October 28, 2015
Mortgage rates moved quickly higher after today's Fed Announcement. While the Fed was, by no means, expected to hike rates in October, there was a risk that the statement would introduce some verbiage that opened the door for a rate hike in December.
Those of us that saw this verbiage change as a possibility figured it would be a clear warning about where the Fed's collective minds were. Reason being: the recent economic data hasn't really justified any acceleration in the rate hike timeline, so if the Fed STILL insisted on alluding to a December hike, we'd know they were fairly serious about it.
Many market participants agreed--having pushed out bets on the first rate hike to March of 2016 due to the recently downbeat economic data. They figured there was little chance that the Fed would be hiking in 2015 with absent inflation and deteriorating economic conditions. It came as a surprise that the Fed was not only relatively upbeat about the economy, but actually went so far as to change the verbiage that referred to rate hike timing. That verbiage now specifically discusses "the next meeting" (December). While it doesn't promise a hike at that meeting, it's a clear warning shot and markets reacted accordingly.
Shorter term Treasuries (which are more directly affected by the Fed's policy rate) rose significantly. Longer term rates like 10yr Treasuries and the rates implied by mortgage-backed-securities, still got hurt, but not quite as badly. Many lenders that had been quoting 3.75% on conventional 30yr fixed loans have now moved up to 3.875%. That said, there were plenty of lenders that remained at the same rates seen yesterday with only moderate increases in upfront costs. We've definitely seen bigger swings after surprising Fed news.
Is it a game-changer? It's too soon to tell, but it does make a lot of sense to protect against that possibility while rates are still holding inside the recent range.
Loan Originator Perspective
"Ok, so Fed Day arrived. The consensus was that they wouldn’t raise rates, and they didn’t. Everyone wanted to know their tone and see what they said. They seemed to think we’re doing a little better than last meeting and aren’t as concerned about China as before. So with a little bit of a hawkish view bonds sold off and hurt rates a bit. We’ll see where we go from here. A lot of data coming up and now the question is will they hike in December or not. In the short term I’d think locking is prudent unless some catalyst, most likely very bad data, appears to push us lower than the range we’ve been in. But we’re still range bound, but will see how markets interpret things as we go forward." -Jeff Anderson, Loan Officer, Salem Five Mortgage, LLC
Today's Best-Execution Rates
- 30YR FIXED - 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).