Last week’s major headlines included that existing home supplies plunged to a 2-year low in December, and unemployment claims dropped more than expected, giving hope for the U.S. economy in 2011.

We have another week that is loaded with economic news.

As always, if it is a Fed week, it is the big news story.  Scheduled for Tuesday and Wednesday, we’ll get the first press release of the year after the meeting on Wednesday.  It’s a virtual lock that the Fed Funds Rate will remain unchanged.  The big question, as always, is what the Fed will say.  If it is bullish on the economy, mortgage rates will go higher.

We also will see more housing data.  There are four reports scheduled:

1. Case-Shiller Index (Tuesday)
2. Home Price Index (Tuesday)
3. New Home Sales (Wednesday)
4. Pending Home Sales (Thursday)

Strong results for housing will push mortgage rates higher.  Since November 3rd, mortgage rates have moved higher.  In the past few weeks, they’ve been trading in a narrow range.  Like stocks, bonds tend to make a move after moving sideways for this long.  With a loaded economic calendar, a Fed week, and the State of the Union, there’s enough data for mortgage rates to make a move this week.

Here is some of what the Fed discussed last month:

• On inflation : Core inflation levels “trend lower”; disinflation risks are low.
• On housing : The market is still “quite depressed”; demand is “very weak”.
• On stimulus : The Fed will stick to its $600 billion support plan

Yesterday’s mortgage rates closed relatively unchanged as there wasn’t a lot of news in the release.  And then today happened.

Mortgage bonds are currently off about 40 bps.  If you were quoted a rate yesterday with no points, on average, that same rate would cost about 0.40% in discount points or $400 per $100,000 in loan.  Realistically, it’s not a big expense in the wake of the news as it’s pretty good for the economy overall.  The ADP payroll report that comes out in advance of the jobs report shows a staggering 297,000 private sector jobs were added in December.  That’s the largest number in the report’s history.

We’ll wait to see how this follows through in the government’s Non-Farm Payrolls Report.  If unemployment moves lower, it is usually will mean that home values and mortgage rates move higher.  If that’s the case, home affordability figures should drop from these unprecedented levels.

To keep this in context, mortgage rates are issued in the form of rate sheets.  Lenders publish these in the morning and update as necessary.  This has already been a volatile period where lenders have been averaging about two rates sheets per day for the past 12 months.  Last week, there were as many as five rate sheets per day.

“What is today’s interest rate?”

It’s a common question, but it presupposes that rates are issued daily.  They’re not.  They change when the market changes.  In the past 12 months, “what is today’s interest rate” wasn’t a good question without a DeLorean and a trip to the early 2000′s.  It has just been too volatile for years for a rate to survive the entire day without changing.  In the past few weeks, “what is this hour’s interest rate” was almost too vague of a question.

Interest Rate Predictions | This Week

If you thought last week was volatile, this week could be crazy.  It’s a Federal Reserve Open Market Committee meeting week.  That release will hit Tuesday and is always a market-mover.  Beyond the Fed statement following their meeting, we also have a loaded economic calendar:

• Inflation:  Producer Price Index (Tuesday) and Consumer Price Index (Wednesday)
• Spending:  Retail Sales (Tuesday)
• Housing:  Housing Market Index (Wednesday) and Housing Starts (Thursday)
• Employment:  Initial and Continuing Jobless Claims (Thursday)

This week is one of those weeks where there is enough data to give Wall Street an indication of which way the economy is heading.  If we’re looking at growth, recovery or inflation, mortgage rates could still tick higher.

Rates remain historically low.  That has not changed in spite of this recent run-up.   It definitely appears that mortgage rates are on their way up, although there is little reason to believe that they’ll continue to rise at this pace.

If you’re looking at a home purchase for next spring, accelerating your time frame may not be the worst idea.  Mortgage rates and home values move up due to the same circumstances.  If you don’t find yourself buying until rates are at 5.5% or 6.0%, you’ll probably also pay more for the home itself.

On their own, either would have been a market mover.  We also had key inflation data released and the midterm elections.

As volatile as last week was, the week as a whole saw mortgage bonds close higher 25 basis points.  Again, when bond prices go up, rates go down.

As we mentioned last week, the 30 Year Fixed v. 5/1 ARM gap may widen and we saw it at the end of the week.  The fixed rates improved less on the week than the adjustables.

Recapping last week’s economic news:

• Core PCE, the Fed’s preferred inflation gauge, posted a lower-than-expected 1.2% annual growth—Good for mortgage rates
• The Federal Reserve announced a $600 billion package to support the economy; more than most estimates—Good for mortgage rates
• According to the government, 151,000 new jobs were created last month. Economists expected 61,000—Bad for mortgage rates

This Week’s Interest Rate Predictions

This is an interesting week.  There isn’t much data scheduled for release and Veteran’s Day closes the markets on Thursday.

Weeks that have limited data and low volume tend to be volatile and follow the momentum of the market.  That’s to say that if rates start improving, they can usually continue improving.  If rates start deteriorating, they can usually continue to deteriorate.

The direction is anybody’s guess.  So, for Monday morning, where are current mortgage rates at the opening bell?  Mortgage bonds are unchanged.

If you’re still weighing the pro’s and con’s of a refinance, you need to get a faster scale.  We’re finishing up a 6-month rate rally and the lowest rates in history mean that most loans can be reset into a lower rate.

For people shopping for adjustable rates, you can take a risky, but logical stance of waiting for the ARMs to tick a little lower.  The risks probably outweigh the rewards, but it is possible to see lower rates on shorter-term loans like the adjustables.

For people shopping for fixed rates, you should not take the QE2 announcement as reason to wait any longer.  The objective of this $600 billion (plus more as they reinvest previous purchases) plan is to actually push up both inflation and long-term rates.  In other words, no, you should not be holding your breath waiting for a 3% 30 year fixed.  You should get into the fixed now and keep a copy of the note so that your grandchildren actually believe you had a 4.something% mortgage rate once upon a time.

Mortgage rates again road a volatile course last week, but ultimately ended the week relatively unchanged.  Unlike the past few weeks where the early part of the week was rate friendly and then Thursday and Friday gave back the gains, we went in the opposite path last week.

Conforming and FHA mortgage rates rose as much as 0.375% during the worst of the Monday through Wednesday sell-off, but logged strong rallies Thursday and Friday. 

Here’s what’s happening with mortgage rates today.  We’ve seen the 30-year fixed get worse, the 15-year fixed hold, and the 5-year ARM improve.  That’s very normal when no one has any inkling of what mortgage rates will be like in the future.

This week, we look into the future. 

This Week’s Mortgage Rate Predictions

Elections are Tueday.  The Fed’s 2-day meeting adjourns on Wednesday.  This week is probably more important than any other single week that we have had in quite some time. 

The elections may have a limited impact.  It increasingly looks like we’ll have a Republican House and it’s not so certain if the GOP will also take the Senate.  In a way, gridlock may be very attractive to the market as they’ll at least know the rules won’t be a moving target. 

The Fed’s meeting is the big deal.  The market is focused on the likelihood and content of the new Fed stimulus program.  There is no certainty as to the nature or scope and it has caused much of this recent volatility.   The market is expecting anywhere from $250 billion to possibly another $1 trillion in bond support.  The market rallied a few weeks ago when expectations for a big number came out, then sold off as expectations have been sliding towards the lower end of that range. 

This week might be volatile, but it is reasonable to expect mortgage rates to be relatively flat until the Fed’s Wednesday announcement.  Once that happens, we could be set for one of the more volatile afternoons in recent history.  If the Fed program is bigger than expected, mortgage rates should hold or even dip.  If the Fed’s program is smaller than expected, rates could zip up fairly quickly.

This week will be eventful, if not predictable.

That is not news.

The news from yesterday’s press release included:

• Pace of economic recovery “has slowed”
• Household spending is not recovering for the same factors we’ve discussed before, including unemployment, home values, and restrictive credit

This is the second consecutive FOMC statement that was less optimistic than the year-long series of optimistic Fed releases starting in June 2009.

There are two truths that we all need to accept so that we can move forward:

• The recession is over
• Growth has resumed, just at a snail’s pace

Why Mortgage Rates Rallied Yesterday

By all accounts, this was not a heavily pessimistic statement and it really shouldn’t have triggered a mortgage rates rally and it really shouldn’t have triggered chaos in the equity markets.  What’s happening now is the typical Wall Street game where traders infer what a particular sentence fragment means and then they make multi-billion dollar trades based on the info.

In a nutshell, that actually describes why Fed policy days are so volatile.

The concern right now was that the Fed referenced, whether as a main point or a side point, that they wouldn’t hesitate to inject further cash into the economy if the recovery can’t grow on its own.  While that’s reassuring to know that the Fed won’t stand idly by if the economy starts pulling a Titanic, it also caused half of the Western world to wonder what exactly the Fed is expecting to go wrong.

That single statement pushed gold over $1,300 an ounce.   Similarly, money poured into bonds, including mortgage-backed bonds, pushing mortgage rates lower on the day.

Where are Mortgage Rates Going?

No one knows where, but we know it will be a pretty volatile ride along the way.

Those two goofy percentages are probably going to be in a lot of posts in the near future.  Long-time readers will remember the “inflation high, mortgage rates high” and “inflation low, mortgage rates low” relationship that we regularly cover.

There is only one thing that scares central bankers more than Carter-esque inflation, it is Japan-esque deflation.    In a perfect world, the Fed would be able to manipulate inflation to a low, steady, and non-volatile constant.   The world is not perfect and inflation can be a little fussy when you try to manipulate it.

All eyes are now turning from the fluff that is the post-meeting release to the full minutes that we’ll see in a few weeks.   Right now, there are a lot of question marks.   We are all prepared for a slow, but stable recovery.  The Fed threw a curveball with the “prepared to step-in” statement….what do they know about the recovery that we don’t or was that just to reassure everyone?  If deflation is a concern, the Fed will act aggressively to encourage inflation.  If necessary, they’ll choose “too much” inflation before they’d let deflation set in.

If I was handicapping these bets right now, here’s what I see:

• Fed fails, we start to see deflation:   It  doesn’t matter what you do.  It’s the Japan-plan.  It’s a 20-30 year mess where we just talk about the woes of having an aging society.
• Fed succeeds:  Rates higher, home prices higher, rents higher.

The stakes are pretty high.

After adjourning, Fed Chair Ben Bernanke will release the formal post-meeting press release and policy statement.  The market has a 99%+ forecast that rates will remain unchanged and in their target area of 0.000-0.250%.  It’s been at that level since December of 2008.

The Fed Funds Rate is not a mortgage rate.  It’s not a consumer rate of any kind.  It is the rate that defines the cost of an overnight loan between banks.  The Fed Funds Rate has no direct consequence on mortgage rates, but it is the basis for the Prime Rate, the interest rate that drives most consumer credit cards and many business loans.

Since it is all but a guarantee that the Fed Funds Rate will not change, most consumers will wake up tomorrow with the same credit card rates as they had today.

Mortgage rates, on the other hand, will likely change today.  Perhaps dramatically.

Home mortgage rates don’t tend to vary based on what the Fed does, but rather what the Fed says.

The policy statement will be a brief release covering strengths and weaknesses in the economy and outline what threats are of the greatest concern to the Fed for the next few quarters.  Depending on how Wall Street interprets the release, interest rates will either rise or fall.

Strong economic forecast = higher rates.  Weak economic forecast = lower rates.

We’ve discussed this repeatedly in the past few weeks.  All measures of “strong” or “weak” in terms of economic forecasts are relative to expectations.  Since Wall Street expectations can only be described as dismal or worse, anything better than a “sky is falling” message could trigger rates to jump higher.

If you’re actively shopping for a mortgage, locking in your mortgage rate before the 1:15 CDT announcement may be prudent.  There remains very little to gain and quite a bit to lose.

Investors cannot discern if the U.S economy is growing, contracting, or flat.  Thus, we get these volatile weeks and end up right back where we started.

Last week’s August Retail Sales report is a great example.  The headline data showed sales were strong nationwide.  The subset of the data that excludes the impact of rising gas prices and auto sales shows a virtually flat economy.   That one report pushed the market both higher and lower before leaving it virtually unchanged.

Another example, consumer confidence hit a 12-month low.  That nearly always would push mortgage rates lower.  However, its release coincided with an improving employment report that shows a looming jobs recovery, again allowing the market to make large swings in both directions before finishing virtually unchanged.

On the week, the 30-Year Fixed pricing deteriorated, the 15-Year Fixed pricing held steady, and the 5/1 ARM improved on its already absurdly low levels.

Interest Rate Predictions for This Week

We’re in one of the the always-volatile weeks that includes a Federal Reserve Open Market Committee meeting, plus a “moderately” loaded economic calendar:

• Monday : Homebuilder Confidence Survey
• Tuesday : Housing Starts, Building Permits, FOMC Meeting
• Wednesday : FHFA Home Price Index
• Thursday : Existing Home Sales
• Friday : New Home Sales

Mortgage rates are going to be subject to at least one housing-related news release per day, plus the Fed’s post-meeting announcement.

It is entirely possible that mortgage rates will again experience wild and crazy swings and end up exactly flat.  It’s unlikely, but certainly possible.  Should the market develop any conviction, it is certainly more likely that mortgage rates would jump significantly rather than go down substantially.   In handicapping these rates, there is just so much risk of interest rates moving higher and yet not much room for them to move lower.