Mortgage rates edge upward

Mortgage rates rose modestly this week as investors shifted money from bonds to stocks.

The benchmark 30-year fixed-rate mortgage rose 6 basis points to 5.76 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 39 discount and origination points. One year ago, the mortgage index was 6.11 percent.

The benchmark 15-year fixed-rate mortgage rose 7 basis points to 5.36 percent. The benchmark 5/1 hybrid adjustable-rate mortgage rose 8 basis points to 5.35 percent.

Bankrate conducts its weekly mortgage rate survey every Wednesday, and the economic calendar was relatively light during the week. The lack of important economic reports left Treasury yields and mortgage rates at a relative standstill. They dropped a bit on the morning of the London train bombings, then returned to their previous levels by the end of the day.

What sent yields up, finally, was the prospect of a happy week in the stock market. Rising corporate earnings encouraged investors to move money out of bonds and into stocks. That caused bond prices to fall and yields to rise -- and mortgage rates follow.

The economic calendar promised to get more crowded later in the week, with today's release of the Consumer Price Index for June, and Friday's release of last month's Producer Price Index. Both of those can influence mortgage rates; unexpectedly high inflation can send rates upward. Today's report on June's retail sales and Friday's report on industrial production in June also could affect mortgage rates.

But as of deadline time, all those reports are in the future. For an expert's glimpse into the near-term future, we have Doug Duncan, chief economist for the Mortgage Bankers Association. On Wednesday he issued the latest update of his three-year economic forecast.

Duncan predicts that 30-year, fixed-rate mortgages will be about 20 basis points lower in the third quarter (July through September) than they were in the second quarter (April through June). In Bankrate's weekly survey, the 30-year averaged 5.78 percent in the second quarter.

Duncan expects long-term mortgage rates to rebound in the fourth quarter, ending up at about where they are now. He predicts that they'll gradually rise another half a percentage point through 2006, "finally reaching about 6.25 percent for a 30-year, fixed-rate mortgage in 2007."

That's still low by historical standards, Duncan points out, and he's certainly correct. Mortgage rates have been exceptionally low for three years, averaging less than 6 percent in 2003, 2004 and so far this year. The 30-year averaged 6.55 percent in 2002, 7.01 percent in 2001, 8.08 percent in 2000 and 7.46 percent in 1999.

You have to regard rate forecasts skeptically, even when they're the product of Duncan, who has a good track record compared to his peers. Two years ago he predicted that the 30-year would be averaging 7 percent now, and one year ago he predicted that the 30-year would be averaging 7.3 percent now.

Duncan's forecast two years ago was founded on his belief that job creation would run strong, putting pressure on prices and forcing interest rates up. In fact, he underestimated the strength of the job market. But interest rates are lower now than when he made that prediction. That's not what anyone would have expected.