Mortgage Market Update May 18, 2009

Mortgage bond prices rose last week helping mortgage interest rates fall. Most of the gains came early in the week prior to the surprise inflation data. Weaker than expected retail sales data along with concern about the health of the banking industry helped mortgage bonds improve. Unfortunately stronger than expected producer price and core consumer price data Thursday and Friday stoked inflation fears which erased some of the earlier gains. Trading remained volatile. For the week, interest rates improved by about 1/2 of a discount point. The housing starts data will set the tone for trading this week. Leading economic indicators data may also result in some mortgage interest rate volatility. LOOKING AHEAD

Inflation Concerns Inflation is an increase in the level of prices of goods and services over a period of time. Mixed inflation signs do not generally bode well for mortgage bonds. Inflation erodes the value of fixed income securities generally causing bond prices to fall and interest rates to rise. The mortgage bond market received mixed inflation data last week. The producer price index, a major gauge of inflation at the producer level, rose a surprising 0.3% in April. This figures was considerably higher than the expected 0.1% increase. However, the core rate, which excludes volatile food and energy, rose 0.1%. This figure was exactly as expected. The relatively flat core producer price figure helps reinforce the belief that inflation remains in check. However, the higher than expected producer price figure supports the opposite conclusion. Unfortunately the consumer price index data did little to settle the score. Consumer prices were unchanged in April, as expected. However, the core, which excludes volatile food and energy prices, rose 0.3%, higher than the expected 0.1% increase. Higher core inflation readings are usually terrible for fixed income securities such as mortgage bonds. We saw an example of this Friday morning as bond prices fell and interest rates spiked higher erasing some of the recent improvements. With the mixed data and President Obama recently stating that the US debt load is "unsustainable" the fear of inflation looms. If future data echoes that of the core consumer price data, then it is a real possibility that mortgage interest rates could push higher. However, if future data alleviates some of the recent concerns we could see rates hold steady or even push a little lower. Be aware that floating in this environment is risky. The good news is that mortgage interest rates currently are historically favorable. It is a great time to take advantage of rates at the current levels. For more news and information about purchasing or refinancing a home visit www.ToMortgageServices.com