Comments Off on Looking Back And Looking Ahead : March 24, 2008

Looking Back And Looking Ahead : March 24, 2008

2008
03.24

Conforming mortgage rates edged slightly lower for the second week in a row.

Mortgage rates fell for two main reasons:

  1. The Federal Reserve offered fiscal support for troubled mortgage-backed securities
  2. A government group gave Fannie Mae and Freddie Mac permission to lend more of money to American homeowners

These two actions combined to make mortgage-backed securities safer for mortgage bond investors and when mortgage bonds are safer, their required rate of return (i.e. interest rate) comes down.

This is the financial concept of Risk vs. Reward in action.

Expect mortgage rates to be in flux and highly volatile again this week, however.

Aside from housing and consumer confidence data, markets will respond to Friday’s Personal Consumption Expenditures data. PCE is a “Cost of Living” index that the Federal Reserve watches very closely.

PCE is different from other Cost of Living indices because it accounts for “substitutes”. For example, if beef is getting too expensive, PCE will substitute chicken — much like a regular person would.

In this way, PCE better reflects the true cost of living for the average American.

PCE is expected to show 2 percent growth year-over-year. If the actual figure is higher, expect mortgage rates to rise on inflation concerns.

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