Friday, June 16, 2006

Inflation moves interest rates

After slipping last week, mortgage rates moved up this week better reflecting the trend borrowers can expect in the coming months. That means iron-clad mortgage rate locks and speedy loan closings should be the strategy of choice for home buyers as well as refinancing and equity-tapping home owners

Inflation was brisk in May spurred by higher housing, gasoline and energy costs. The seasonally adjusted Consumer Price Index rose 0.4 percent in May, representing a 5.2 percent annual rate. For all of 2005 the rate was only 3.4 percent. That kind of inflation erodes consumer-spending power by making prices move faster than wages. To curb inflation, the Federal Reserve raises the cost of money.

And that's just what analysts say the Fed will do on June 29 for the 17th consecutive time, this time raising the benchmark short-term interest rate from 5 percent to 5.25 percent. When the fed increases the cost of money to curb inflation, short-term consumer borrowing costs for credit cards, home equity loans and adjustable rate mortgages likewise take a hike.

Mortgage interest rates have fallen eight times this year, but during the first 24 weeks in 2006 they've risen twice as often, according to Freddie Mac's Primary Mortgage Market Survey. Last week, Freddie reported the 30-year fixed-rate mortgage (FRM) averaged 6.62 percent, down from the previous week’s average of 6.67 percent, exactly one full percentage point higher than they were one year ago.

Still, there has been no drastic movement in mortgage rates and we see nothing on the horizon that would bring about any extreme rise or fall in rates going forward. Still, the pinch is on. From May 2005 to May 2006 inflation is up 5.7 percent.

Consumers pay $3 a gallon for gasoline, transportation costs are up nearly 21 percent and business is passing onto consumers energy costs they have soared by 35 percent. Housing costs keep going up too and rental rates are scheduled for a long overdue increase.

With so much inflation, higher mortgage rates, perhaps moving higher faster, aren't far behind. The economic fundamentals apply.

Enjoy your weekend. We have family coming in from Alaska for a visit and so will probably stay close to home. Remember to call Dad on Sunday if you can. If not remember the good times.

Ken Calhoon, Broker
Your friend in the foothills

When I was a boy of fourteen, my father was so ignorant I could hardley stand to have the old man around. But when I got to be twenty-one I was astonished at how much the old man had learned in seven years."..........Mark Twain


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