Housing Starts Up

Events Next Week:

Mon 3/24
Existing Sales

Tues 3/25
Confidence

Wed 3/26
Durable Orders
New Home Sales

Thur 3/27
GDP

Fri 3/28
Core PCE
Sentiment

It was another volatile week in mortgage markets, with major news out on each of the first three days. The net effect of the ups and downs was a nice reduction in mortgage rates. Two stories surprised investors Monday morning. In an uncommon emergency meeting over the weekend, the Fed decided to lower its discount rate to 3.25% from 3.50%. The other major announcement was the sale of Bear Stearns, a large investment bank, to avoid bankruptcy. Bear's stock, which had been trading around $80 per share in January, would be sold for just $2 per share. Investors took the news to mean that the risks to the credit markets were even greater than they thought, and they embarked on a flight to relatively safe investments, which lowered mortgage rates.

Tuesday, the Fed cut the Fed Funds rate by three quarters of a point to 2.25%, as expected by many investors, although two of the ten voting Fed members were in favor of a smaller rate cut. Stocks rallied on the news, and the Dow closed higher by a whopping 420 points, but the Fed's emphasis on the risk of higher inflation hurt mortgage markets. Overall, the Fed's statement described reduced economic growth and higher inflation expectations. The Fed believes that inflation should moderate over coming quarters, but that the uncertainty over the inflation outlook has increased. Mortgage investors require higher yields to offset future inflation, and mortgage rates rose, offsetting some of Monday's reduction.