There’s concern about a potential economic slowdown for the months ahead and it may be well-founded.

Despite an improving jobs situation and booming retail sales, households are less optimistic about the future and so is the Federal Reserve. In its post-meeting minutes released last week, the Fed revised its U.S. growth estimates downward for 2010 and 2011.

For rate shoppers in Arizona , this is excellent news.

Because of the weakness, conforming mortgage rates fell again last week, extending the current rally in rates to 16 weeks. Mortgage rates are lower than at any time in measured history.

This week, data will be housing market-heavy and mortgage rates could rise or fall.

• Monday : National Association of Home Builders Index
• Tuesday : Building Permits and Housing Starts
• Thursday : Existing Home Sales

Strength in any, or all three, of these housing-related reports should push mortgage rates higher on higher hopes for the economy. Weakness, on the other hand, should have the opposite effect.

Overall, though, mortgage markets are trending better.  Momentum is in effect and refinance activity is soaring. That said, it doesn’t mean that rates won’t rise — they could absolutely. It just takes a change in market sentiment. And that could happen quickly.

Mortgage rates are artificially right now so even the slightest jolt could cause them to spike. It would be similar to what happened in June 2009 when rates rose 1.125% in just 10 days’ time. Therefore, if you’re shopping for a mortgage and like the rate you’ve been quoted, consider locking in as soon as possible.

There’s very little room for rates to fall further but a lot of room for rates to rise. Make sure you’re on the right side of that bet.

Homes are more affordable in Tucson and across the nation as the housing market emerges from a slow winter season with mortgage rates still near 5 percent.

Soft housing and low rates are an excellent combination for home buyers but whereas home values rise with a gradual pace, mortgage rates change in an instant.  It’s something worth watching.

Each 0.25% increase to conventional or FHA rates adds approximately $16 per month for each $100,000 borrowed. Mortgage rate volatility can change your household budget.

If you’re trying to gauge whether rates will be rising or falling, one keyword for which to listen is “inflation”. Mortgage rates are highly responsive to inflation.

By definition, inflation is when a currency loses its value; when what used to cost $2.00 now costs $2.15. As consumers, we perceive inflation as goods becoming more expensive.  However, it’s not that goods are more expensive, per se. It’s that the dollars used to buy them are worth less.

This is a big deal to mortgage rates because mortgage bonds are denominated, bought, and sold in U.S. dollars.  As the dollar loses value to inflation, therefore, so does the value of every mortgage bond in existence. When bonds lose their value, investors don’t want them and bond prices fall.  Mortgage rates move opposite of bond prices.

Prices down, rates up.

In today’s market, the relationship between inflation and mortgage rates is helping home buyers. The Cost of Living made its smallest annual gain in 6 years last month and the Fed has repeatedly said that inflation will stay low for some time. The combination is driving investors to buy mortgage bonds which, in turn, is suppresses rates.

So long as it lasts, the cost of home ownership will remain relatively low. Combined with the expiring tax credit, the timing to buy a Tucson home may be as good as it gets.

By the end of the trading week, conforming mortgage rates had jumped by as much as 0.500 percent.

The spike in rates can’t be pinned on any one factor, but 3 contributing factors include:

1. The lingering impact of high energy prices on inflation
2. The ongoing weakness of the U.S. dollar
3. A rally in the financial sector, marking a return to risk-taking

Inflation and a weak dollar both devalue mortgage repayments, a well-chronicled relationship on this Web site.  In short, when mortgage bond investors find that their repayments are worth less, they demand a higher return.  This causes mortgage rates to rise.

But, it wasn’t inflation or the dollar that caused the majority of the damage to mortgage rates last week — it was the rally in the financial sector.

Rates had edged higher Tuesday on the inflation data but it wasn’t until Wednesday’s morning stronger-than-expected announcement from banking leader Well Fargo that mortgage rates really started to spike. 

In its quarterly report, Wells Fargo said that its balance sheet was strong and that it planned to increase shareholder dividends.  The rosy announcement sparked a strong demand for all things financial and — by day’s end — the sector scored a 12.3 percent gain on Wall Street. 

It was the largest one-day gain in financial stocks ever.

Then, following Wednesday’s rally, financials picked up additional momentum and ended up closing out the week higher by 21 percent. 

Unfortunately for mortgage rate shoppers, a large chunk of the money that fueled the rally came out from the mortgage bond market. 

As investors looked for cash to buy financial stocks, many chose to sell mortgage bond holdings, creating excess supply.  More supply leads prices lower and, in the mortgage world, when prices fall, rates go up. 

Because mortgage bond prices fell a lot last week, mortgage rates rose by a lot.

This week, expect momentum to be The Big Story.  There is little data beyond Thursday and Friday’s Existing Home Sales and New Home Sales, respectively, and Friday’s Consumer Sentiment Index.  And only a few members of the Fed will be speaking in public.

The one bright spot last week was falling oil prices. 

After an 11 percent decline, Americans are waking up this morning to lower gas prices.  This is anti-inflationary and could help tug mortgage rates lower.

For the third month in a row, the economy shed jobs, suggesting that the U.S. is in a recession.

March’s monthly loss of 80,000 jobs is the largest since March 2003 and follows January and February’s losses of 76,000 each. 

The weak data is edging mortgage rates lower as we head into the weekend. 

The connection between poor jobs data and today’s falling mortgage rates is a little bit strained, but worth discussing.  It all comes down to expectations.

Prior to today, there was an expectation that the Federal Reserve’s recent rate cuts would over-ignite the economy sometime this Summer.  The Fed has cut 3 percent from the benchmark rate since September 2007.

Meanwhile, consumer spending makes up two-thirds of the economy and people can’t spend if they don’t earn.

So, after today’s report showing fewer workers (and falling confidence levels to boot), the largest component of the economy is expected to sag for a while. 

This lack of spending should offset the cumulative impact of the Fed’s rate cuts and lowers the expectation for runaway inflation later this year.

Now for the connection: If inflation causes mortgage rates to rise, it’s the absence of inflation that causes them to fall. 

And that’s precisely what we’re seeing today.