Mortgage rates remained just above 6.0% for the third consecutive week. Some other headlines from the week offer a hint of what’s behind the recent creep upward in those rates:

• Oil and gas prices surged to new record highs, after oil had looked like easing during the previous week
• Retail sales showed unexpected strength in April
• New jobless claims declined in the latest weekly data
• Productivity gains were surprisingly strong in the first quarter

For potential mortgage borrowers, the level of mortgage rates might be the only headline that draws attention, but the broader economic developments can provide some clue as to what to expect in the mortgage market during the weeks and months ahead.

Inflation Emerging as the Biggest Economic Concern

All of this relates to mortgage rates because those rates have been pulled in opposite directions by two competing economic concerns. As 2008 began, economic news was dominated by forecasts of an impending recession. Since economic weakness tends to bring interest rates down, mortgage rates continued a decline that began in the middle of last year.

Meanwhile though, there were troubling signs of inflation. Most people got a regular reminder of the inflation threat when they visited the gas pump, but over the past couple months it has become clear that oil and gas inflation has spread to other segments of the economy, most notably food. Inflation pushes interest rates higher, so inflation concerns created a pull on mortgage rates in the opposite direction from the downward trend resulting from the slowing economy. 

While the latest highs in oil and gas prices show this inflationary trend is alive and well, retail sales increases and the decline in jobless claims indicate that the economy still has a pulse. On the heels of the advance release of first quarter GDP showing that the economy eked out a slight gain for the first three months of 2008, these retail sales and employment figures suggest some resiliancy remaining in the economy.

Taking all of this together, it seems as though inflation is replacing recession as the number one economic concern at the moment.

Productivity Gains: Good News on Both Fronts?

The productivity gains in the first quarter bring together the growth and inflation trends, in a way that may suggest good news on both fronts. Productivity measures output per hour of work, and this tends to rise when the economy is growing — business and industry operate most efficiently when they are busy, and inefficiencies crop up when demand is slack. Seeing productivity continue to grow is another sign that economic demand may not be falling as quickly as had been feared.

The side benefit of this is that productivity gains are anti-inflationary. The more output per hour, the cheaper labor costs are relative to production. In this sense, first quarter productivity gains could be good news for growth and a moderating force on inflation.

The Direction of Mortgage Rates

For now though, inflation remains the dominant concern. This explains the recent move in mortgage rates back above the 6.0% level. Looking ahead, potential home buyers would do well to remember that mortgage rates are still relatively low compared to historical norms. With more inflation threats still looming, there should be no delay in getting serious about mortgage shopping.

Tags: 2008, borrowers, interest rates, mortgage rates

This entry was posted on Thursday, May 8th, 2008 at 11:35 am and is filed under Weekly Wrap-Up. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.