May 28, 2013
There is no adequately descriptive language for movement in Mortgage rates today. "Vaulting catastrophically higher" only begins to capture the brutality of the movement. Until today, December 7th 2010 had been the largest day-over-day increase in 30yr rates that we'd logged since 'Black Wednesday'--which was essentially the worst day for mortgage markets in the post-meltdown era (it's a bit chilling to consider the date was 5/27/2009). Today's move is about 50% larger than December's and right in line with Black Wednesday. The conventional 30yr fixed rate with the most efficient combination of cost and payment for a perfect scenario (best-execution) skipped completely past 3.875% and moved soundly into 4.0%. Many lenders are already at 4.125% or higher, but almost all of them moved higher by surprisingly similar amounts (given the size of the move).
There's no elegantly simple 'cause and effect' behind this move higher in rates, and in fact, such cause and effect is typically absent from these sorts of moves (as it was in May 2009). That doesn't mean there's not an underlying reason behind why things are happening this way. In the current case, part of that reason has to do with something we already discussed in greater detail HERE. The remainder of the reason, as I've chosen to explain it today, ends up being quite a long story. If it's hard to follow, that would be understandable, but in that case, please let me know, and we'll continue the dialogue and re-approach it from another, possible more intelligible angle.
The important thing to understand in all this is that the Fed's asset buying is a very very very big deal, both to broader rates markets and to mortgage markets specifically. The pendulum is swinging back from April's extremes and is being accelerated by changes in the Fed's asset buying outlook--even though no changes in the asset buying have yet occurred.
All of this IS NOT to imply that rates are higher because the Fed has stopped buying MBS and Treasuries, or even that markets believe this will happen soon. Indeed, those who trade most closely with the Fed are in agreement that the buying programs won't be ending in 2013. Rather, the phenomenon has more to do with a SHIFT--one that we think has been underway for quite some time, and that served as the original impetus for including "rising rate environment" in the list of lock/float considerations beginning in early 2013.
The improvements in rates seen from the end of March through April provided reason to doubt that the 'rising rate environment' would continue. We sometimes use the term "snowball" to refer to the natural momentum that can occur in rates markets and that time frame was an example of a snowball that worked in our favor--at least it DID until May 3rd. That was the day of the last Employment Situation Report, and was what markets were waiting for with respect to that particular instance of snowballing. The events leading up to it unfortunately added speed and size to the snowball.
Whether we use the snowball metaphor or "leading-off" or consider the stretching of a rubber band, the bottom line is that markets were increasingly building momentum, pushing, stretching, leaning, and preparing for an eventuality that might fall almost all the way to the far end of the low rates spectrum. In other words, if that Jobs report had been awful, we'd have seen rates move even lower (probably). More importantly, we'd have seen rates move as low as they were willing to go shortly thereafter.
Instead of getting a Jobs report that justified that leaning, we got the extreme opposite. Not only was the actual report itself bad for low rates, but it "undid" the benefit of the previous report. Not only was it a rude awakening from the current dream, but a reminder that the last one wasn't nearly as pleasant as it seemed. The snap higher in rates on that day alone was only the beginning; just the first step in a longer process of getting back to where we might have been if the snowball never started rolling.
The problem with those sorts of "returns to equilibrium" is that they frequently overshoot the midpoint. At the risk of adding yet another metaphor, this is like a pendulum that's been pulled to it's limit on one side, swinging back toward the other, and requiring a sufficient force to prevent it from moving past the mid-point. Not only did we not get that "sufficient force," but instead were treated to a hearty push toward the other end of the pendulum's range. This came in the form of the rather frantic shift in expectations about Fed buying discussed above.
Now we come to the thesis, but have one order of important house-keeping beforehand: the Fed IS NOT pulling out of the MBS or Treasury Market any time soon. They haven't even curtailed purchases at all yet. The problem is that expectations drifted away from such a thing even being possible, and were reintroduced seemingly overnight (between May 10th and May 22nd). The pendulum is swinging and the snowball is rolling in the opposite direction from that seen in April.
Not only have we had to abruptly pull back from the exploration of the low end of the rates range after April's jobs report (on May 3rd) simply because it's an important piece of data that came in on the opposite end of expectations, and not only has the Fed ramped up rhetoric about how and when it might begin buying fewer long term assets (like the MBS that help mortgage rates), but markets have had to account for a potentially volatile reaction between those two phenomena where the upcoming data--and ultimately the June 7th Jobs report--serves as a trigger for the Fed to get even more serious about tapering their buying programs.
Simply put, if we had been fighting a battle for low rates, morale was high heading into the end of April. We were storming the castle--rushing headlong through the front gates, feeling optimistic about our chances of victory, or at least willing to put up a good fight. Then May 3rd would be like the occupants of the castle turning out to be invincible robots from the future. Imagine being scared enough of that fact, in and of itself, only to see the robots had pet robot dragons (also invincible) and that those dragons started spitting out some pretty gnarly fireballs in short order. Whatever era of warfare this fantastical metaphor might belong to, we run. We run hard and fast and we probably won't look back until the sound of fireballs at our heels lets up. When we do, we may see that dragons and robots weren't quite as invincible as it first appeared, but for now, the orders are to keep running until further notice.
That's how bond markets and mortgage rates have been feeling for the past few weeks and today was the 'fireball' day where we gave up the fight for the time being and ran away from the battlefield. Even if we live to fight another day, it was a devastating loss. For this NOT to turn out to be the confirmation that the battle has turned against us, something new and unforeseen would need to happen. It's this sense that the tides have turned that is causing the pain for mortgage rates today, despite the fact that the war is far from over.
Loan Originator Perspectives
"Ah yes it's a great day to be in the mortgage business. Rates are up .625% in 30 days, and .25% to .375% in just 1 week. Any quote older than this morning is outdated. It will take a week or two for the media to report the rapid rise in rates. This last 30 days has been a great example of the quick pace of rising rates. Gradual is never the trajectory of rates during a climb. The next piece of news coming next week in the form of the NFP report will either add to the pain or stop the bleeding. I think we may see some slight improvment between now and then, but locking is a must." -Mike Owens, Partner, Horizon Financial Inc.
Today's Best-Execution Rates
- 30YR FIXED - 4.00%
- FHA/VA - 3.25% or 3.75%
- 15 YEAR FIXED - 3.125%
- 5 YEAR ARMS - 2.625-3.25% depending on the lender
Ongoing Lock/Float Considerations
- After rising consistently from all-time lows in September and October 2012, rates challenged the long term trend higher, but failed to sustain a breakout
- EU and domestic economic data remain relevant to mortgage rates, but uncertainty over the Fed's bond-buying plans through the rest of the year is causing volatility
- The further we've progressed into 2013, the faster the swings have become
- Fears about the Fed's bond-buying intentions were proven well-founded on May 22nd when rates rose to 1yr highs after the Fed confirmed their intention to taper bond buying programs sooner vs later
- Just as the pendulum pushed far to the positive side of the rate range in April, the opposite swing occurred in May (now the worst single month for rates on record since 2008)
- (As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario. There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you're following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).