So many questions have been raised by the surprising state of affairs in the world of mortgage rates this year. Why did rates move in the opposite direction from broad-based expectations to start the year? Why have rates continued to hold their low ground in such a stable way? Why have rates been able to push to year-over-year lows despite ever-stronger economic data? Why do we now seem 'stuck' at those lows while Treasury yields have continued to fall? And most importantly, how long will this relatively favorable environment stick around?
Mortgage rates are driven by movements in financial markets--most directly by MBS (mortgage-backed-securities, which actually dictate how much mortgage debt is worth to investors). MBS are always trading with some level of correlation to broader bond markets where 10yr Treasuries are one of the best big-picture reference points.
As is always the case when it comes to financial markets, there's rarely ever a single answer that explains why things are the way they are. This is certainly true of the current situation with mortgage rates. That said, if we had to pick one predominant answer to all of the above questions, the only obvious candidate would be--in a word--Europe.
European market considerations have taken US markets on several wild rides since 2010. This came to a head in 2012 with the 2nd Greek debt crisis. That wasn't just about Greece though. Because the Eurozone countries share a currency, if Greece defaulted on its obligations, it would affect the currencies value, making it significantly more likely that the next weakest country would share a similar fate. From there, the fear was that an irreversible domino effect would wreak havoc on the global economy and financial system.
That Greek drama ushered in all-time low rates in the US, because in 2012, it coincided with a time in the history of domestic monetary policy where markets saw the Fed's only two choices as "hold steady" or "more easing." In other words, QE and other easy money policies were at no risk of being reversed. The Fed's foot never left the vicinity of the gas-pedal. Treasuries hit all-time lows and Mortgage rates fell into the low 3's.
It wasn't until mid-2013 that the Fed's metaphorical foot moved to the vicinity of the brake pedal and the conversation opened in earnest about the circumstances that might result in hitting the brakes. The "taper tantrum" ensued, but for all the wailing and gnashing of teeth, the Fed did a reasonable job of snapping investors' mindsets back to reality. Investors, themselves, did a brutally efficient job of bracing for the expected slow-down in Fed accommodation.
They did such a good job, in fact, that when the slowdown in accommodation finally got underway, rates had moved high enough already that there was no additional selling pressure. The paradoxical improvements in rates in early 2014 were a result of expectations being so widespread that rates would go higher. When everyone in the room is taking the same side of a bet, no one makes money. So the entire month of January was spent moving sharply lower in rate--effectively resetting a new baseline for 2014.
And oh what a baseline it was! Compared to the volatility of 2013, rates were barely budging in 2014! There was no reason for them to move in either direction until inspiration of one form or another came along. It finally did in early April. That was when a Friday jobs report came out in line with expectations--something that rarely results in an abrupt improvement for rates--yet rates IMPROVED ABRUPTLY. The culprit was news that had come out around the same time suggesting the the European Central Bank (ECB) had begun modelling a €1 trillion QE program.
Europe hasn't done QE yet--at least not in the same way we've done it in the US. So this was big news. The European economic weakness that brought about this news wasn't nearly as relevant as the potential presence of an extra €1 trillion in the global monetary system. If we've learned anything from the various instances of domestic QE, it's that these big injections are worth something in and of themselves when it comes to trading levels. As such, they're immediately worth something to rates.
Of course, this was only the first phase of real QE consideration in Europe, but the ensuing weeks and months would show they were indeed serious about it. Even as recently as this past weekend, the ECB President had reiterated the council's commitment to "do what it takes," and promised that work was continuing on their asset purchase program.
In short, this has created tidal momentum in global rates markets, and it has made no sense for domestic bond markets to try to swim against it any more than they already are. The benchmark European 10yr government debt is currently trading around 0.94%! Compare that to US 10yr Treasuries at 2.40%! These rates are no longer simply reflecting that "good old stuff" from days past (economic outlook and inflation), but are now serving as tactical betting tables for Central Bank policy.
In other words, investors are not buying and holding German/European debt because they want to earn 0.94% interest over time. They're buying it because the trend is for that rate to move lower as European QE becomes more of a reality, and any drop in rate tomorrow or beyond equates to solid short-term profit for investors that buy those bonds today (as rates fall, the PRICE of the bonds rises, so investors are essentially buying low to eventually sell high).
US Treasuries don't get nearly as much benefit from this phenomenon, but their movement certainly correlates heavily with European debt. For Treasuries, this is really the only big-ticket inspiration in town in 2014. So they've moved lower in rate despite improvements in economic data and stocks. MBS are yet another degree removed from European influence. They benefit, to be sure, but not as much as Treasuries.
Those benefits for domestic bond markets have been compounded by geopolitical risk in Ukraine (which incidentally also drives demand for core European bonds, further helping rates fall). Geopolitical risk also has a distinct tendency to benefit sovereign debt markets over things like mortgage-backed-securities--offering yet another reason for Treasury rates to be falling faster than mortgage rates.
To conclude, Europe is a wet blanket on domestic interest rates. The proportions may not be epic, but they've been utterly persistent. The nature of the degrees of separation between the source of the market movement and MBS has meant that US mortgage rates have only managed to trickle modestly lower in the last few months. But the good news is that until something changes about the situation in Europe, it would be very hard for rates to embark on any significant move higher. That's a really long way of saying that the best 30yr fixed rates are in the low 4's until they aren't any more. On the upside, it also leaves the possibility open for an ongoing trickle to get us back into the high 3's. This isn't necessarily likely, but it's possible, and that's a lot more than we might have hoped for 9 months ago when the threat of moving out of the 4's instead meant "low 5's."
Loan Originator Perspective
"Lender pricing improved once again today. The rate sheets i have viewed showed lenders improving pricing by about .20bps. So if a rate yesterday was giving you a one point credit, it now should give about a 1.20 credit. My advice is unchanged from yesterday. If you are within 10 days of closing, you should take this opportunity to lock in the recent gains. Longer term closings should continue to float to see if these gains can be built upon. However, rates are putting up quite the resistance to move much lower. " -Victor Burek, Open Mortgage
"Rates were pretty flat once again today even in the face of a much better than expected consumer confidence reading which ended up being one of the best reports in many years. Thursday and Friday we will get some hard hitting data with the release of GDP and PCE reports. With equities trading at all time highs it is possible for the numbers to miss expectations and spark a bond rally but it is also equally possible for stronger than expected numbers to create a bond sell off. Locking today or tomorrow to protect your rate is the safest way to play the data. " -Manny Gomes, Branch Manager, Norcom Mortgage
"We're getting all too familiar with a slow and mostly sideways grind at or near current resistance levels. There is no telling when we bounce off these levels which direction the bounce will take us or what exactly might cause it. For borrowers with little risk tolerance and closing in the next 30 days, my opinion is to go ahead and lock in as pricing deteriorates quicker than it improves and my opinion is there is little to gain in floating " -Steve Chizmadia, Mortgage Advisor, American Capital Home Loans
"Another day of limited movement in rate markets, which is not a bad thing. The one month charts for both bonds and MBS show continued improvement. Until economic or geopolitical sentiment changes, we may enjoy further gains. As always, those close to closing or with limited/no risk tolerance could do worse than locking at current levels." -Ted Rood, Senior Mortgage Planner, tedroodteam.com
"Markets are eerily quiet so far this week with very little movement. Some potentially market moving data coming up on Thursday and Friday with another GDP reading, jobless claims, inflation data and some other economic data tidbits. I still think a locking stance for shorter term closings is warranted. Evaluation of your risk tolerance is warranted for longer term closings but in general the lack of recent volatility seems like it wants to stick around for awhile. Watch out for surprises though!" -Hugh W. Page, Mortgage Banking Officer, Seacoast National Bank
Today's Best-Execution Rates
- 30YR FIXED - 4.125
- FHA/VA - 3.75%
- 15 YEAR FIXED - 3.25%
- 5 YEAR ARMS - 3.0-3.50% depending on the lender
Ongoing Lock/Float Considerations
- The hallmark of 2014 so far has been a disconcertingly narrow range in rates. Too many market participants bet on rates going higher in 2014, and markets have punished that imbalance with a paradoxical move lower.
- As of June, rates were officially lower year-over-year, but that's due to rates' path higher in 2013. The current path in 2014 remains sideways.
- European markets continue to play a nagging role in the background, generally helping rates in the US remain lower than they otherwise might be.
- From a wider point of view, we're in limbo, waiting for the first significant move away from the narrow range. A rally into late May stood a chance to act as this break, but rates have since returned to what were previously the lower limits of the 2014 range.
- As always, please keep in mind that the rates discussed generally refer to what we've termed 'best-execution' (that is, the most frequently quoted, conforming, 30yr fixed rate for top tier borrowers, based not only on the outright price, but also 'bang-for-the-buck.' Generally speaking, our best-execution rate tends to connote no origination or discount points--though this can vary--and tends to predict Freddie Mac's weekly survey with high accuracy. It's safe to assume that our best-ex rate is the more timely and accurate of the two due to Freddie's once-a-week polling method).