Phoenix/Scottsdale Mortgage Update for May 14, 2011

The further we get into this weak recovery, the more it looks like a weak recovery is what we’ll be enduring for a while. As resource-slack-absorbing growth remains in the distance, investors seem to be taking a less-concerned attitude about rising inflation, at least for the time being. The recent falloff in oil prices is especially helpful in that regard.

Along with a leveling of gains in equity prices over the past couple of weeks, at least some money has come back into bonds, taking the top off of a spike in mortgage rates which saw the conforming 30-year fixed-rate mortgage run from 4.32% on October 22, 2010 to as high as 5.09% on February 18 of this year. This week’s average of 4.74% for that most common instrument is almost exactly halfway between those two bookends.

But even if inflation isn’t a great concern, prices certainly should be, and may be at the heart of the recent decline in rates.

It should be noted that popular measures of inflation only gauge the rate of change of prices, not the actual price levels themselves. It’s also worth noting that everyone of us has a personal inflation index, since your choices and purchases dictate whether you are affected by the rising price of an item or items. After all, if you don’t smoke, you don’t care that the price of cigarettes has increased by 100% over the last few of years… but if you did, those increases might affect your spending patterns. You might cut down spending in other areas, try to use coupons or change to a less-expensive brand, for example. On the other hand, though, if you’re not purchasing a computer, you don’t care that you can get a much faster, more powerful computer for the same price you paid for your older, slower one, which counts as a price that is declining.

There are some more or less universal price increases which affect everybody. Although there are others, food, energy and clothing costs are at the top of the list. These day-to-day items do matter, since increases in them absorb a considerable portion of the consumer pocketbook on the most regular basis, and are largely unavoidable. People need to eat, heat their homes and transport themselves from place to place and cover themselves to some degree. With incomes only increasing meagerly, these increases eat up more and more of a share of available income, and should the become too costly, other spending patterns can become affected.

Prices may rise to a level where they are consuming income at a most painful clip… then level off. Measures of inflation may show the increases, month after month, and of course investors become concerned and interest rates may rise. However, when prices level off, the rate or change falls to just a small increase or even to no increase at all, inflation concerns wane to some degree. In this way, even though the rate of change has returned to more favorable levels, actual prices paid by consumers are still at levels which create changes in their spending patterns.

Mortgage rates are a good reflector of both the current and potential economic climates. As prospects rose last year and it looked as though we’d be running a closer to full steam by now, both underlying and mortgage interest rates marched higher. As the reality dawned that we’re in for a slow slog of a recovery, and that a full or more robust recovery isn’t coming real soon, interest rates have stepped back down, and with the “unofficial” start of Summer starting to loom in the windshield — Memorial Day just a couple of weeks away at this point — we could be in for a slow Summer, and one which won’t even have the Fed’s QE2 program to distort it.

Not that we expected them to, but mortgage rates went down this week. Now that we’re a near-equilibrium — halfway between valley and peak — do they really have the legs to keep falling? Absent an additional sign of considerable economic slowing, probably not, and they may find a home at these levels for a little while.