May 9, 2014
Mortgage rates rose today, pulling back just slightly after spending 6 of the last 7 days in an aggressive move to the lowest levels in more than 6 months. There were no significant events for markets to consider, leaving this bounce to stand as more of a correction to the previous strength. In other words, today's higher rates are a product of normal market behavior and are not 'event-driven.' The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) remains split between 4.125% and 4.25%. Today's move equates to an effective increase of 0.03%.
When it comes to mortgage rates, it's good to remember that we're dealing with numbers that are directly related to movements in financial markets. Prices of Mortgage-Backed-Securities, or MBS are the key determinant in lenders' rate sheets. MBS tend to move in close proximity with other fixed-income investments like Treasuries, though not in perfect lock step That proximity is why many believe Treasuries dictate mortgage rates. In a way, Treasuries actually do determine mortgage rates, but only when MBS are moving in close proximity. There are days (and sometimes weeks and months) where MBS will move in a different direction and by different amounts.
Because of that relationship, and because Treasuries speak more to the broader momentum in the world of interest rates, we can observe certain behaviors that give us more info about how mortgages might behave in the coming days and weeks. Recently the most widely traded benchmark for longer term rates--the 10yr Treasury--has been having a tough time getting under the 2.57-2.60 area. That's like the 'warning track' in the 4 month range of 2.60-2.80. It coincides with mortgage rates at 4.25%.
The fact that rates have pushed into 4.125% to some extent is indicative of broader bond markets pushing more aggressively on that longer term range. 10yr yields spend more time trading under 2.60 this week than they have all year. But until and unless rates are convincingly breaking lower--until they're clearly past that warning-track that goes to 2.57, it makes sense to stay cautious about a common market phenomenon: a correction.
Corrections can be large or small and can serve to 'correct' strong movement in the long or short term. Mortgage rates have had a strong move over the past two weeks. Today's increase is a short term correction to that move. But rates (both mortgages and Treasuries) have also had good improvements over the past month and a half as well. If today's smaller correction is the beginning of a broader correction for that longer time frame, it would make even more sense to be locking now as rates might not be back this way for weeks. And that's another wonderful thing about financial markets... there's never any guarantee that rates would come back at all, though there are plenty of experts on both sides of that debate.
Loan Originator Perspectives
"Lock today to protect the recent gains we’ve seen in rates. Could see a little increase from the recent 6 month lows so locking in the gains seems like a good plan. If the downward trend continues, we can renegotiate for the improvements." -Michael Owens, VP of Mortgage Lending at Guaranteed Rate, Inc.
"LOCK--We're still at the bottom of the range and without substantial news to push us through the bottom, I expect we'll start to see rates rise as we move towards the middle of the 3 month range. If you've been floating, you've done well. Take your gains." -Brent Borcherding, www.brentborcherding.com
"A continued reluctance of the 10 Yr Treasury to break below 2.58 and remain there this week tells me there is a pronounced risk of recoil higher in rates. While I would love to be proven wrong about this, the prudent thing to do in this environment is to lock in these rates now if you’re closing within 30 days. For those on a longer time horizon for a closing, a “gut check” on your risk tolerance is in order as well as a frank discussion with your mortgage professional who should be in your speed dial." -Hugh W. Page, Sen. Mortgage Consultant, M.B.A. Capital Partners Mortgage
"Two steps forward, one back in rate markets as we lost a bit of ground today. We need compelling economic data or geopolitical strife to break our current rate range. It's uncommon to see large rate improvements on Fridays, and today is no exception. One day doesn't make a trend, we'll reload on Monday and see Ukraine and economic data take us. " -Ted Rood, Senior Mortgage Planner, tedroodteam.com
"The technical picture from bonds is turning bearish and caution should be exercised. Locking at the moment appears prudent for both short term and longer term closings. As we have learned things could change quickly and pricing still may improve further in the weeks to come but the risk appears to be outweighing the potential reward. " -Manny Gomes, Branch Manager, Norcom Mortgage.
Today's Best-Execution Rates
- 30YR FIXED -4.125 - 4.25%
- FHA/VA - 3.75-4.0%
- 15 YEAR FIXED - 3.25-3.375%
- 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 of the second week in May, rates were as low as they've been since November 1st, certainly suggesting a break of the 2014 rate range, but still lacking confirmation from related markets.
- (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).