The volatility in mortgage rates continued. During the week, Freddie Mac reported that average 30-year fixed rates dropped to the lowest level in decades, but mortgage rates moved higher later in the week. Weak Treasury auction results and concern about demand from foreign investors were negative for mortgage rates, and they finished the week moderately higher.

The Fed's new quantitative easing program which was announced last week initially helped mortgage rates drop to decade lows, but investor concerns stalled further improvement. The quantitative easing program pumps dollars into the economy, and the increased supply weakens the value of the dollar relative to other currencies. When foreign investors sell US securities, they must convert the US dollars they receive into their own currency. If the value of the dollar falls, then the value of their US investment falls in relative terms to their own currency. As a result, foreign investors may reduce their purchases of US securities, including mortgage-backed securities (MBS), which would cause yields to increase. This fear of weaker foreign demand hurt mortgage rates this week.

The latest forecast from the Mortgage Bankers Association (MBA) projects an increase in home sales in 2011. Modest economic growth, pent-up demand, and stabilizing home prices are the main reasons for the expected gains. According to the MBA, both purchase originations and existing home sales will increase in 2011 from 2010. The MBA also forecasts that fixed mortgage rates will rise during 2011.

Week Ahead

The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Tuesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Wednesday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Retail Sales, an important indicator of economic growth, will be released on Monday. Retail Sales account for about 70% of economic activity. Industrial Production, another important indicator of economic growth, is scheduled for Tuesday. Housing Starts will come out on Wednesday. Empire State, Leading Indicators, and Philly Fed will round out the week.