The Mortgage Rate Prediction For The Next 7 Days (March 18, 2010)

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Need a mortgage rate prediction? I am a regular participant in the Bankrate.com Mortgage Rate Trend survey and this week's survey may help you.

Conventional, Conforming Mortgage Rates

By way of disclosure, the Bankrate.com survey is for conventional, conforming mortgages only. It does not apply to FHA mortgages or jumbo mortgages. Nor is the survey specific to North Carolina or Texas mortgage rates. Furthermore, unique property types including non-warrantable condos and condotels may be excluded.

for a real-time rate quote.

Breaking Down The Predictions

Here's the group's mortgage rates predictions:

• 33% predict mortgage rates will increase
• 8% predict mortgage rates will decrease
• 59% predict mortgage rates will remain unchanged

I expect mortgage rates to decrease.

My advice not be appropriate for your individual situation and I'm not always right. Ultimately, you may find your time better spent watching the 3rd best Saturday Night Live Opening Monologue of all-time than reading my analysis.

Either way, here's what I told Bankrate.com:

"The complete absence of inflation leads rates lower."

For all this talk of the Federal Reserve ending its support for mortgage markets, a more insidious force on rates is inflation.  And without inflation, U.S. mortgage bonds go in demand.

What Is Inflation?

There is a daisy-chain relationship between inflation and mortgage rates and it's a simple one to understand.

First, a definition. Inflation is the devaluation of a currency. For example, if you can buy a loaf a bread, container of milk, and stick of butter for $5 today but the same groceries costs you $5.50 next year -- all things equal -- that's an inflation rate of 10%.

Most people look at this and say "prices went up". That's one way to look at it. Another perspective is that the dollars in our wallet are less valuable than they used to be.

This is how markets view inflation.

Inflation Is The Enemy Of Mortgage Rates

With respect to mortgage bonds, inflation can be devastating.  This is because mortgage bonds are denominated in U.S. dollars and all coupon payments are made in U.S. dollars.  If the dollar is losing value, mortgage bonds become less attractive to investors.

Less demand drives bond prices down which, in turn, push bond yields up. Mortgage rates rise.

Even worse is that it doesn't take actual inflation to make mortgage rates rise.  Even just the threat of inflation can do the job.  This was the case in June 2009 when mortgage rates leaped 1.125% in 10 days.  If you were shopping for a mortgage at the time, you remember how scary it was.  Lenders were issuing up to 5 rate sheets in a day.

But without inflation -- or the threat of it -- mortgage rates can benefit.  And that's what we're seeing now.

• The Federal Reserve says inflation should remain low for a while
• The Producer Price Index is dropping
• The Consumer Price Index is dropping

Each of these points makes market feel like inflation is a ways away. As a result, mortgage bonds are in demand.

No inflation, no rise in rates.  At least for now.

Rate Increases Aren't Out Of The Question

If you need a rate lock, consider taking it this week.  Timing still looks right and locking a rate can never be wrong.  The wildcard here is the Fed's termination of its $1.25 trillion support for mortgage markets.  It's possible that markets could spook when the program ends March 31 and that could send rates northward.

Rates are down 1 percent since the program started and it's reasonable to expect them to give back some -- or all -- of the improvements once the Fed bows out.

You're playing with fire if you ride this out too long. For now, though, float.

Ride It Out, But Be Ready To Lock

Mortgage rates change all the time. Make sure you're not locking too soon. It can be the difference between saving 1/8 percent or losing it. You're going to want your loan officer to help you with timing.

Or, if it's easier for you,with your situation and we'll get you set up with the lowest rate we can.