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Existing Home Sales showed weaker-than-expected numbers this morning, but that hasn't stopped the recent slide in mortgage-backed securities.  This is a counter-intuitive so let's take a deeper look.

First, the supply of homes dropped from 7.3 months to 6.8 months.  With less supply, there is a tendency for home values to stabilize and that is exactly what is happening.  Median home prices are turning flat versus the year-over-year declines during the last quarter of 2006.

Additionally, there is a growing feeling that the housing market has already bottomed-out and that the worst is behind us.  A re-energized housing market will fuel additional economic growth in 2007.

Markets are slowly convincing themselves that inflation is seeping back into the economy and they expect that the Fed's rate-setting Open Market Commitee will confirm that for them at their meeting next week.

Because of those inflation expectations, between now and the FOMC's adjournment January 31, mortgage rates can only stay flat or move higher.  It would behoove rate shoppers everywhere to lock their mortgage rates as soon as possible.  The more traders that place bets on inflation, the more likely that mortgage rates will head higher in the interim.

Already today, mortgage rates are moving with gusto and may be subject to worsening mid-day repricing if momentum trading picks up any steam.

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.