May 29, 2008 Mortgage rates drifted up this week over market concerns that the Federal Reserve Board may soon raise short-term rates later this year. A recent working paper published by the Federal Reserve Bank of Minneapolis suggested that the recent rate cuts this year run a risk of unhinging long-term market expectations for inflation. Indeed, market inflation expectations increased over the last few weeks and the federal funds futures market now has a 25 basis point rate hike priced in by the end of the year.

Meanwhile, house prices are continuing to decline. The S&P/Case-Shiller® index for 20 metropolitan areas fell 14.4 percent over the twelve-months ending in March, the most since the series began in 2001. In addition, the index has fallen every month since January 2007. Nineteen of the 20 cities had negative year-over-year growth; Charlotte, North Carolina had the only positive growth of 0.8 percent.

On a more positive note, new home sales unexpectedly rose in April and the number of month's supply of new homes for sale fell from 11.1 months in March to 10.6 months in April. Moreover, the median sales price for new homes rose 1.5 percent in April from the same month in 2007, representing the first yearly increase since November 2007. » Next Commentary: June 5