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Mortgage Rates on Hold

Another Fed rate hike and anxiety about Hurricane Rita drove prices of U.S. Treasury securities higher. Meanwhile, yields, which move in the opposite direction of prices, edged back down from their highest levels in a month. Although the Federal Open Market Committee raised rates and indicated it would continue with its rate-hike program, it also voiced deeper concerns regarding energy-induced inflation. Bond traders saw this as a continuing effort to rein in rising inflation. This benefits Treasuries, which are hurt by high prices that erode their value. The decline in Treasury yields, although significant, did not influence lenders to pull back on mortgage rates. Hurricane Rita is expected to dent (or worse) oil production in the Gulf of Mexico. This likely will lead to another spike in oil prices, higher prices at the pump, and a slowdown in consumer spending. Bond traders were seeing slowing economic growth replacing higher interest rates by the Fed, but inflation is now becoming a bigger souce of worry, as it could deflate demand for Treasuries. On Friday these concerns sent yields back up.

News from the housing market indicated possible slowing, as numbers fell for the second straight month. Housing Starts in August slid 1.3 percent to an annual rate of 2.01 million from 2.04 million in July. Permits took an even bigger hit, dropping 2.3 percent to an annual rate of 2.12 million - a more troubling statistic, as permits indicate future starts.

As expected, first-time jobless claims for the week ended Sept. 16 jumped by 8,000 to 432,000 due to applications by Hurricane Katrina victims. The more influential four-week average, which smoothes volatility, rose to 376,250 - 29,000 higher than last week. The final report of the week was the Index of Leading Indicators, which fell 0.2 percent in August.

According to the Mortgage Bankers Association, mortgage applications presented a mixed picture for the week ended Sept. 16. Applications to purchase fell 2.6 percent, while refis climbed 7 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) remains below 5.625 percent, while the 15-year fixed-rate is just over 5.125 percent. The introductory rate on the volatile one-year ARM is holding above 3.75 percent.

As usual, the last week of the month is loaded with market-moving economic reports. Among the most influential are Consumer Confidence for September, new and existing homes sales for August, and an August report on Durable Goods Orders. Also in the mix: final second-quarter GDP, and the Chicago PMI index of September business conditions. Reports indicating economic strength would put pressure on Treasuries, but Hurricane Rita could also spur selling. These possibilities could result in stable or slightly higher mortgage rates.

Carolyn Siegel

carolyn@interest.com