Even with rates at all-time low levels I still get asked by customers if they should hold-off and wait for rates to move even lower.  It’s extremely hard to imagine that mortgage rates will improve significantly from these levels but not many in our industry thought they would ever get this low in the first place and yet….here we are.

So what factors will play a role in determining the direction of rates over the next few weeks and months?  The European Debt Crisis and our own economic recovery are the two main drivers that we’ll be watching.

The European Debt Crisis, which has been around for nearly two years at various levels of intensity, impacts mortgage rates because when investors around the globe lose confidence in the Euro-zone’s ability to repay its obligations they seek “safety” in US-dollar denominated assets, including mortgage-backed bonds (MBS’s).  The additional demand for MBS’s causes mortgage rates to improve.  Should investors grow optimistic about the EU’s ability to dig themselves out of their fiscal hole without too much collateral damage to the economy then mortgage rates here in the US will likely increase and vice versa.

Meanwhile, a sluggish economic recovery here in the US  has also helped mortgage rates remain low.  This is because interest rates are sensitive to inflationary pressure.  When lenders expect prices to climb in the future they charge higher rates of interest to compensate for the anticipated decline in purchasing power.  Until our economy shows convincing signs of continual growth inflationary pressure should remain tepid which should help mortgage rates remain low.  However, at some point the economy will pick up again and at that time we expect inflation and therefore mortgage rates to tick up as well.

Accurately predicting the future of mortgage rates is like predicting the future value of the stock market.  Some one’s predictions will prove true but the problem is that we don’t who until after we arrived in the future.

Regardless, the current rate climate provides a tremendous opportunity for existing homeowners to take a look at their debts and see if a refinance wouldn’t make sense AND is helping to increase the affordability of housing across the country.

Believe it or not there are still many people who have yet to take advantage of these all-time low mortgage rates.  Please contact me today if you would like a no obligation review of your personal situation.  Furthermore, please mention this post to a co-worker, friend, or family member who you think would benefit.  Thanks!

The European Debt Crisis does not seem to be going away any time soon and its existence has been the primary factor for rates achieving all-time lows so this year may be an anomaly but I still think a locking bias is a prudent approach as we enter the new year.   Have a great holiday!

The Economist magazine have a couple good pieces about inflation in their current issue (see HERE and HERE).  Their view?  Inflation is certainly on the rise but mostly in the developing world where a greater percentage of income is spent on food and energy. In the developed world we are seeing price pressure but from very low levels and at this point it’s too early to sound any alarm on hyper-inflation.

This bodes well for interest rates.  I’ve been writing since last fall that rates would have to begin moving higher.  My hope is that they don’t get shocked higher but move gradually instead.

What do you think?  Do you believe we’re in for an acute rise in rates or will they increase gradually?  Leave your comments below.

The WSJ’s MarketBeat blog is watching oil prices, gold prices, Israeli stocks, the US Dollar, and US Treasury prices as barometers.  Mortgage rates are likely to follow suit with US Treasury prices.  If violence and uncertainty surrounding the outcome of the protests continues to grow then we’d expect investors to seek “safe” investments which are typically fixed-income assets here in the US (including mortgage-backed bonds).  This move known as a “flight-to-safety” would put downward pressure on rates.  However, if the transition to a new regime is relatively smooth then we likely won’t see too much of a change.

Check back in to my daily mortgage rate updates for more information.

If you are a regular reader of this blog then you know that inflation is the primary driver of interest rates.  Simply put, if you lend someone some money today and you think the purchasing power of that money will be less in the future you will require a higher rate of interest to be paid for the right to borrow the money.

Chinese inflation can lead to inflation here in the US because we import so much from China.  In fact, in 2009 the US imported almost $300 billion worth of goods and services.  Therefore, if prices rise in China then the price of those goods that we purchase from them will rise as well.  That is likely to impact the consumer price index here in the US and pressure mortgage rates higher.

This could lead to another “flight-to-safety” in which investors of European bonds sell their positions and reinvest that money in US debt securities which are deemed to be less risky.  If they do that would benefit mortgage rates.

Inflation is a significant measurement for the economic health of countries around the world, but rates are often reported weeks after data is collected. To address this problem, Professors Roberto Rigobon and Alberto Cavallo at MIT Sloan School of Management have launched the Billion Prices Project (http://bpp.mit.edu), the first Website to publish daily price indexes and provide real-time inflation estimates around the world. Over the past three years, the team developed a methodology to systematically collect prices of items sold by online retailers and compute inflation statistics on a daily basis. More than 5 million prices are monitored every day from categories such as food and beverages, household products, electronics, apparel, and real estate. While the project tracks prices in more than 50 countries, it currently publishes data for a smaller subset that includes the U.S. and U.K. as well as Argentina, Australia, Brazil, Chile, China, Colombia, France, Italy, Turkey, and Venezuela.

If you’re a reader of ‘rate update‘ you know that inflation is the primary driver of mortgage rates so I might start checking into the BBP price index as a part of my research.

“The low level of inflation and the sluggish pace of economic recovery have raised concerns about sustained deflation—an inflation rate below zero with a general fall in prices. However, the relative prices of inflation-indexed and non-indexed Treasury bonds, which historically have proven to be good measures of inflation expectations, suggest that financial market participants consider the probability of deflation to be low.”

The threat of deflation is one of the primary reasons why long-term interest rates have been driven so low recently.  It is also the reason why the Fed has indicated they are likely to engage in another round of quantitative easing.  This further suggests that rates may have bottomed out at current levels.  It will be interesting to see what happens next week after the Fed provides details about QE2 but I am not entirely convinced that rates will move substantially lower.

So how are TIPS significant in terms of gauging mortgage rates?  We know that inflation is the primary driver of mortgage rates.  When expectations for future inflation rises then long-term interest rates rise as well, including rates on mortgages.

What THIS ARTICLE points out is that over the past couple weeks TIPS’s have outperformed standard US Treasuries after under-performing for the first 9 months of the year.  This is may be an indicator that the markets view of inflation/ deflation is shifting back towards an inflationary bias AND that mortgage rates will soon begin to rise in reaction.  Of course, the market’s outlook can change with new information and we expect the Fed’s post monetary policy statement on November 3rd to be a significant new piece of information.