Mortgage Rates Improve As Economy Sputters, August 16, 2011

Current mortgage rates are holding today as fresh signs of an economy that is sputtering are seen.  Whether it is US housing starts or permits or more importantly the industrial output of our nation, the news is mixed.  In Europe the economy is showing signs of major weakness.  The stock market appears ready to reverse yesterday’s gains and head meaningfully lower.  Home purchasers and refinancers considering locking their interest rate should pay close attention to the markets today as high volatility is expected.

Housing starts declined significantly from last month and permits for new homes also dropped. Yet the drops were not as significant as forecasted.  More significantly, the industrial production level of the US economy was better than expected.

While the US economy continues to sputter the European economy appears to have stalled.  Gross Domestic Product figures in Germany fell sharply and were below expectations.  With the rest of Europe already facing slow growth the news that its most dynamic economy is also turning downward is a bad sign for the future.

Comments following a meeting between the leaders of France and Germany relative to the European debt crisis are expected early this afternoon.  The market appears to expect a commitment for the issuance of so-called Euro-bonds, debt instruments that would be issued and backed by the entire Euro-zone.  These bonds would help lower the borrowing costs of the troubled nations, but would put the stronger, more responsible countries in Europe on the hook for the risk of default.  Early comments from both leaders’ advisors suggest that Euro-bonds will not be proposed.  If that, indeed, is the case, the stock market could fall further and US bonds, including mortgage-backed securities, could rally.  This means lower mortgage rates.

In the face of great weakness in Europe, the US fiscal situation actually looks better.  In that regard this morning, Fitch a ratings agency, reaffirmed its AAA rating on US debt and indicated that the outlook was stable.  While the last few months have been ugly and depressing given the debt ceiling debate and the US credit downgrade by S&P, the economic data and corporate earnings have held up better than many expected.  Consequently, I repeat my belief that once a longer term fiscal deal is reached in the US, the economy (and mortgage rates) could move quickly higher.