January 6, 2015
Mortgage rates are on an absolute tear. In the past 2 days, they've rocketed a full eighth of a point lower. They're a full quarter point lower than the average rates available in 2nd half of December and .375% lower than December's highest rates. For anyone feeling like they missed out in May 2013 as the taper tantrum began, here's your opportunity. Today is officially the first day we can say that rate sheets are at least as good as May 21st, 2013, the day before Bernanke's congressional testimony unofficially kicked off the taper tantrum and sent mortgage rates quickly higher.
At that time, the abrupt rise meant a move up to 3.75% from 3.625%. Today's gains restore 3.625% as the lowest widely-available rate for the best borrowers. One caveat is that this is somewhat dependent on the lender at the moment. Not all lenders improve their pricing in lock-step with the rest of the market, but if underlying MBS (mortgage-backed-securities) prices are in similar territory tomorrow, they'll follow suit.
Unfortunately, that poses a bit of a problem from a historical standpoint. Past examples of similar moves suggest we have a bounce in the near future. This is by no means guaranteed, but on other occasions where rates have fallen this fast and for this many consecutive days, there's a much better than random chance that we get at least one day of a correction. The most recent example on October 15th resulted in rates moving higher for almost 3 weeks! While the circumstances surrounding today's drop in rates are different, it's still a good reminder about the potentially fleeting nature of long-term lows.
The takeaway is that your strategy should depend on your time horizon, among other things. Of course you should never float if you can't stomach some losses if markets move against you. Beyond that, however, it doesn't make much sense to keep pushing for additional improvements here if you have a loan in process and are closing any time soon. In these cases, floating is more for those who are buying into the long-term trend that's carried rates lower throughout 2014 and into 2015 (itself, part of an even longer term trend going back to 1980), and who have time to wait for it to play out. Everyone else should be focused on the increased risks of a pull-back.
For the record and to be totally clear, none of my assessment here is based on what I think rates will do in the intermediate-to-longer term. If anything, I'm generally optimistic about rates until Europe manages to turn a significant corner. This is all about past precedent and today offering a guaranteed chance to take advantage of an opportunity that most everyone had given up on.
Loan Originator Perspective
"Mortgage rates make another move lower to best levels in quite some time. Anytime rates set new lows, it isn't a bad idea to consider locking. Many people want to lock at the bottom, but the problem with that approach is you don't know where the bottom is until it is past. Without a doubt, if you are within 15 days of closing, I would be locking today." -Victor Burek, Open Mortgage
"Nothing to consider here, if you are within 30 days locking is by far the most intelligent option." -Constantine Floropoulos, Quontic Bank
"This movement down is moving pretty quickly, probably a little too quick. When this typically happens, it will often be followed by a few brutal days the other way! Just be prepared and don't be greedy!" -Jason York - VP of VA Operations, Prime Mortgage Lending, Inc
"Our rally continued today, as both government and mortgage bonds posted large gains. We're now at levels not seen since mid May 2013. After a run like we've had the past 7 days, it's likely we'll pull back, at least short term, soon. The main market motivation, however (deflation, EU economic distress and QE) remain intact. I can see going either way here....locking at best pricing in 20 months, or holding out for further gains. In any case, borrowers who missed the refi boat in 2013 have been given a new opportunity!" -Ted Rood, Senior Loan Originator
Today's Best-Execution Rates
- 30YR FIXED - 3.625-3.75
- FHA/VA - 3.25
- 15 YEAR FIXED - 3.0-3.125
- 5 YEAR ARMS - 3.0 - 3.50% depending on the lender
Ongoing Lock/Float Considerations
- The hallmark of 2014 was 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 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 was chalked up to an epic slump in oil prices. This drags inflation expectations lower, which is a net-positive for interest rates, but it could be debated as to whether oil prices were a chicken or an egg in the global growth story.
- 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).