December 29, 2014
Mortgage rates continued chipping away at the moderately abrupt increases seen last week. Today's gains were indirectly a result of political instability in Greece. After Greece's parliament failed to elect a new President, the country will be forced to hold a new national election. The frontrunner is an advocate of Greece exiting its bailout agreement. At best, this has growth implications for the Eurozone. At worst, it could be broadly destabilizing.
When such things happen in Europe, the strongest countries with the soundest sovereign debt end up coming out ahead. The benchmark for European bond markets is Germany, and Germany's 10yr sovereign debt yield fell to another record low today after the Greece news. Strength in the German bond market usually translates to strength in the US bond market, and this includes the mortgage-backed-securities that dictate mortgage rates. Of course it's not a one-to-one relationship, but a positive contribution nonetheless--especially on a day where little else is happening to inspire market movement.
The net effect was a drop in the costs associated with the most prevalently-quoted rates. For top tier borrowers seeking conforming 30yr fixed loans, those rates are currently 3.875% and 4.0% depending on the lender. With the New Years holiday closing down markets for a day and a half, and kids out of school, market participation will remain light for the rest of this week. We've now seen enough resilience to balance the outlook heading into the end of the year. It continues to be the case that rates could easily move slightly higher or lower over the next few days and that we won't get a glimpse of the next major trend until next week at the earliest.
Loan Originator Perspective
"Rates dropped slightly today, as more EU Drama arose in Greece. It's pretty clear that the EU still faces the same issues it has, and that bodes well for US bonds, including MBS. Our long term rate trend still slopes down, and those with some time and risk tolerance may want to consider floating until they near closing. If your loan pricing and/or debt ratios are tight, and your loan works at present rates, nothing wrong with buttoning it up and removing all risk as well." -Ted Rood, Senior Mortgage Originator, MB Financial Bank
"What happens when a country can't elect a president? I myself am not sure what the answer to that question but what I am sure of is Markets do not like that level of uncertainty and a flight to safety is generally the outcome. Greece failed to elect a new leader and our bond market and others around the world rallied on the news. It may be wise to float as the Greek drama plays out. " -Manny Gomes, Branch Manager Norcom Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 3.875-4.0
- FHA/VA - 3.25
- 15 YEAR FIXED - 3.125
- 5 YEAR ARMS - 3.0 - 3.50% depending on the lender
Ongoing Lock/Float Considerations
- The hallmark of 2014 has been a narrow range in rates. Too many market participants bet on rates going higher in 2014, and markets punished that imbalance with a paradoxical move lower. This continues to serve as a reminder that prevailing beliefs about where rates will go won't necessarily be correct simply because they're the most prevalent.
- European bond yields have trended constantly lower in 2014, thus playing a prominent role in keeping US rates lower than they otherwise might be. Many feel that Europe will continue to slide until their central bank engages in US-style quantitative easing. Some see this happening in early 2015. In any event, we're looking for a turn in Europe, first and foremost, before worrying about the longer-term trend in bond markets being at serious risk of reversing.
- Much of 2014 could be considered "sideways to slightly lower" in terms of mortgage rates. All things considered, it actually has been a remarkably gentle drift lower. Things became less gentle in mid October when rates briefly broke into the high 3's. They came back for a more gradual, determined push into the 3's in December. Some of the late-year strength is being chalked up to an epic slump in oil prices. This drags inflation expectations lower, which is a net-positive for interest rates.
- 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).