August 2, 2013
Mortgage rates fell sharply today, matching the pace of yesterday's abrupt move higher. By the end of the day most lenders were close to their best rates of the week. Whereas 30yr Fixed best-execution was near a move to 4.625% yesterday, it's well back into the 4.5% range today with buydowns to 4.25% once again making sense for some scenarios (meaning that a top-tier borrower not paying any discount points at 4.5% may find long term value in paying the points associated with moving the rate down to 4.25%).
Today's much-anticipated Employment Situation Report was tamer than expected, with fewer jobs created despite the drop in the unemployment rate. Job creation (or "payrolls") is actually a much more important metric than unemployment (U/E) as far as markets are concerned. Part of the reason for this is the nature of the U/E calculation in that it relies on survey data from the general public to determine the size of the labor force. If more people who previously counted themselves as unemployed say they're not looking for a job, the unemployment rate goes down even if those people don't find work.
The payrolls data, on the other hand, is derived from a survey of companies (as opposed to individuals). The companies report the number of payrolls added or subtracted for a given criteria. The sample size is extrapolated to the entire workforce and the number of public and private payrolls added or subtracted from the economy is determined. These numbers end up being revised several times, but even on the first reading, economists and forecasters predict the results, a consensus is formed, and markets react--sometimes violently--to any deviation from that forecast.
Today's report was expected to show 184k new payrolls and only saw 162k. This is not a huge miss in terms of this report, but it's an important one in the current climate. This is because market participants are trying to determine if the Fed is more likely to begin reducing their asset purchases ("tapering") in September or December. The sooner that happens, the worse the implication for mortgage rates (because less money flowing in from the Fed drives the cost of financing up--a cost that's passed on to consumers in the form of higher up front costs or higher rates).
Markets were prepared for the worst today, and indeed, if payrolls were well over 200k, rates may well have moved sharply higher. As it stands, the 162k level was enough to cast doubt on September as the most likely time frame for tapering. This is good for rates today but that doubt will have to continue in order for more progress to be made. Unfortunately, the volatility of the past few days remains inside the gradual trend higher in rates (you can see that trend on this page by zooming in the chart). That's the sort of thing that COULD be in the process of holding more sideways or turning around, but there's no way to be sure that will happen. It's just as easily the kind of movement that will continue higher. Bottom line: today was a relief, and it may turn into something more, but we're still in a rising rate environment until proven otherwise. Floating is less risky today than it has been leading up to today, but nothing should be taken for granted.
Loan Originator Perspectives
"Today's NFP report's weakness was enough to stabilize rates near Thursday's AM levels. Too early to tell if we can progress from there, but at least we recaptured yesterday's losses. While data was tepid, can't feel certain it will result in markedly lower rates. For now, we're sitting on a mid 4's rate ledge, remains to be seen if we fall off it soon." -Ted Rood, Senior Originator, Wintrust Mortgage
"Nice recovery but we're still not as low as we should be in my opinion. I think the next jobs report will dissappoint as well. The types of jobs being created are low paying or part time. This is why GDP numbers are not great. I think the FED knows this and they are worried behind the scenes. We haven't even seen the effects of higher rates in the reports for home sales, but they're coming and they will disappoint. That's when rates retreat below 4% again. Hopefully :) " -Mike Owens, Partner, Horizon Financial Inc.
"Weak payroll data has helped us to recover all the loses from yesterday. Despite that, lender rate sheets are still worse than the opening ones from yesterday. Two reasons for that 1)lenders always slow to pass along gains, 2) its Friday. If you floated through today, I would definitely float til Monday and re evaluate your pricing." -Victor Burek, Open Mortgage
"Today, for one day, I suggest floating. This Friday - this odd day when NFP disappointed, but not horribly, has seen the MBS coupons improve tremendously. The lenders haven't kept up - maybe it's the "Friday" pricing, maybe it's awaiting confirmation of the 10 year yields below 2.62 on Monday, maybe lenders are tired of volatility. The float suggestion today is related to a unrealized gains, which should hit Monday. Reevaluate and play defense again next week." -Matt Hodges, Charlottesville Sales Manager, Presidential Mortgage Group
Today's Best-Execution Rates
- 30YR FIXED - 4.5%
- FHA/VA - 4.25%
- 15 YEAR FIXED - 3.625%-3.75%
- 5 YEAR ARMS - 3.0-3.25% 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
- 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).