Due to a traditionally slow final holiday week of trading in 2004, bonds were up only slightly, creating a slight dip in mortgage interest rates. The first week of 2005 saw the release of two key reports that typically have a direct correlation on the direction of home loan interest rates. The mixed results of these two reports, coupled with a revision of the previous month’s results probably explains why 2005’s beginning mortgage rates are largely unchanged from where they ended last year. Let’s examine. January 3rd’s release of the Institute for Supply Management’s (ISM) factory index figure of 58.6 for December, up from 57.8 in November, was the highest since August. The weather could be a factor, with higher temperatures driving the price of crude oil down; thereby reducing the costs on, and increasing spending into, the manufacturing industry. This bodes well for the economy as it adds to confidence of continued growth. Interest rate shoppers for home loans were not likely to feel enthused, however, as the general rule of thumb states: “good for the economy – bad for mortgage rates.” While the ISM factory index had the potential to affect interest rates, Friday’s release of the jobs report for December had more potential to impact the treasuries and, with them, mortgage rates. The U.S. Department of Labor reported on Friday that there was a significant increase in jobs created from November’s total of 112,000. My first reaction to these numbers was to brace for a noticeable spike in the yield on the 10 year Treasury note and mortgage rates. The spike never happened. Why? Although the 157,000 new jobs created in December is a respectable number, it fell short of the anticipated number of 175,000. Furthermore, November’s total of 112,000 was revised up to 137,000, thereby lessening the gain in December. The above numbers serve to demonstrate that predicting the direction rates are going to take is far from an exact science. The reports we discussed are two common determining factors but, as in this case, the numbers are always open to revision. Ask several experts and you will likely get very different answers. Last January saw numerous predictions that the interest rate party was over and that rates would begin a long and steady climb in 2004. What did we see? There were interest rate spikes, to be sure. However, the rate increases never sustained themselves. Instead, mortgage rates in 2004 rose and fell but eventually finished the year slightly lower then the previous year. Last
year’s story should not diminish the significance of this
week’s reports and their effect on rates. The short term results
will be apparent soon enough. What is much more elusive, however,
will be how the market will play out over the next year. |
