Mortgage rates moved considerably higher following another sell off in the mortgage-backed securities market yesterday. Since Monday, current coupon MBS prices have moved 200 basis points lower, consequently pushing the par 30 year fixed mortgage rate from 4.875% to 5.375% (in one week!!!). Prior to “Black Wednesday”, 30 year fixed rate mortgages were at 4.625%. So, in less than 2 weeks, mortgage rates have moved almost a full percentage point higher!
The market is betting that our economy is on the road to recovery. Investors are fleeing risk averse assets (Treasury debt) in favor of seeking higher potential returns in the stock market. Good news right? Yes, unless you were waiting for a sub 5.00% mortgage rate. Remember: a weak economy forces the Federal Reserve to implement relaxed monetary policy, which helps keeps mortgage rates low. Low mortgage rates allow for more refinance opportunities and make home ownership more affordable...which stimulates the economy!
This morning the market's optimistic sentiment was reinforced when the Employment Situation Report was released. Non-Farm Payrolls: The Employment Situation Report lets us know the number of jobs lost or gained in the previous month, it reports the unemployment rate, and also gives a measure on wages.
The press release indicated that payrolls were considerably less than any economists’ forecasts. The street's consensus was for a loss of 520,000 jobs in May, the actual print was only 345,000 jobs lost. The unemployment rate, which was expected to come in at 9.2%, moved higher to 9.4%. Although this is still a very ugly report, it is much better than what the market was expecting. The prior 2 months were also revised better with March’s initial 699,000 loss being lowered to 652,000. April’s initial reading of -539,000 job losses was also revised lower to 504,000.
Immediately following the release, MBS moved lower by almost 100 basis points and Dow futures skyrocketed. One positive aspect, for MBS, of the report was the wage component. Economists’ had expected wages to move higher by .2% but they only showed a .1% increase. This is a positive sign for wage based inflation and as you know, the biggest enemy to mortgage rates (fixed income) is inflation.
As mortgage rates have moved higher and higher over the past 10 days, more and more are asking "What, if anything, will the Federal Reserve do to keep their housing initiatives intact? Are the days of sub 5% mortgage gone? Do we need sub-5% rates to stimulate a housing recovery? How can housing recover if rates are rising? Thoughts?
Early reports from fellow mortgage professionals are indicating that the par 30 year fixed rate mortgage is in the 5.125% to 5.375% range for the most qualified consumers. Adjustable rate mortgages might make for a nice option especially if you are not planning on keeping a home for more than 7 years. Currently 5 year arms, which means you will have a fixed interest rate (and payment) for 5 years followed by a 25 year period of an adjusting/floating rate, are at 4% today. Many homeowners know they are planning to move within a few years so an ARM is a good alternative for some. If you are considering an ARM, be sure to ask your mortgage professional for a proper explanation of how your loan amortizes. You can always ask us too!