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Mortgage rates fall for 1st time in a month

Mortgage rates fell for the first time in a month as the bond market waved goodbye to last week's Fed rate increase and looked ahead to the June employment report.

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The benchmark 30-year fixed-rate mortgage fell 2 basis points to 6.91 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 0.31 discount and origination points. One year ago, the mortgage index was 5.7 percent. Four weeks ago, it was 6.69 percent.

The 15-year fixed-rate mortgage fell 3 basis points to 6.54 percent. The 5/1 adjustable-rate mortgage fell 4 basis points to 6.55 percent.

Weekly national mortgage survey
  30-year fixed 15-year fixed 5-year ARM
This week's rate: 6.91% 6.54% 6.55%
Change from last week: -0.02% -0.03% -0.04%
Monthly payment: $1,087.79 $1,440.96 $1,048.34
Change from last week: -$2.21 -$2.72 -$4.36

Inflation fears ebb
Long-term mortgage rates tend to move up and down in the same direction as yields on 10-year Treasury notes because, from an investor's standpoint, they have similar time horizons. After the Federal Reserve's June 29 rate increase, yields on 10-year Treasuries fell the next couple of workdays.

Why in the world did Treasury yields fall after a Fed rate hike? Investors read the Fed's explanation and interpreted it to mean that the central bank believes that inflation is under control. Low inflation bestows low long-term bond yields. Some investors read the statement wishfully and concluded that the Fed was hinting that it won't raise rates at its next meeting, in August. That helped to push down long-term rates, too.

The Fed's rate-setting committee meets eight times a year. In the eight meetings from June 30, 2005, to May 10, the Fed raised the federal funds rate by a quarter of a percentage point each time. A week or so after each of these eight meetings, mortgage rates in Bankrate's weekly survey went up six times and fell twice. So it's not unprecedented to see a decline in mortgage rates shortly after a boost in the federal funds rate.

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Rate drop might not last
There are signs that mortgage rates will rise in the next week. First, crude oil futures rose to a record-high price, Wednesday, as investors worried about North Korean missile tests and political developments in the Middle East. Fed officials are on record as worrying that higher fuel prices eventually will filter into the rest of the economy, resulting in higher overall inflation.

Then there's the June employment report, which the Department of Labor will release Friday morning. Treasury yields and mortgage rates often jump higher when job growth is unexpectedly strong. Wednesday brought a sign that the June employment report will indeed show surprisingly robust job creation.

The sign came in the form of the ADP National Employment Report. ADP handles payroll processing for companies that employ one-sixth of U.S. private-sector workers. Its employment report comes out a few days before the Labor Department's official nonfarm payrolls numbers.

The ADP report for June estimates that nonfarm payrolls grew by 368,000 in June. By contrast, economists and investors expect the Labor Department to say that 160,000 to 175,000 net jobs were created in June.

Opposing guesses on jobs
People in the mortgage industry are waiting to see whose guess is closer to the mark: ADP's or the consensus among economists and investors. "Now you're seeing ADP's report vary significantly from what the consensus is, so let's see who's right," says Dick Lepre, senior loan officer for Residential Pacific Mortgage in San Francisco.

If ADP is correct, and job creation exploded in June, "the thesis is if there are a lot more jobs, that's going to create higher wages," Lepre says. Higher wages bring higher prices, which push interest rates upward.

The linkage isn't that simple or direct, because wages are "sticky" and resist moving up and down quickly. But mortgage rates haven't been sticky this year. They've gone up more than three-quarters of a percentage point since mid-January.

Bankrate.com's corrections policy
-- Posted: July 6, 2006
 
 
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Mortgages
Compare today's rates
NATIONAL OVERNIGHT AVERAGES
30 yr fixed mtg 4.08%
15 yr fixed mtg 3.19%
5/1 ARM 3.36%
Rates may include points
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