Is Smart Money Telling Us Something About Mortgage Rates?

We don't really know if the money is smart or not, but we know someone's money is saying something about interest rates and mortgage rates.

Over the past week, the yield on the 10-year U.S. Treasury note has climbed over 10-basis points. This continues a trend established late January. Over the past three weeks, the yield on the 10-year note has actually climbed 40 basis points to 2.1% from 1.7%.

As the yield on the 10-year note goes, so frequently goes the rate on long-term mortgage loans. Nationally, shows the 30-year fixed-rated loan averaged 3.96% this week, while the 15-year fixed-rate loan averaged 3.21%. Both are at 2015 highs.

The Federal Reserve, in its latest meeting minutes , opines that the economy is strong. With a strong economy usually comes higher interest rates, which we've seen in recent weeks. Interestingly, the Fed also highlighted that it was in no hurry to raise the influential federal funds rates for fear the “strong economy” could weaken.

Fortunately, the Fed has some leeway on raising the fed funds rates, because consumer price inflation remains a non-issue. Thanks to falling energy prices – oil and gas in particular – consumer price inflation is running less than 1% annually (the Fed would like to see it run at 2%). Higher interest rates aren't needed to tamp down consumer price inflation, because there isn't any to tamp down.

Then again, maybe the economy isn't quite as strong as the Fed is projecting. Housing comes to mind. On the national scene, it's a bit disconcerting that activity in the new-home market has backslid.

Housing starts declined 2% in January to 1.065 million units on an annualized rate. More discouraging, starts were down 6.7% for the month compared to December. Disappointing starts were reflected in home builder sentiment. The National Association of Home Builders (NAHB) reports that its housing market index clocked in at 55 in February, down from 57 in January. The good news is a reading above 50 is mostly positive.

Sluggish home sales are reflected in sluggish lending activity. The Mortgage Bankers Association purchase index was down for a fifth-consecutive week last week. To be sure, rising rates have taken some steam out of overall lending activity. But if someone is serious about buying a home, 3.85% on a 30-year loan compared to 3.75% shouldn't keep that person on the sidelines. In short, we'd like to see a few more serious buyers off the sidelines and in the market.

Information provided by Jessica Regan.

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