This probably doesn't apply to many other mortgage rate watchers, but for me, like a witch on a broom stick, this week flew.
Mortgage rates had their little hissy fit and consumer borrowing costs moved to one month highs. But it was all part of the game. We anticipated this would happen. The correction process is already underway. Our plan is playing out as expected. So far at least....
If you've been M.I.A from Mortgage Rate Watch all week. This is what you missed....
(WHY MORTGAGE RATES ROSE)
If you're still a passenger on the float boat, it's because you made a decision to pass on rates below 4.25% in favor of a chance to lock in a rate below 4.00%. It's because you decided to PLAY THE RANGE UNTIL BERNANKE PLAYED YOU
Plain and Simple: The bond market got way head of itself about QEII. The sugar high wore off. However because it is a "trader's market" and a trader is always looking to profit, the over-exuberance correction picked up day trader momentum and led to a short term trend of rising mortgage rates. That short term momentum was squashed yesterday and confirmed dead today.
(WHY WE EXPECTED MORTGAGE RATES TO STOP RISING)
We anticipated a pre-FOMC rally because recently rising rates were a function of an increase in "short selling" in the bond market (long end). We thought interest rates would turn around before the FOMC meeting next week because we knew the "short selling" was short term. We knew traders wouldn't want to cover their short positions (buy) at higher prices (reduces profit!). These short positions were covered yesterday and today(profit taking). Covering means buying and when investors buy bonds their prices go up and their yields go down.
(WHAT WE EXPECT FROM MORTGAGE RATES IN THE DAYS AND MONTHS AHEAD)
On November 3, 2010 I anticipate the Federal Reserve will announce another Quantitative Easing program. This event is expected to lead consumer borrowing costs back down to record lows, which means we should see mortgage rates dip below 4.00% with much more attractive float down structures (in terms of how long it will take to recover points paid at closing).
FYI: This process might not be instantaneous, we might have to give lenders a few days to ease into rates below 4.00% again.
Do I think mortgage rates will go lower than 3.75% if the Fed announces QEII?
No I do not. Why don't I see rates moving below 3.75? Because I don't see 3.0 MBS trading in enough liquidity to allow lenders to offer rates below 3.75%. This is a bold prediction considering we don't know exactly what the Fed is plotting. If 3.0s do trade in size, lenders will be able to go as low as 3.25%
How long do I think QEII will keep mortgage rates at the record lows??
Long enough to lock your loan at record low rates!!! :-D
Unfortunately I can't provide an acceptable answer to that question yet, we just don't know enough details about the QEII program. We do however know that the Fed is looking to spark a little "Demand Pull Inflation" via "Cost Pull Inflation", and we also know inflation is the enemy of mortgage rates. While demand pull inflation won't ignite immediately, if the Fed's QEII plan is as successful as previous alternative policy strategies (which were intended to stabilize the economy, and they did), mortgage rates will eventually rise, and it will happen on the slightest hint of consumer led inflationary pressure or sustained job creation. I'm not even going to venture a guess on when that might happen though. Traders, economists, and analysts alike are still operating in a very reactive manner. Outlooks are constantly changing as the economic and political environments evolve. Let's see what the Fed says on November 3rd and go from there....
What if QEII is not what the market was expecting???
"Disappoints" is hard to quantify but I think there would be an initial period of selling that pushed the best par 30 year fixed mortgage rates at least back up to 4.375%. "At least" would imply the Fed announces QEII but it fails to inspire bond buying. In that case I still think we'd see mortgage rates touch record lows again sometime in months ahead, but I also think that would be a factor of the market losing faith in the Fed which would lead to a sense of panic and extra protectionism. This would be good for no one!
What if the Fed paints a much rosier picture of the economy and they say "no QEII for you"????
When the bond market gets overcrowded, which it still is, an event that shocks the herd would greatly increase the potential for snowball selling. The Fed deciding to delay QEII would be an event that "shocked the herd". If this scenario played out, the best par 30 year fixed mortgage rate would move at least up to 4.75%. This would reflect a lack of liquidity in the 4.0 MBS market.
We don't want that, we really don't want that. I don't think the Fed would let that happen either. They've over-telegraphed QEII. I spent the entire week researching alternative policy approaches and modeling market reactions. In none of my studies was I able to uncover a logical reason why the Fed would be planning a trick when we clearly expect a treat.
Waves of asset purchases are coming. And the size should be limitless if the Fed really wants to spook wage earners into requesting a hike in their wage rate(bc of cost-push inflation). These asset purchases should also accompany a more accommodative tone in the FOMC statment. For example "rates will be low for longer than an extended period" (not how Ben would communicate but you get the point). This is an imperative part of the easing/debt monetization process. The Fed must send the markets a clear message that they fully intend to reflate the monetary base with inflationary policy. On a side note, I still believe the Fed will eventually encourage the designation of a resolution authority to mop up the overabundance of non-performing assets in the market. It's like Cancer, we gotta cut it out.
If QEII is not announced fence sitters are gonna be o.g "ticked off" and many loan officers are gonna be pointing their fingers directly at me! I'm cool with taking the blame though. I usually don't offer such direct lock/float advice, so when I do, and I do it consistently like I've done all week, you know I believe in it.
Trick or treat?