May 2, 2014
Mortgage rates and many other areas of financial markets moved in shockingly counterintuitive ways after today's big jobs report. Nonfarm payroll creation stood at 288k in April, significantly higher than the 210k forecast. This is the single most important piece of economic data out each month, and when it's so much stronger than expected, that historically all but guarantees that rates will be heading higher. But that was NOT the case today! To give you an idea of how rare this is, a 78k 'beat' has never before resulted in a move like this. The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) is now solidly into 4.25% territory with some lenders already close to 4.125%!
How did this happen?
First off, we discussed some growing predisposition toward lower rates building in yesterday's trading session, but also warned that it didn't necessarily mean rates could still improve in the face of much stronger jobs report. Indeed this was the case AT FIRST today, as bond markets pushed rates significantly higher immediately following the report. But then, disconcerting headlines surrounding the Ukraine/Russia conflict began surfacing and increasing in severity, with the most notable being Russia's request for an emergency meeting with the UN Security Council.
It's not fair or accurate to say that rates are lower ONLY because of these headlines. In fact, markets often use these sorts of events as cover and justification for trading decisions that might otherwise seem to not make enough sense. But it's highly unlikely that rates would have been able to move lower today in the face of such a jobs report without help from this additional variable. At this point, it's a guessing game as to how much of the strength owes itself to that predisposition and how much owes itself to geopolitical risk. One of the only safe conclusions that can be made is that while we're now breaking out of the 2014 rate range, we would certainly remain in that range if we factored out the geopolitical risk.
The best policy with respect to your lock/float decisions continues to be one that respects the volatile possibilities inherent when geopolitics are having an effect. We haven't broken out of the 2014 range convincingly enough to conclude a new trend is forming, though we're close. Until we can confirm that, it makes sense to stay super defensive against the possibility that any gains could quickly evaporate, even if the move higher doesn't end up breaking the range on the other end.
Loan Originator Perspectives
"Blowout employment data sends rates higher....wait, that didn't happen, rates rallied. It appears geopolitical drama is much more important than very solid economic data. The problem with rallies from geopolitical issues are they can be resolved at any time, unlike a economic report that is released at a specific time and date. Today's pricing is the best we have seen in many months. It appears things will get worse before they get better in Ukraine which does favor floating. If you are happy with today's unexpected gains, nothing wrong with locking, but lenders haven't passed along all the gains." -Victor Burek, Open Mortgage
"In the world of completely unexpected turn of events, today is about as big of a surprise as you can imagine. I would float cautiously into Monday, because if we can sustain this break lower...this could be just the beginning. That said, be ready to lock on Monday because a move higher will likely do so with quite a bit of momentum." -Brent Borcherding, www.brentborcherding.com.
"Headline news on the Jobs Report was a way better than expected 288K jobs created and it scared more than a few loan originators at 8:30 this morning. But, once the market digested some of the weaker internal aspects of the report the rally we've experienced this week regained its footing. Still, as we continue to bounce around the bottom of the range we've been in for awhile the risk of a move higher may outweight the prospects of more moves lower. I still believe locking these gains is prudent and removes that risk." -Hugh W. Page, Sen. Mortgage Consultant, M.B.A. Capital Partners Mortgage
"Remarkable day in rate markets, as Ukraine Drama trumped a shockingly strong jobs report and rates improved. Typically, a robust jobs report sends interest rates soaring; today is a rare exception. Whether the rally will continue depends almost entirely on Russia's response to the unrest. International tension can develop quickly, and sometimes wane just as fast. Float for now, IF you have some time before closing and am able to reach your originator quickly to monitor loan pricing." -Ted Rood, Senior Mortgage Planner, tedroodteam.com
"Strong Jobs report and a bond rally!! Things are certainly going against the norm. Maybe it was the labor participation rate which spooked the market or news from Ukraine of increased tensions. What ever the reason I am happy to have floated loans closing outside of two weeks. Float but be on guard. Things can change at anytime. " -Manny Gomes, Branch Manager, Norcom Mortgage
Today's Best-Execution Rates
- 30YR FIXED -4.25
- FHA/VA - 3.75-4.0%
- 15 YEAR FIXED - 3.375%
- 5 YEAR ARMS - 3.0-3.50% depending on the lender
Ongoing Lock/Float Considerations
- The Fed has stayed the course on their $10bln per meeting reduction in bond buying, though markets have handled it relatively calmly compared to the days of "coming to terms with tapering" in 2013.
- Rates fell significantly in January, leveled-off in February and took choppy steps higher in March, they've since settled into a flat range mostly consisting of 4.375 and 4.5%, but with occasional forays to 4.25 and 4.625%
- The uncertain impact on the economy from the colder-than-normal winter weather as well as geopolitical risk surrounding Ukraine helped the range persist.
- While the bias had been generally toward higher rates, it reversed course in April and rates returned to the lower end of the range by May 1st. As the "weather effects" fall out of the spotlight, market participants are seeing a bit more organic weakness in the economy than they'd expected. The focus is returning to economic data to determine where we go from here.
- (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).