Yesterday, mortgage backed securities (MBS) continued their recent upward trend. As MBS moved steadily higher throughout the day consumer borrowing costs inched lower by about .125 in points.  So far this morning, MBS are holding steady near yesterday's closing prices.  Lenders continue to offer par 4.625% to 4.875% for well qualified consumers. A few aggressive lenders are offering 4.50% for borrowers with high FICOs and low loan to values.

Let’s jump into the data released this morning.

First out this morning was the weekly Mortgage Bankers Purchase applications report which showed purchase and refinance applications dropping last week by 11%.  It appears the main cause for the decline was the Easter holiday.  The purchase index is still very depressed but the refinance activity remains at very high levels in response to the historically low mortgage rates.  The MBS Commentary blog will explain this in greater detail, MBS Commentary.

Next, the US Labor department released the Consumer Price Index (CPI) which gives us a reading on inflation at the consumer level.  Since inflation is the biggest enemy to mortgage rates, this is the highest impacting report for the week.  The data came in mixed with overall inflation falling 0.1% which is lower than the 0.2% increase economists were expecting. The core consumer inflation rate came in at 0.2%, a little higher than expectations.   After the release mortgages showed continued stability.

This is yet another piece of economic data that supports the opinion of no risk for inflation today or in the near term.   Year over year, headline consumer inflation reflects a drop in consumer prices by 0.4% which is the first yearly decline since 1955!!! 

I have been asked by a few people the difference between headline and core inflation.  Well, headline inflation takes into account everything that you buy including food, gas, furniture, appliances, etc… while the core reading strips out food and energy from the report. Core CPI does not take into account the change in price of food or gasoline.  There are a couple reasons for this.  First, even though the core reading does not take into account gasoline, everything that you buy has the price of gasoline worked into it.  For example, does Best Buy make that Sony flat screen TV in the back room, or is it shipped to Best Buy?  So, the television that you buy has the price of gasoline worked into its price.  Next, food and energy is very volatile and a change in their price may not be a true reflection of current economic conditions.  A great way to explain this is to use Oranges.  I heard this explanation at a seminar that I attended.  Let’s say a cold weather front moves into Florida today resulting in freezing temperatures.  We are at the beginning of growing season, so if Florida where to be hit with freezing temperatures it will devastate the orange crop.  If the orange crop is severely damaged, the price of oranges will move higher which is inflation; however, was the inflation caused by a current economic condition or an act of God?  Thus, the reason why we get a headline number and a core number and the fed’s favorite gauge for inflation is the core reading.   

Next was the release of the New York Empire State manufacturing report which came in much better than expectations and has muted the positive news from the CPI report.  This report was expected to show a reading of -34.0 but came in much better at -14.7.   It appears that manufacturers are more optimistic about future economic growth than economists had expected.  This report is a negative for MBS as future economic growth can lead to higher inflation.  

Just out is the industrial production report which measures the change in production at our nation’s factories.  If production is increasing, that is a signal of future economic growth which can lead to higher inflation so MBS prefer a lower reading.  Economists had expected this report to show a decline of 0.8% but the actual reading came in at a larger decline of 1.5%.  

Later today the Federal Reserve will be releasing the Beige Book.  This report is used at the Federal Open Market Committee (FOMC) meetings where the Fed sets monetary policy.  The Beige Book is a survey of economic conditions across the country and is released 2 weeks before the upcoming meeting.  This report gives investors insight into how the Fed may act at the upcoming FOMC meeting.

Early reports from fellow mortgage professionals show at least 2 lenders offering 4.5% to the best qualified consumers.  MBS are trading in a tight range today and they have a tough layer of resistance overhead that is preventing them from moving higher which would result in lower mortgage rates.  MBS’ have hit this level several times and each time they are pressured lower.  If you are sitting on the sidelines in hopes of lower rates, you may want to consider jumping off the fence and proceed with your refinance.   There is much more room above for mortgage rates to move higher than there is for mortgage rates to move lower. 

I would love to hear from readers who are sitting on the sidelines currently.  What is your reason for not pulling the trigger now?  Are you hearing news from other sources that rates will be lower?  I would just like to get your opinion so I have a better understanding of the mind set of the average consumer who is considering refinancing or buying a new home.