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Rates Soar: Inflation On The Horizon?

by Peter G. Miller
February 26th, 2008

Interest rates last week took a sudden jump, news which is not helpful for borrowers, those refinancing or owners selling a home.

Why is this happening? Two thoughts: First, investors are not thrilled by the expanded 2008 loan limits for FHA mortgages and conventional loans. Second, the whiff of inflation worries contained in www.federalreserve.gov/newsevents/testimony/bernanke20080214a.htm”>testimony from Fed Chaiman Ben Bernanke.

“On the inflation front,” said Bernanke, “a key development over the past year has been the steep run-up in the price of oil. Last year, food prices also increased exceptionally rapidly by recent standards, and the foreign exchange value of the dollar weakened. All told, over the four quarters of 2007, the price index for personal consumption expenditures (PCE) increased 3.4 percent, up from 1.9 percent during 2006. Excluding the prices of food and energy, PCE price inflation ran at a 2.1 percent rate in 2007, down a bit from 2006. To date, inflation expectations appear to have remained reasonably well anchored, but any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank’s policy flexibility to counter shortfalls in growth in the future. Accordingly, in the months ahead we will be closely monitoring inflation expectations and the inflation situation more generally.

Here are the rate results from three major mortgage tracking sources:

___ Freddie Mac said “the 30-year fixed-rate mortgage (FRM) averaged 6.04 percent with an average 0.6 point for the week ending February 21, 2008, up from last week when it averaged 5.72 percent. Last year at this time, the 30-year FRM averaged 6.22 percent.”

___HSH.com — the highly-regarded financial publisher — says “the economy is soft, perhaps still softening, but that’s yesterday’s problem. Freshly in focus are concerns that inflation is getting more of a toehold, and that yield-eating problem was at least part of the reason for a sharp rise in fixed mortgage rates this week. The combined average for the 30-year FRM leapt 27 basis points (0.27%), ending the week at 6.62%, the highest such reading of 2008. Hybrid 5/1 ARMs, quickly becoming a viable alternative (though still being shunned in the market, like nearly all ARMs) closed HSH’s survey at an average 5.84%.

“Both conforming and jumbo fixed rates kicked better than a quarter percent higher. The jumbo 30-year FRM averaged 7.08%; its spread of 84 basis point over the conforming was the same as last week.”

___Bankrate.com reported that “the benchmark 30-year fixed-rate mortgage rose 41 basis points, to 6.37 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week’s survey had an average total of 0.4 discount and origination points. One year ago, the mortgage index was 6.29 percent; four weeks ago, it was 5.57 percent. The 30-year fixed hasn’t been this high since the middle of October, when it was near 6.5 percent.”

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