The fears are being confirmed.  Last week through yesterday marked one of the worst increases for mortgage rates in recent memory.  The reasons are twofold: quality concerns and inflation concerns.  In short, the inflation boogie man is out again and beyond the inherent inflation concern, traders are skeptical of the quality of Mortgage Backed Securities in general.  These reasons combined are devastating to mortgage rates, as we've seen over the past week and a half.

Here's the raw data for today:

1. Store sales were unchanged week over week (this is a relatively unimportant report)

2.  Housing starts nearly matched estimates coming in at 1.012 million.  Even though this number was expected, it confirms bad news for the housing sector as this figure is the lowest rate of housing growth in 16 years.  This would normally be good for mortgage rates, but it is mitigated by:

3. CPI (consumer price index).  This is the strongest measure of inflation in terms of economic reports.  Annual inflation increased to 4.3% up from 4.1% in December.  This is very very bad news for mortgage rates as inflation gains make mortgage bonds worth less.

So, in essence, the CPI data confirms the fears that have been causing the massive rate increases.  Friends, we are in for trouble.  The non-inflation related market data will continue to be good for mortgage rates, but the normal benefits will not be felt as long as inflation looms.  Many are concerned that aggressive FED rate cuts can be inflationary.  In not so many words, we are in a catch twenty two.  The market data will be telling stocks to go lower, but saying inflation will go higher: the dreaded stagflation; one of the rare times where it's bad for both mortgage rates and for the economy in general.

But let's keep this in perspective.  Although volume and volatility are high, it appears that mortgage bonds have stabilized somewhat this morning.  There is not much of a change, if any, from yesterday afternoon's pricing, and so far, bonds are holding near unchanged today.  So historically, mortgage rates in the low to mid 6's are not going to cripple the mortgage market. 

It's very difficult to predict what will happen.  I personally don't see rates going lower than their current levels any time soon.  There are two variables that need to be satisfied first: quality and inflation.  The smaller of the two, quality, will only be gradually recognized by traders as they determine what the inherent value of a mortgage bond should be in relation to a T-Bill.  If the perception of quality improves, so will the mortgage rates.  More important is inflation.  There are no outstanding signs that inflation will moderate in the short term.  Of course we hope it does, but given the current tenor of the market, I fear it.  That's right, I admit that I too, am afraid of the inflation boogie man.  Protect yourself by locking now before the next wave of inflation news hits the market. 

Keep in mind though that there is not any inflation related news for the rest of this week.  The point is that if rates to manage to regain some ground, it won't be anywhere close to the amount of ground they will lose the next time the "I" word is mentioned.  So even though you might be risking a small profit today, the safest way to go in the short to mid term is to lock.  As you know by reading this blog, I usually don't take a strong stand on lock vs. float because I like to provide the data, my opinion, and let you draw your own conclusions (because no one can be a master of this market).  But as of now, I'm taking a stand on locking.  As soon as I see data to refute that stance, I will immediately update you.  And I apologize in advance if this admonition leads you towards locking if rates do in fact go down.  Consider the facts for yourself.  I think inflation is too big of a concern for the economy right now to allow much of a decrease in rates.

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