Posted: 5/7/2008 6:59:00 AM
This week began in slow fashion as there were next to no scheduled economic reports that affected mortgage rates. When data is in short supply, traders turn to the stock market to get clues about how to invest in MBS. Stocks have had some ups and downs this week, but are generally even with the end of last week. As a result, MBS are even as well.
The activity level picks up today with more economic reports already released and set to release. however, these reports have had mixed signals for mortgage rates. Concomitantly, the Dow is just about dead even on the day, currently down 8 points. So here we are, yet again with rates holding steady. The question is not so much about whether or not rates are good (because they are historically low), but is more about whether rates will move up or down. one thing is for sure, when we have held these steady levels for so long, we know we will see movement soon.
Whether or not that movement will come today is anyone's guess. The ingredients are in place for a rate improvement later today. It's always a risky bet to float your rate when rates are historically low, but if you choose to do so, you may be able to snag a slightly lower cost for your interest rate. For instance, a moderate improvement in the mortgage rate market today could lead to your closing costs decreasing by .125-.25% of your loan amount. We ARE NOT talking about .125-.25% change in interest rates. The mortgage market would have to have an amazing day for that to occur. More often the movements we see simply affect the COST of the rate as opposed to the rate itself. by the time we see a change of .375-.625% in cost, we begin to see our first .125% change in rate.
Though the bonds that dictate mortgage pricing are distinctly different from US treasuries, they do move in the same direction most of the time. With limited data set to release for the rest of the day, the stock market and the treasuries will be a decent indication of whether or not you should lock. If you see stocks or treasury bond rates shoot up (just watch the 10 year note), you will then want to immediately check the "professional blog" on this site to see if there is an update. if there is not, locking is the way to go. Remember that lenders can reprice numerous time per day, and are fast to do so, though not faster than I can see these changes coming. Nonetheless, if yields on bonds rise by a few ticks, you only have a window of about 20 minutes before the fastest lenders will begin repricing for the worse, so you must be vigilant if you will float.
As far as the medium term, though rates are low, I believe they have room to come down. Recently we've gotten better than expected economic data and the markets are adopting the perception that we will avoid a recession. This would indicate that rates will not get any lower. however, if you agree with me that the market will be down again soon, and that this recent optimism is just a "latching on" to much needed positive data, then floating has the potential to net you some small gains if we do indeed decline again. I wish I could give you a "crystal ball" prediction, but that is impossible. So I present you with the relevant considerations and advise you to trust your experience and "gut" from there. Just because my gut tells me we will move lower soon doesn't guarantee it. If I am too pessimistic on the market outlook, my thoughts will be rendered invalid if the market ends up improving.
So as is the answer to so many of life's questions, go with your gut. Good Morning and Good Luck.
Posted: 5/2/2008 1:12:00 PM
The Employment Situation report was released today. The most important component of this report is the Non-Farm-Payrolls. Analysts had predicted that this number would read negative 75,000.
However, the actual reading was only negative 20,000. This is significantly better than expected and adds to what some consider to be growing evidence that the economy is pulling up from a nose dive into recession. In general, when the economy is weak and inflation is under control, mortgage rates will be low. We are currently enjoying rates in the 5's and 6's because of the general level of economic weakness we've been experiencing.
So when data comes along like this which points to a recovering economy, it is not good for mortgage rates. The underlying reason is that investors always want their money to be positioned for the highest and safest return. When the economy is strong, stocks have a higher return potential than bonds considering risks. So this means fewer investors are putting their money in mortgage bonds which causes sellers of those bonds to lower their prices. And this raises mortgage rates. The opposite is true when economic weakness is evident. Investors seek the safety of lower, but more guaranteed rates of return offered by bonds. This competition among buyers allows sellers to raise the price of their securities which improves mortgage rates.
So, in a nutshell, that's what we have happening today. There was a precipitous drop in mortgage bond pricing immediately following the jobs announcement. It has failed to recover as of this afternoon. Even though I use the word precipitous, this will likely no change rates that were available to you yesterday by more than .125.
Next week is fairly light in terms of economic data, so we will stay tuned to stock market movements and economic news headlines to gauge the direction of the market. In both a near and long term historical context, rates are very low, which is a good argument for locking. If you are firmly convinced that the stock market will fall next week, or that other signs of economic weakness will be displayed, floating your rate can pay off, but locking is the safer choice considering the nice rate improvements we've had over the past 2 weeks.
Posted: 4/29/2008 7:23:00 AM
The same interest rate today will probably cost you about .25 less than it did yesterday. This is due to the market gearing up for what it hopes will be a bond-friendly announcement from the Fed (recall that mortgage bonds are directly responsible for interest rates. The higher the price of bonds, the lower the interest rate. So "bond-friendly" for traders is good for you).
Traders are hoping that Bernanke will give as firm a verbiage as possible indicating future rate cuts are unlikely. This will ease the market's mind about inflation, which is an arch-enemy of bond pricing.
Mortgage rates have pushed into such a nice territory this morning that it may be best to lock unless you firmly believe that Big Ben will in fact say 2 things:
A: No more rate cuts
B: Inflation will continue to moderate
If he does, floating your rate, although risky, may be worth it. Still, if we go strictly by historical numbers, we're in the area now where we've encountered precipitous resistance in the past, making the safe bet to lock this afternoon. Can rates improve the rest of this week? Absolutely, but they can get worse even quicker if we don't get the data we want. If you want to "let it ride," stay tuned to the professional blog throughout the day and make sure you are ready to lock your loan at a moment's notice.
Posted: 4/28/2008 1:24:00 PM
We saw a lot of volatility last week for mortgage rates. This is often the case on weeks where there is a limited amount of scheduled economic release data.
This week is the opposite. There is a significant amount of data for the markets to digest ranging from the Federal Reserve's interest rate announcement, closely watched inflation measures, manufacturing data, consumer data, and jobs data. All in all, this is the most action-packed week we've seen in a while.
As such, there is good potential for rates to improve if the data is favorable to the mortgage bond market. Unfortunately, there is just as much potential for rates to worsen if the economy reads stronger than expected or inflation worse than expected. This occurs because a strong economy encourages investors to keep more money in the stock market. This leaves too many sellers and not enough buyers in the bond market (of which mortgages are a part), and so sellers must offer higher interest rates in order to entice buyers. These higher interest rates are passed on directly to you as consumers. Conversely, when the economy is suffering, investors seek the safe haven of fixed income investments such as mortgage bonds. More buyers than sellers mean that sellers can raise their prices and offer lower rates of return on those bonds. This directly lowers mortgage rates. As far as inflation, bonds will always suffer with inflation as the rate of return is fixed, so the higher inflation is, the lower the effective rate of return on bonds causing investors to demand higher returns if they are going to get on board. Again, their rates of return going up means mortgages rates will go up by the same amount.
So all in all, if you are firmly convinced of a weak economy and that the reports scheduled for release this week will show worse than expected economic weakness coupled with moderate inflation, then we should rates greatly improve throughout the week. Keep in mind though that the weakness of the data is not what will move rates, but rather the degree to which actual numbers differ from analysts expectations. The reason for this is that the market is already trading based on what analysts think is going to happen. If they are more pessimistic on the economy than you, and the data is average, rates are going to go up because the market has already "baked in" an overallowance of risk based on analysts predictions.
That's what makes it tough to call: we know the economy is weak, but how do we know if the analysts have already hit the nail on the head? We don't. So all we can do is to take a look at the historical context of the data and ask ourselves if the predictions "feel" high or low.
Speaking of historical context, this evening and tomorrow morning are fine days to lock. If rates improve this week, it probably won't be by enough to make you regret your decision to lock. But if they worsen, they can do so precipitously.
Stay tuned to the financial news and this blog for recaps on what we are seeing in the economic data.
Posted: 4/24/2008 7:02:00 AM
Rates are up sharply this morning as two key economic reports were not favorable to mortgage bond traders. Jobless Claims and Durable Goods Orders (excluding transportation) both came in better than analysts had anticipated. News that is good for the economy in general is usually bad for mortgage rates. This occurs for several reasons, but the most basic of which being that mortgage backed bonds are a fixed income investment similar to treasuries and are usually sought as a "safe haven" from potentially weak returns in other sectors of the market. So when data indicates the market may be improving, investors move money out of bonds which causes prices to drop and rates to go up.
The disaster is not quite so terrible as Stocks haven't really exploded out of the gate. In fact, the Down just dipped under positive on the day. There is plenty of data to keep stocks in check such as weak corporate earnings (in general), and the lowest new home sales reading in 17 years.
Yesterday's recommendation was to lock. If you did not, the signals are pointing more towards floating this morning, but as always, stay glued to the news. The news won't always help you know which direction rates are going, but today, we have no significant factors that will cause the mortgage market to deviate from other fixed income. So if you see the yield rising on the 10 year treasury and stocks are rallying, it's probably best to lock. Still, I think we'll avoid that now that we have the home sales data out.
Posted: 4/23/2008 8:56:00 AM
If you already have rates this morning and have not yet locked, now would be a good time.
Posted: 4/23/2008 7:10:00 AM
I hate to sound like a broken record, but it is, yet again, an uneventful day for mortgage rates (so far).
There was some data released that seemed to hurt mortgage rates: AMBAC, a large bonds insurer announced a larger than expected loss due to its mortgage related activities. But other economic weakness including corporate profits and a worse than expected report on Mortgage applications is helping to balance things out.
Still, we have lost a little ground this morning and the same rate today may cost an additional .125% points over yesterday.
To reiterate yesterday's advice, the safest bet is to lock considering current market conditions. The only caveat here is that, if you have several weeks before you need to close and firmly believe that the stock market will continue to decline, floating can still make you some money. But likely, you would lose more money if the market dives than you will gain from floating if the market improves. This is a simple factor of "resistance." In other words, in a recent and distant historical context, rates are better than average. So the "invisible" forces exerted on rates to worsen are greater than those stimulating improvement. Traders and analysts refer to this as "technical analysis."
Stay tuned to the professional blog for intraday updates if you are indeed considering floating. Simply watching US Treasury prices will not be good enough today as the mortgage market and the treasury market have moved in opposite directions.
Stay tuned...
Posted: 4/22/2008 7:01:00 AM
As we have discussed on this blog many times, the only financial instrument that directly impacts mortgage rates is the Mortgage Backed Security, which we commonly refer to as MBS. MBS are traded just like bonds, so when demand goes up, price goes up. When price goes up, yield falls. The yield moves in direct proportion (more or less) to the interest rates that lenders offer.
All that to say that today, like yesterday, is a low volume day when it comes to MBS trading. Limited selling is being met with decent demand which has served to keep rates more or less unchanged this morning.
Normally, we have numerous scheduled economic released from various institutes, agencies, the government, university studies, etc... But this week is very light in terms of those scheduled releases. This means that any factors that do come along to impact mortgage rates will have an exaggerated impact. Right now, the lack of movement in rates simply means we have NO impact.
In the historical context of the last few months rates are just a bit shy of their best levels. The lowest rates on 30 year fixed mortgages are around 5.625% assuming you pay full closing costs and have perfect qualifications. In the historical context going years back, we are also near our best levels.
So you really can't go wrong with locking a loan today. Even if rates improve, the improvement can come very incrementally, and can convulse in the process. If rates get worse, they can get worse quickly in this "data vacuum" this week.
Stay tuned this week for any market movers.
Posted: 4/21/2008 6:23:00 AM
Mortgage Backed Securities (MBS - the bonds that directly relate to mortgage rates), had a rough week last week. By Friday afternoon, they had recouped much of their losses and pushed higher through the end of the day. But it was certainly not enough to get us back to the great rates we were seeing 7 days prior.
Friday's post discusses some of the reasons for the weakness, but the main theme was stock market bullishness coupled with persistent inflation data.
This week is very light in terms of scheduled economic reports. Traders analyze these reports to gauge market direction, so if they are greatly higher or lower than expectations, markets react accordingly and interest rates can move up or down. Not only is this week light in terms of those reports, but today, in fact, we have none. When this is the case, traders turn to news headlines, and the financial markets grapevine to get an idea of how to trade. None of the big stories so far are having a negative impact on MBS, but they also have mixed blessings that are preventing rates from improving past their highs of last Friday.
Speaking of headlines, here they are:
1. Bank of America's profit declined 77% owing to credit losses and write downs. This is bearish news for the economy which is usually good for MBS, but because B of A is a big player in MBS, the stock market bearishness is offset by probable worries that another banking giant with signs of credit fallout is an ill omen for liquidity in the mortgage backed security market.
2. National City, a top-ten bank is working on a plan for capital infusion, which several other large firms have done recently. Again this is a mixed blessing at it signifies weakness in the financial sector which is good for MBS from a sense of contributing to a slowing economy, but because National City has mortgage holdings, it hurts a bit as well. Another "wash" just like B of A.
3. In the UK, their central bank, in a similar move to our own Fed, is offering 100 billion to shore up risky debt with government debt. This is thought to create much-needed liquidity in the credit markets. Yet another mixed blessing as liquidity is good for mortgage rates, but it is also good for the stock market because when large banks can unload their mortgage holdings, it frees up capital for growth which can hurt mortgage rates.
4. Oil continues it's foray into record high territory. This bodes ill for inflation, little of which has been passed on to the end consumer yet as evidenced by the discrepancy in the PPI versus the CPI (producer and consumer price index - key measures of inflation). MBS do not like inflation, so although we don't normally see high oil prices with a direct effect on mortgage rates, this is another factor that prevents us from gaining too much today as traders must concern themselves with the threat of even worse inflation data looming. On the flip side, pricey oil also slows the economy which is good for mortgage rates. Another mixed blessing?
5. More and more economists and analysts are calling the duck a duck as they begin to agree that we are headed into a recession. "Headed into?" Where have these guys been?! The number of analysts at large firms who are predicting negative GDP and other "bad stuff" has risen to levels not seen since the last recession in 2001. In general, this is good news for mortgage rates as a recessionary economy motivates traders to move money into fixed income. If we weren't dealing with inflation and concerns about the mortgage market, MBS would be doing even better.
All in all, rates should be ever so slightly better than they were on Friday afternoon. We have not lost any ground this morning, and as long as the stock market stays tepid and we avoid mortgage related negative headlines, this trend should continue and we can even gain some ground. We're getting close to the territory again where locking can make too much sense to pass up, though rates have had a reasonably regular pattern of ups and downs recently. Don't assume they will always come back down if they go up however, because historically, they will have to head north for an extended period of time. Hopefully that time period is farther away.
Stay tuned for any mortgage impacting updates and Happy Monday!
Posted: 4/18/2008 7:45:00 AM
The Mortgage-Backed-Security (MBS) market took a beating this week. MBS are the bonds that directly correlate to mortgage rates. Some upbeat news on the stock market and some better than expected financial reports created a sense, among some, that the worst may be over for this troubled economy. The stronger the economy, the higher interest rates go, in general.
In addition, inflation is still very high historically. A key report came in higher than expected on Tuesday which caused a very large sell-off in the MBS market, thus raising rates.
For a reference point, rates are higher by anywhere from .375 - .5 %. That's a very big swing for one week.
There are two ways to approach decisions to float or lock at this point. If you agree with the stock market bulls, then you are probably a locker, and if you agree with the bears, you are a floater. What do I mean by this? Remember that, in general, the weaker the economy the lower the interest rates. The bulls believe the worst is over for the credit crunch, the mortgage meltdown, etc... If you count yourself among them and believe that the Dow is on the way back up, you would probably want to lock your rate.
If you are a market bear and believe that this week is just a bounce on the way down (for the economy), then you will probably want to hold out for what should be some improving rates. Another feather in the bear's cap is that mortgage bonds have regained a bit of their quality perception which lowers the risk premium they must offer compared to a ten year US treasury. The more days we go without horribly shocking mortgage headlines, the more traders are persuaded to put their money in mortgage bonds as opposed to the lower yielding US treasuries. So again, this gap between treasuries and mortgage bonds has been closing (slowly, albeit), and so when the market sentiment does turn, we'll be that much farther ahead.
So I hate to leave you with an "either/or" lock float recommendation, but the truth is that even the worlds' greatest geniuses could disagree on the direction of interest rates in this day and age. That's why I'm arming you with the facts and giving you the "if/then" scenario. As for myself? I'm a bit more of a market bear than a market bull. Nonetheless, I'm always amazed at the resiliency of stocks in the face of the gathering economic storm. So despite my cynicism in general, it's not enough to make a firm bet against the stock market in hoping rates will get lower.
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