October 27, 2015
Mortgage rates were sideways to slightly lower today, depending on the lender. Whereas some rate sheets were carbon copies of yesterday's latest offerings, others were markedly improved. Any discussion of movement in the mortgage rate world these days would be incomplete without pointing out the fact that everything has been taking place in an exceptionally narrow range. While we can technically observe that the 'effective rate' is changing from day to day, all of the recent changes have been to the upfront costs/credit as opposed to the contract rate itself. 3.75-3.875% have been the dominant lender quotes on top tier conventional 30yr fixed scenarios for weeks.
What's it going to take to change that? It's one of those things that we'll know when we see. For pretty much the entire year, the consensus in the media has been for rates to move higher, yet here we are flirting with the lowest levels in 6 months. In other words, if someone tells you what the catalyst for change will be, they're guessing. The better guesses would include at least some mention of the big picture as opposed to Federal Reserve rate hikes. It's really that broader, global economic trend that will do most to dictate longer-term rates like mortgages. After all, that's the entire reason rates are as low as they are despite the ever-increasing sense of the Fed's rate hike intentions.
All that having been said, it's not a mistake to consider Fed policy in the rate outlook, but it makes more sense to do so in the context of volatility. History gives us examples of the Fed Funds rate moving up from an extended period of long term lows only for mortgage rates to fall. Part of the reason for this counter-intuitive movement is the fact that bond markets can rapidly adjust to changing market conditions and expectations of Fed movement well before the Fed actually hikes. It's more than fair to consider that this same dynamic is behind much of the upside drive in rates during 2015.
Loan Originator Perspective
"If you have been floating, you should be seeing better rate sheets today. Bonds continue to consolidate toward the bottom end of the range. As of about 2pm eastern a couple lenders have repriced for the better. With today's gains, I think it would be wise to go ahead and lock in prior to tomorrow FOMC announcement. All of our recent gains could be wiped out very quickly tomorrow. " -Victor Burek, Churchill Mortgage
"While bond markets enjoyed strong support and posted gains today, rates didn't seem to benefit accordingly, as many lenders remained near yesterday's pricing. We'll see what the rest of the afternoon brings, but from my perspective, pricing could easily be 40-50 bps better than it currently is. I'll hold off locking for the moment, given the fact we're "owed", but will certainly have my finger on the lock button for all floating loans tomorrow when the Fed Statement is released." -Ted Rood, Senior Loan Originator
"Mortgage rates and pricing have been moving within a fairly narrow range for pretty much all of October. It could be markets are simply waiting to hear from the Fed and get some indication of direction from them. Tomorrow we hear from the Fed and it always has the potential for fireworks although I don't expect any tomorrow. A change in language from the Fed could spark sharp movement nonetheless so I would be locking here as any Fed meeting for the next 6 months could be market moving in a big way." -Hugh W. Page, Mortgage Banker, SeacoastBank
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).