July 5, 2013
Historical data has its limitations when it comes to mortgage rates. For instance, the longest-running series are only updated once a week, making it hard to determine exactly where an individual day falls in the record books. Even then, today's rise in mortgage rates is among the largest ever, and certainly the largest in the past 10 years. Today alone, rates rose more than most entire weeks. Conventional 30yr Fixed best-execution rates moved forcefully into 4.75% territory, with some lenders at 4.875%. That means that any rate quoted on Wednesday would be roughly 0.375% higher today--brutally ironic considering the most mainstream weekly rate survey from Freddie Mac noted that rates "reversed course and ticked down" on Wednesday.
Today's catastrophic surge higher was a direct effect of a stronger-than-expected Employment Situation Report, which not only showed June job creation to be better than expected, but revised the last two months into stronger territory as well. The more profound indirect consideration is the report's role as the key barometer for Fed policy. This is the reason the rise in rates of the last two months has been as sharp as it is.
(Read More: Why Did Mortgage Rates Skyrocket Past 2013 Highs on May 22nd?)
(Read More: Mortgage Rates Annihilated; Brief History of All-Time Lows)
Fed policy is also the reason rates have been as low as they have been as it has allowed for an unprecedented stream of direct investment into the secondary mortgage market. The Fed's third round of quantitative easing in late 2012 reinvigorated a tired rate rally and for the rest of the year, markets were more interested in how much more the buying spree might be extended as opposed to how soon the Fed might stop buying. In early 2013, some talk of slowing those asset purchases was heard from various Fed members, with Bernanke himself discussing tapering prospects in a press conference on March 20th.
At that time, Bernanke said that the Fed was looking for something stable from labor markets, hinting that recent improvements were sufficient to consider dialing back on stimulus but that the Fed would need to be sure the Strength wasn't temporary. The jobs report that came out 2 weeks later was horribly weak, suggesting that markets didn't have the stability the Fed was looking for, and the tapering fears subsided. As it happens, that set markets up for a massive sucker punch when May's numbers not only came in strong, but revised the horrible April numbers into territory consistent with the stability the Fed sought.
A week later, panic mode began to set in as markets realized they'd run too far in the wrong direction (lower in rate) and had to hurry higher in case this was more than another fire drill. Minutes from the Fed meeting released on May 22nd fanned the flames and jobs numbers on June 7th confirmed the trend in labor market data remained intact. June 19th gave the Fed an official opportunity to reiterate their stance, which they did. This left today's Jobs numbers as yet another potential nail in the coffin for Fed asset purchases.
The strength of today's data--while debatable in a historical context--marks progress in the recent economic context, and it goes a long way toward solidifying markets' expectations that the Fed will start backing off asset purchases at their September meeting. Some economists think the Fed could taper asset purchases as early as the July meeting, and while today's data increases those odds, it's not a majority viewpoint and isn't likely to become one.
Even so, the reiteration of September tapering likelihood is an austere moment for bond markets. When it finally happens, it marks the end of an era for the Mortgage-Backed-Securities that most directly affect mortgage rates (MBS). The Fed has maintained that it would increase buying again if it becomes economically necessary, but rates markets are less interested in considering that upside risk as they are in fearing that 2012 may have marked a generational interest rate low--30 years in the making.
Even if that's not what ultimately happens here, the fact that it's even on the table makes the cost of protecting against volatility astronomically high for interest rates. So not only do we have the price of debt falling due to Fed tapering fears, but extremely high volatility puts additional pressure on prices--especially prices of MBS. When those prices fall, rates go up. The downward spiral for mortgage rates doesn't end there as the individual lenders must also build in a cushion against rampant volatility, further magnifying an already awful situation for anyone hoping to secure a mortgage.
Is it awful in and of itself--as a frozen moment in time? Not at all. Rates in the mid-to-high 4's are some of the best ever before mid-2011. But since then, not only are those rates on the highest end of the spectrum, but we were fairly close to all-time lows at the end of April. That makes the past two months incredibly abrupt, and it's that rate of change that's most painful for mortgage rate shoppers who may have seen a rate quote a few days/weeks/months ago only to shake their heads in disbelief over today's rates.
At this point, it is not safe to assume anything about the upcoming week. So many times in the past 2 months, there's been an urge to think "surely, that must be as high as rates go for a while," but we have yet to see any meaningful reversal.
Loan Originator Perspectives
" If you are choosing to float your mortgage lock in this market you definitely taking a gamble as today’s market reaction has proven. Weigh your risks vs potential gains carefully. You can’t lose with locking in and securing your loan terms. " -Kenneth Crute Branch Manager Prime Mortgage Lending Inc
"If there was any doubt over the future direction of rates, today's MBS reaction to June's jobs report obliterated it. We've lost the most ground in one day EVER, and best execution rates may be in the 5's soon. It's impossible to overstate the magnitude of MBS losses in the past 2 months, and anyone who was floating a loan is in for a rude awakening when they look at current pricing." -Ted Rood, Senior Originator, Wintrust Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 4.75-4.875%
- FHA/VA - 4.25% -4.75% (depending on lender buy-down structure)
- 15 YEAR FIXED - 3.875%
- 5 YEAR ARMS - 3.0-3.5% 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
- Uncertainty over the Fed's bond-buying plans is causing immense volatility in rates markets and generally leading rates quickly higher
- Fears about the Fed's bond-buying intentions were proven well-founded on May 22nd when rates rose to 1yr highs after the Fed indicated their intention to taper bond buying programs sooner vs later
- The June 19th FOMC Statement and Press Conference confirmed the suspicions. Although tapering wasn't announced, the Fed made no move to counter the notion that they will decrease bond buying soon if the economic trajectory continues
- Rates Markets "broke down" following that, as traders realized just how much buy-in there was to the ongoing presence of QE. These convulsions led to one of the fastest moves higher in the history of mortgage rates and market participants have not been eager to be the among the first explorers to head back into lower rate territory until they're sure they'll have some company.
- (As always, please keep in mind that our Best-Execution rate always pertains to a completely ideal scenario. There are many reasons a quoted rate may differ from 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).