Wednesday, July 16, 2008

Fannie and Freddie Baked in the Cake

Jumbo Mortgage markets have turned their attention back to the U.S. economy this morning, causing yesterday's rate improvements to unwind a bit.
Rates had fallen Monday after the Federal Reserve and U.S. Treasury's joint announcement in support of Fannie Mae and Freddie Mac. Today, it's the data that is taking center stage.
Most notably, the U.S. Dollar is trading at an all-time low versus the Euro and other currencies.
This is a negative for active home buyers because American homeowners repay their mortgage interest in U.S. dollars. When the dollar loses value, so does the value of those interest payments so mortgage rates end up increasing in order to attract new investors.
Another reason why mortgage rates are higher this morning is that June's Producer Price Index registered much higher than was expected, posting its largest one-month gain since November 2007.
PPI is a lot like the Cost of Living index, except that it measures operating costs for businesses instead. When business costs are increasing, they are often passed onto consumers and this is why rising PPI is thought to be inflationary and inflation -- like a weakening dollar -- pressures mortgage rates to rise.
So, while Monday's rate improvements haven't completely erased, today's action reminds us that mortgage markets wait for no one and yesterday's mortgage rates rarely carry forward.
Especially when inflation is in the mix. Did you buy bread or gas this week? I did. Inflation is alive and killing our purchasing power.