Friday, April 21, 2006

Mortgage news ... what's happening

Mortgage bond prices fell last week applying upward pressure to interest rates. Rates were under pressure all week as trading conditions were thin ahead of the extended holiday weekend. Investor fears of inflation tied to economic growth and continually high oil prices pressured mortgage bonds. In addition, there was speculation that improved economic conditions abroad could lead to a reversal of the foreign flight to quality buying that helped interest rates remain low over the past years. For the week, interest rates on government and conventional loans rose about 5/8 of a discount point.

Consumer price index data and the Fed minutes will be the most important events this week. Producer price index, housing starts, leading economic indicators, and the Philadelphia Fed survey will also be important.

Consumer Price Index

The Consumer Price Index is widely accepted as the most important measure of inflation. The CPI is a measure of prices at the consumer level for a fixed basket of goods and services. The National Statistics Office and the Bureau of Agricultural Statistics of the Department of Agriculture collect price data for the computation of the CPI. Since it is an index number, it compares the level of prices to a base period. By comparing the level of the index at two different points in time, analysts can determine how much prices have risen in that period. Unlike other measures of inflation, which only factor domestically produced goods; the CPI takes into account imported goods as well. This is important due to the ever-increasing reliance of the US economy upon imported goods. Analysts primarily focus on the core rate of the CPI which factors out the more volatile food and energy prices.

High oil prices continue to weigh heavily upon the financial markets. The health of the economy remains uncertain. Stocks continue to bounce up and down.

Market participants expect the consumer price index to set the tone for bond market trading the last portion of this week. Inflation friendly data may lead to improvements in mortgage interest rates. However, unexpected consumer price spikes may push interest rates higher in the short-term. With the uncertainty surrounding the release now is a great time to take advantage of mortgage interest rates at their current levels.

Connie Echeverria
Loan Officer
Prosperity Mortgage Company

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