May 10, 2013
Mortgage rates rocketed higher precipitously today, taking them to their highest levels since April 2nd. The move was all the more confounding as it happened on a day with no significant headlines or data releases--at least not the caliber of information that normally motivates such violent swings. When the dust settled, borrowing costs at the 3.5% 'best-execution' were up anywhere from 0.4 to 1.2% depending on the scenario (this is equivalent to $400-$1200 in closing costs or lender credit for every $100k financed). It was also enough of a move to bring 3.625% back into picture and as a viable best-execution contender. The differences between those two rates are minimal in terms of efficiency, and in most cases, the choice amounts to a trade off between up front cost and monthly payment.
While there was no overt causality for today's big movement, it wasn't without it's reasons. That said, the reasons (or 'probable' reasons, as the case may be) have to do with some of the more esoteric factors driving mortgage rates. We know that Mortgage-Backed-Securities (MBS)--the financial instruments that groups of similar loans ultimately become, have the most direct effect on mortgage rates. We've also spoken about how the movements of MBS prices are often very similar to movement of bond prices, particularly in US Treasuries.
While gyrations in the mortgage market can certainly have an effect on Treasuries, more often than not, it happens the other way around, and today was definitely one of those days. There are several ways to approach the reasoning behind this quick move lower in price (lower bond prices = higher interest rates), but thankfully the most tangible is also the most important when it comes to deciding how to approach the mortgage rate environment.
Simply put, rates were in a well-defined range that had been moving higher since mid 2012, and this continued to be the case until early April's market movements challenged the trend. This could be thought of as "railroad tracks" that had contained all of the movement through early April, with rates breaking lower, outside the railroad tracks after that. The chart appearing in the this morning's MBS Commentary gives an idea of this with the yellow lines below:
The risks outlined this morning included the possibility that rates, in general, were getting drawn back into the longer-term uptrend (back inside the railroad tracks), after what might turn out to be an overly exuberant attempt to break out. This could also turn out to be just what markets want you to think. There's never any way to know for sure what the future holds in financial markets, but for those looking for retrospective explanations, today could be viewed as a sort of rush to get back to a defensive position against the next significant economic data.
After all, that's exactly how the breakout of the longer term trend first happened as markets were "defending" against the possibility that last Friday's jobs report would be as weak as a lot of the data leading up to it. When markets are moving in one direction with momentum (as they were when coming down from March's rate highs), and big events lie ahead that could suggest even more movement in the same direction (like last Friday's Jobs report), trading levels have a tendency to get a bit ahead of themselves in defensive anticipation. It's easier to trade the bounce back if you're wrong than to try to catch up with the rest of the crowd who ran ahead.
That "bounce back" is precisely what happened on Friday. Rates had gotten just a bit lower than they probably would have otherwise been without the major headline on the horizon. This "probably" level is approximated with the dotted white line in the chart above. Once the jobs report came in resoundingly stronger than expected, rates moved EXACTLY back to the dotted white line to close out the previous week and have gotten back to the business of trading in the same old railroad tracks this week. Today's move was meant to look like a confirmation that this is indeed the case. Retail Sales on Monday may ultimately decide whether or not we're getting ahead of ourselves running back in the other direction this time.
Loan Originator Perspectives
“Bond markets tumbled today, sending rates back to recent highs. We’ve been advising clients to lock in pricing at application to avoid days like this, glad they’ve taken that advice. The bigger question is if we’ve hit the top of rate range, or if next week will lead to further worsening. For this weekend, anticipate locking new applications unless clients enjoy gambling. Personally, I don’t.” -Ted Rood, Senior Originator, Wintrust Mortgage
"Today was a repeat of last Friday with sharp selling in key MBS coupons lenders use as benchmarks for pricing consumer rates. Rates rise when MBS prices drop on a selloff, and rates are up .125% today and could go higher if there's no recovery Monday. We're now marching back to the higher levels of the year that we say from late January to early April. This is a wake up call for refinance loan shoppers. As for home buyers, they can't lock rates until they're in contract on a property, so they're subject to rates at that time." -Julian Hebron, Branch Manager, RPM Mortgage.
Today's Best-Execution Rates
- 30YR FIXED - 3.5% - 3.625%
- FHA/VA - 3.25% (varies more between lenders than conventional 30yr Fixed)
- 15 YEAR FIXED - 2.75-2.875%
- 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 are challenging the long term trend higher
- Lingering concerns over European finances have helped keep Core EU rates low, which has some "spillover effect" onto US Rates.
- Domestic economic weakness has played a role in helping balance the outlook for Fed bond-buying.
- We're at a crossroads where we'll soon see if the "rising rate environment" remains intact or is successfully challenged.
- (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).