Mortgage Rates Increase

A big jump in mortgage rates last week occured after more fears of inflation in the economy persist. The national average on the 30-year Fixed Mortgage rose over 40 points and the national average on the 15-year Fixed Mortgage increased over 20 points. Any sustained increase in inflation could lead to higher US Treasury yields and increases by the Federal Reserve of benchmark interest rates, although at this point economists are forecasting inflation as more of a concern in the third quarter or fourth quarter of 2008. So while we are expecting inflation down the road the US economy is still in a no-growth or negative-growth environment. The chart below provided by HSH Associates shows the historic relationship between the Fed Funds rate and mortgage rates.

The interesting aspect of the chart is the relatively narrow range of 30-year fixed rate mortgage rates when compared to the Fed Funds rate. Market watchers are still convinced that the Fed will lowering rates another 25 or 50 basis points in March, but as we see in the chart even within a upward or downward trend in interest rates - mortgage rates can drift in the opposite direction. This seems to be the consensus of economists who are warning of a steepening yield curve with lower short-term rates and higher long-term rates. Mortages consequently would be expected to drift higher or stay level despite the Fed’s intervention.