Confused by the economy, mortgage rates stall
By Holden Lewis • Bankrate.com

In a week in which it seemed that every economic report contradicted itself, mortgage rates almost stood still.

The benchmark 30-year fixed-rate mortgage was unchanged at 6.42 percent, according to the Bankrate.com national survey of large lenders. The mortgages in this week's survey had an average total of 0.32 discount and origination points. One year ago, the mortgage index was 6.17 percent; four weeks ago, it was 6.44 percent.

The 15-year fixed-rate mortgage fell 1 basis point to 6.1 percent. A basis point is one-hundredth of 1 percentage point. The 5/1 adjustable-rate mortgage rose 1 basis point to 6.24 percent.

Weekly national mortgage survey

Results of Bankrate.com's Oct. 18, 2006, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

Forces push and pull
Various forces vied to push rates upward and pull them downward. Leading the way were two important measures of inflation that came out this week: the Producer Price Index, which measures inflation at the wholesale level, and the Consumer Price Index, which measures inflation at the retail level. Both of them showed that overall prices fell in September, but core prices went up.

Overall prices include food and fuel. Core prices exclude food and fuel because those two commodities can jump up and down rapidly from month to month in response to bad weather, war and the vagaries of the markets. And that's what fuel prices did. Retail energy prices fell 7.2 percent in September, and wholesale energy prices fell 8.4 percent.

But when you strip out food and energy, prices were up. Core wholesale prices rose 0.6 percent in September after falling 0.4 percent in August. As for core retail prices, they went up 0.2 percent for the third month in a row. Core retail prices have risen 2.9 percent in the past year, which is considerably above the Fed's comfort zone of an inflation rate between 1 percent and 2 percent.

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Fed expects falling energy prices
Over the past couple of weeks, Fed officials have said in speeches that they expect falling energy prices to reduce the upward pressure on the core inflation rate. If they're right, the Fed's rate-setting committee might not need to raise short-term interest rates. The rate-setting panel meets next week and is expected to retain its watching-and-waiting stance while keeping rates untouched.

Fed officials plan to watch and wait because they believe the economy hasn't felt the full effects of 17 straight rate increases in two years. They were trying to cool off the housing sector, and they seem to have succeeded: Median prices are down slightly, and house construction has fallen off. But the record there is mixed, too.

Market conditions affect home building
This week the Census Bureau announced that in September home builders started construction at an annual pace of 1.772 million. That was down almost 18 percent from September 2005, but the number was stronger than Wall Street had expected. Construction permits for houses unexpectedly plunged to an annual rate of 1.619 million, down 27.7 percent from the previous September.

The National Association of Home Builders attributes the unexpected increase in housing starts to good weather in the South and Midwest. "Builders are reacting to current market conditions by pulling fewer new permits and instead focusing on their backlogs of existing orders," says David Pressly, president of the association.

He adds that many builders are willing to "sweeten the deal" to get houses sold. Builders are trying not to reduce prices. Instead, they first offer free or reduced-priced upgrades in building materials and amenities or offer to pay closing costs on the mortgage.