November 2, 2015
Mortgage rates continued slightly higher today, after hitting 1-month highs late last week. In general, the mortgage rate environment has been under pressure since last week's Fed Announcement. To reiterate a frequent point, the Fed doesn't control or set mortgage rates. That said, MBS (the mortgage-backed-securities that most directly influence rates) do tend to move in concert with US Treasuries and both tend to move toward higher rates when the Fed is expected to tighten policy. In other words, markets are "pricing-in" a rate hike for December after last week's Fed announcement.
That means by the time the Fed actually hikes its policy rate, mortgage markets (and other bonds) will already have moved toward higher rates. In fact that's one of the key reasons we're not currently at all-time lows. The process has been underway by varying degrees since 2013, but clearly met resistance in 2014 and early 2015. With average rates still in the high 3's, you could say that resistance is ongoing. Bottom line, by the time the hike arrives, mortgage rates might not continue higher.
The catch is that they'll be under more pressure in the meantime as markets ramp up expectations for the hike. The more it looks like the hike will happen in December, the more rates will drift higher. Fortunately, the pace won't be extreme by historical standards, but there will be pockets of increased volatility in the near term. This week is more likely than others to be volatile due to the amount and importance of the economic data. Friday morning's jobs report is an especially risky day. Definitely be locked by Thursday if you can't afford to roll the dice.
Loan Originator Perspective
"Very busy week for economic data culminating with the non farm payrolls report on Friday. It is always risky to float through NFP. Looking at past months, rates tend to worsen heading into the report. I think you might be safe to float overnight but if you plan to lock before NFP, then tomorrow might be your last chance. MBS have rallied off the lows of the day, not quite enough to justify a reprice for the better." -Victor Burek, Churchill Mortgage
"Rates rose slightly today as NFP week's festivities began. The September report (released in October) was dismal, and helped rates rally for much of the month. Traders and Fed members will closely examine the revisions to September's report, as well as the initial October numbers. I don't any Royals' style rallies lurking this week, certainly not before Friday's data. Happy with pricing? Take it and run." -Ted Rood, Senior Loan Originator
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).