Mortgage Rate Predictions For The Next 7 Days (February 24, 2011)

• Tweet

In search of mortgage rate predictions? I am a voting member in the Bankrate.com Mortgage Rate Trend Index. This week's survey might help you choose whether to lock or float your mortgage rate.

We're Talking Conforming Mortgage Rates, Not FHA

The survey comes with some fine print. These mortgage rate predictions are for conforming mortgages in places like Fairfax County, Virginia; Gladwyne, Pennsylvania; and wherever else conforming and super-conforming mortgages are available.

Jumbo mortgages are specifically excluded in the survey because jumbos loans price differently. The same is true for FHA Streamline Refis and USDA loans. Furthermore, unique property types such as non-warrantable condos and loans for investors with 5 or more properties financed are excluded.

Click here for a real time rate quote.

Breaking Down The Predictions

Here's the mortgage rate outlook for the upcoming week:

• 13% think mortgage rates will increase
• 50% think mortgage rates will decrease
• 37% think mortgage rates will won't change

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 checking out relative caffeine levels for your favorite energy drinks.

What I told Bankrate.com : "Middle East unrest trumps inflation this week. And that's saying something."

An Unstoppable Force Vs. An Immovable Object

One of the most important things to know about mortgage rates is that they're highly sensitive to inflation. It's a concept we cover again and again, and long-time readers are aware that even a whiff of rising prices is enough to send mortgage rates skyward.

Case in point : The last 14 weeks.  Since the Federal Reserve introduced its $600 billion QE2 program November 3, mortgage rates have climbed a full percentage point and there's talk of 6 percent rates before the end of 2011.

The reason why this is happening is because QE2 opens the door to inflation. It does this in two ways : (1) By adding $600 billion in new currency to the existing supply of money, and (2), By helping to push the economy forward at a time when it may not need the push.

Wall Street worries that when QE2 is done, inflation will be runaway. Hence, the rapidly rising rates since November 3 that seemed to know no limit. Until the Middle East happened.

And this is where it gets interesting.

Click here for a real time rate quote.

Inflation is troublesome to mortgage bond investors because it is, literally, a devaluation of the U.S. dollar, the currency in which mortgage-backed bonds are denominated. Therefore, as inflation takes hold, people owning mortgage-backed bonds watch their net worth slip away. Sometimes substantially.

On the other hand, mortgage-backed securities are considered one of the safest investments in the world. They don't always yield high returns, but the safety of principal in the mortgage bond market is huge as compared to investing in equities, corporate bonds, and the debt of most global governments.

When investors get skittish on the global economy, therefore, they tend to take risk off the table by moving their money to the safest places possible. This includes the U.S. mortgage bond market, of course. The newfound demand leads bond prices up and mortgage rates down.

This buying pattern is more commonly called Safe Haven Buying, or Flight-to-Quality.

So, lately, because of Egypt, Bahrain and, now, Libya, the desire for "safe assets" is outweighing the typical inflationary fears of a well-greased market. Investors are more focused on keeping their principal than earning long-term returns.

It's a bizarre set of circumstances and mortgage rate shoppers should reconnize.

Mortgage Rates Won't Fall For Long

What's most frightening about today's mortgage market is how quickly it could snap-back to pre-Egypt levels.

Therefore, consider your two ways to play the market:

1. Go with the bird-in-hand; lock a mortgage ASAP before things change.
2. Gamble on the future; keep waiting for rates to drop.

I'm firmly in the camp of "lock now". With gas and energy costs rising, inflation could be a far more insidious force than for which it's getting credit right now. Furthermore, the economy continues to show signs of progress. Just this morning, initial jobless claims fell below 400,000 and housing data is looking strong, too.

Once the Middle East situation settles, mortgage rates will head to Skyrocket City.

Click here for a real time rate quote.