarely carry forward.
Especially when inflation is in the mix. Did you buy bread or gas this week? I did. Inflation is alive and killing our purchasing power.

Detail: Fannie and Freddie Baked in the Cake

0 What will happen to jumbo loan rates in 08?

Broadly, jumbo loan mortgage rates fell in 2007. It's befuddling because there are two major reasons why mortgage rates should have increased in 2007:
The U.S. dollar took a precipitous decline against world currencies, devaluing mortgage bonds
Inflation ran beyond the top of the Fed's comfort zone for most of the year, devaluing mortgage bonds
When mortgage bonds get devalued, there should be less demand for them. But that wasn't the case. If mortgage rates are lower now than they were a year ago, it means that demand for mortgage bonds must be higher.

There is an inverse relationship between the demand for mortgage bonds and mortgage rates. As demand increases, mortgage rates fall. As demand wanes, mortgage rates increase.
So, in 2007, mortgage rates fell because global investors' desire to hold U.S. mortgage bonds outweighed their desire to sell them -- despite the constant drag against their value.
We can hypothesize that mortgage rates would have fallen much, much more had the dollar been stronger, or inflationary pressures been weaker.
One way to envision this is to think of a runner with a parachute apparatus attached to his back.
The athlete is moving forward but the parachute is adding a tremendous amount of drag. Once the parachute detaches, the athlete picks up a lot of speed.
In this sense, a stronger dollar or weaker inflation could dramatically drop mortgage rates in 2008. It would be like cutting the parachute loose and letting mortgage markets run at full-speed.
The U.S. dollar is another hot spot. A weaker dollar should discourage foreign investment in mortgage bonds. In this sense, the U.S. dollar represents the parachute and the weaker it gets, the larger the canopy.

The "Recession versus Inflation" should be a hot topic through June 2008.
With every sign that recession is winning, expect mortgage rates to fall. When inflation grabs the lead, expect mortgage rates to rise. And watch out for world events that can change the landscape in an instant.

Detail: What will happen to jumbo loan rates in 08?