Mortgage rate analysis:
Conflicting forces could halt recent rate decline
By Michael D. Larson • Bankrate.com

Everything has looked wonderful in mortgage land lately because of the economic slowdown. But recent data and current events could keep inflation concerns festering enough that rates won't decline much further -- something that seems odd in the face of weakening job markets, consumer confidence and spending.

Why the conundrum? The latest monthly inflation figures came out on Jan. 12, when the Bureau of Labor Statistics released its Producer Price Index, and on Jan. 17, when it put out the Consumer Price Index. The two indexes measure the cost of goods and services to businesses and consumers, respectively.

The overall PPI was flat in December. But the "core" index, which strips out changes in food and energy prices, gained 0.3 percent from a month earlier. That was the largest increase since May and a bit stronger than analysts expected.

On the consumer side, the overall CPI rose 0.2 percent while the core index increased 0.1 percent. That was slightly tamer than market watchers foresaw and a bit less troubling. But the overall inflation rate rose 3.4 percent last year, the biggest gain since 1990, while the core inflation rate increased 2.6 percent, the largest since 1996.

Analysts expect increases to curtail as the economy weakens, but energy prices continue to be a big problem. In California, electric utilities are on the verge of bankrutpcy because they're paying a lot more money for natural gas to run power plants but can't boost the rates they charge customers enough to cover those costs because of state regulations. Consumers in the Midwest and Northeast are getting socked with expensive heating bills because of gas prices, too.

Oil prices, while down from their fall peak, remain high as well. The cost of gasoline, air fares and shipping have all increased as a result. At the same time, members of the Organization of the Petroleum Exporting Countries, or OPEC, are cutting production quotas. They want to avoid a collapse in oil prices like the one that occurred in 1998 when they kept quotas high as demand for energy in Asia slipped. But the 1.5 million barrel, or 5 percent, reduction makes life more difficult for U.S. consumers and businesses whose budgets are already being pinched.

What does all of this mean for mortgage shoppers?

For now, stable interest rates. Without a significant decline in inflation, mortgages shouldn't get much cheaper. The stock market also bears watching. The Federal Reserve Board's surprise interest rate cut at the beginning of January appears to have improved investor sentiment and share prices aren't falling the way they did in the fourth quarter. Any significant market gains will put upward pressure on rates.

Bottom line?

The world doesn't look like it's falling apart the way it did a few weeks ago. If the economy deteriorates further, rates will resume their downward march. But if Fed rate cuts keep that from happening, the refinancing window won't be open for long because mortgage rates will start climbing again. People who really need to cut their monthly bills -- such as those who expect they'll be laid off soon -- should probably go ahead and lock in now. Fence-sitters for whom refinancing is an option, but not a necessity, may want to wait for lower rates.