Looking Back And Looking Ahead: October 20, 2008

Last week, the Dow Jones Industrial Average recorded both its largest one-day point gain and second-largest one-day point loss in history.

Mortgage markets got whipsawed, too.

From day to day, huge rate swings made mortgage rate shopping difficult. It wasn't uncommon for lenders to change pricing 3 times per day.

When the week closed, though, rates were lower than at Market Open Monday, marking the first week of improvement in mortgage rates since early-September.

Last week's constant mortgage rate movement had several causes:

-- Retail Sales data was weaker than expected
-- The Federal Reserve report showing a slowdown in all 12 regions
-- New evidence that commodity inflation pressures are easing

The biggest driver was -- and continues to be -- trader uncertainty.

As measured by the "Fear Index", market volatility reached an all-time high last Thursday. Investors moved into cash positions, selling assets of all types -- including mortgage bonds. This created an excess supply of bonds on the market which drove down prices and, in turn, pushed up rates.

But, there was a demand-side issue impacting rates last week, too.

If you'll remember, the first $250 billion of the government's Rescue Plan was meant to buy bad mortgage debt. Last week, however, those plans changed. Instead, the $250 billion was applied to the balance sheets of the nation's largest banks.

This caused an immediate $250 billion reduction in mortgage bond demand and the reduced demand further depressed prices. Again, mortgage rates rose as a result.

This week, with very little economic data, expect psychology, politics and corporate earnings to drive mortgage rates -- more than 20% of the S&P 500 will report their July-September 2008 numbers.

If earnings are weak, expect mortgage rates to rise on concerns about recession; lately, that has been the market pattern. Conversely, if earnings are strong, expect mortgage rates to improve.

(Image courtesy: The New York Times)