October 14, 2015
Mortgage rates dropped quickly today, getting them much of the way back to lows seen at the beginning of the month. For context, there has only been one day in the past 5 months with better rates (Friday October 2nd, immediately following the weak jobs data). That means the average lender is quoting conventional 30yr fixed rates between 3.75 and 3.875% on top tier scenarios. A few of the more aggressive lenders are already back down to 3.625%.
Once again, weak economic data is at the scene of a strong move lower for mortgage rates. This time around it was a doubleheader, with both Retail Sales and Producer Prices missing the mark. Retail Sales of course, speaks to consumer demand for goods and services. Lower numbers suggest lower growth. Indeed many market-watchers downgraded GDP estimates after the data. Lower economic growth potential tends to coincide with lower interest rates.
The other quintessential consideration for interest rates is inflation. The producer price data speaks to that. It was WAY under the median forecast (+0.8 vs +1.2 year-over-year). Even if it had hit the +1.2 forecast, that's still exceptionally light inflation historically. Low inflation is good for interest rates.
Long story short, the two key considerations for interest rate movement both suggested a move lower today. It also didn't hurt that stocks fell. Stock prices and interest rates have been tracking fairly well lately as financial markets consider a big picture shift in the global economic outlook.
Loan Originator Perspective
"Weak data this morning has helped rates break through resistance. Rate sheets are marginally better today and some lenders have repriced for the better as of 2pm est. Nothing wrong with locking here, but if you can tolerate the risk, I think it would be wise to float overnight to see if the rally can continue and to also allow lenders time to pass along the gains." -Victor Burek, Churchill Mortgage
"Mortgage rates continue to improve and any time we break below 2% on the 10 year treasury, as we have here, I'm suggesting you float. One of these tests is going to be more than a test and the sign of a continued move lower. Let's float and hope this is the one." -Brent Borcherding, brentborcherding.com
"Today's worse than expected PPI report is raising the deflation alarm. Mortgage bonds cheered for the bond market generally loves deflation. It however is not good for the economy or the stock market. This deflation rally may hang around for awhile, especially if stocks continue to trader lower. I am floating carefully." -Manny Gomes, Branch Manager Norcom Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 3.75-3.875%
- FHA/VA - 3.5%
- 15 YEAR FIXED - 3.125%
- 5 YEAR ARMS - 2.75 - 3.25% depending on the lender
Ongoing Lock/Float Considerations
- 2015 began with a strong move to the lowest rates seen since May 2013. The catalyst was Europe and the introduction of European quantitative easing. Investors bet heavily the move lower in European rates and domestic rates benefited as well. But with those bets finally drying up in April and with the Fed seemingly intent on hiking rates in the US, May and June saw a sharp move back toward higher rates. The implicit fear is that global interest rates set a long term low in April, and have now begun a major move higher.
- July said "not so fast" to that potential "big bounce." Some of the data began to suggest the Fed is still a bit too early in talking about raising rates in 2015--particularly, a lack of wage growth or any promising signs of inflation. But Fed proponents maintain that low inflation is a byproduct of temporary trends in the value of the dollar and the price of oil, and that once these factors level-off, inflation will ultimately return. That side of the argument suggests that inflation could increase too quickly if the Fed hasn't already begun normalizing interest rates.
- With all of the above in mind, locking made far more sense for the entirety of May and June, and we were not shy about saying so. The second half of July saw that conversation shift toward one where multiple outcomes could once again be entertained. In other words, we went from "duck and cover!" to "let's see where this is going..." Even the Fed took a similar stance when it held off raising rates when it had an excellent opportunity to do so in September's meeting.
- In the bigger picture, financial markets are now at a crossroads. This is true for both stocks and bonds, with each trying to determine if it will move back into the the ranges seen in June and July or if the recent move lower in yields and stock prices was merely the first wave of a longer campaign. If we take the Fed at their word, and if we forego any concerns about increasingly weak global economic growth, there is certainly more risk that rates move quickly higher vs quickly lower. Hoping for lower rates is a long-term game meant only for economic pessimists who know the fact that the world is doomed will come to light fairly shortly. The latter must also be willing to pay higher rates if they end up being wrong (or otherwise unwilling to wait long enough to be right). All that having been said, those pessimists have increasingly been proven right as 2015 has progressed.
- 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, conventional 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).