Vic gave me permission to write on his blog today. Thank you Vic.

So most readers are locked right? At least those of you who are closing in December?

We have been shouting LOCK from the rooftops since early December. I assume there are not many readers  still holding their breath in hopes of better mortgage rates before 2010. Right? Putting aside compliance issues...administratively I'm not even sure its possible not to be locked at this point in the month. Tomorrow is pretty much an off day, lock desks will be thinly manned and bps cutting decision makers will be no where near their rate sheets. Then early next week, only specific secondary staff will be present, the processing pit will be sparse, underwriters will have up out of office replies...but you should find a few closers and shippers around whose files are CTC, only awaiting final docs. They are only in the office to do one thing though...quickly complete their work and leave ASAP. So yeah,  I think its safe to say that the good majority of you are probably already locked if you are closing in December. 

That leaves only the January/February/March floaters. There are multiple scenarios that could play out for you.

  1. HOLD STEADY OR MOVE HIGHER: Rates could fall briefly only to rebound back to current levels or even higher. Either way, mortgage rates would bounce around a new, higher costing range. This would occur because economic perceptions were optimistic. This is a favorite for early 2010. After several months of choppy growth, the market is beginning to believe "the worst really has been avoided". If economic activity continues to show signs of improvement (even if its scattered), the bond market will take the "better than expected" side of the trade and mortgage rates would creep into the 5's and maybe even test the 5.50 level (at best). This is if the OPTIMISTIC perception grabs hold of headlines. This category also includes an outlook with no brief recovery. 55% chance in short run.  75% in Q1 2010.
  2. CORRECTION BACK INTO RECENT RANGE: Rates could move back into the range we enjoyed from August to December, and stay there (4.50 and 5.00 at best). If this occurs, it will likely be a function of continued economic uncertainties. In the short term, a few more New Home Sales like reports would help rates fall at least towards six month averages. After that, in order for the recent rates range to be revisited for an extended period, we would expect to see mixed economic messages via volatility in monthly economic reports. Very similar to what we've experienced over the past five months. The Fed also plays a huge role in this theory. Their rhetoric must continue to fight off inflation hawks with strong dovish verbiage (dovish = low rates), or number #1 will be even more likely. If you are looking to close in January, this outlook is viable, especially if the recent rates sell off was over dramatized by very light trading conditions. 45% chance in short run. 25% in Q1 2010.
  3. A DOUBLE DIP FLIGHT TO SAFETY. This is very unlikely early on in 2010, so dont get your hopes up for an immediate recovery rally that sets new all time lows. In 2010, it is possible that rates could completely recover all lost progress and move back towards record lows, but only if the economy takes a major turn for the worse. This is not something we expect to see early in 2010. This outlook is less likely to occur if the market is focused on short term growth spurts. Over the long haul, most economic activity is just now stabilizing, right above record low levels. <1% chance in short run. <1% chance in Q1 2010. 

Read  "% chance in Q1 2010" as the likelihood of the scenario being the dominate theme of Q1 2010.

In the short run....for almost the entire month, the bond market has reflected the "worst is behind us" perception. Long term Treasury yields have moved considerably higher in a very short time frame all while stocks have held steady near fresh 2009 index highs. The near term outlook has not be confirmed by any strength in the market, price action has been distorted by light (thin) trading conditions. The market has not provided a clear outlook heading into 2010. It has only provided hints.

That is why in the short term the chances of rates holding steady (or rising) and rates returning to the recent range are so close. Basically what I am saying is, we will know a lot more about where rates are headed once the market goes back to work. But the current environment favors higher mortgage rates.


PS Even the Fed is finding it difficult to provide an accurate forecast of the future, so much is based on what the market THINKS. READ A BREAKDOWN OF THE LAST FOMC STATEMENT