November 6, 2015
Mortgage rates leaped significantly higher today, following an exceptionally strong jobs report. Typically released on the first Friday of every month, the Employment Situation is the most important piece of economic data in the world (yes, the world). At the very least, it has more power to move financial markets than any other economic report. It flexed those muscles today, to be sure, but not necessarily for the regular reasons.
Normally, the jobs report is a market mover simply because of its relevance to the broad economic trends. Bottom line, if the economy is creating more jobs than expected, then it's a bit stronger than we thought it was yesterday, so yesterday's bond yields (aka "rates") and stock prices need to move higher in order to align with the brighter outlook.
While there is some of that traditional impact in play today, the real power in today's data was its implications for Fed policy. We know the Fed has been increasingly serious about telegraphing a rate hike in December, but many market participants thought the Fed might hold off if today's jobs report was weak. "Market participants" (aka traders, investors, money managers) are ultimately responsible for how rates will move because they're constantly deciding how to trade the mortgage-backed-securities (MBS) that dictate mortgage rates.
Their takeaway from today's jobs data was clear: there is very little room left to doubt that the Fed will be hiking rates in December. This resulted in an extension of what has already been a big move higher, bringing mortgage rates in line with the highest levels since July. Most lenders are now quoting at least 4.0% on conventional 30yr fixed scenarios, with many moving up to 4.125% today.
It's tempting to hope that such a forceful move higher will soon result in some pressure being released. Indeed it is common for these sorts of spikes to take a day or two off after moving in the same direction for a certain number of days. You could get lucky if you time one of those bounces correctly, but we haven't seen quite enough damage to be sure we'll get such a break just yet. Consequently, the risk of floating still outweighs the reward.
Loan Originator Perspective
"Well, as feared, today's NFP jobs report surpassed expectations, all but ensuring the Federal Reserve will raise its overnight rate next month. MBS continued their recent slide, losing about 50 bps, although my rate sheets didn't change quite as drastically. I'm been in locking mode for some time, and it's served my clients well. Rates may end up going sideways from here for a while, but I don't see much of a chance of regaining the ground lost since October 27th, which is over 125 bps. Floating might provide some marginal gains for folks >30 days from closing, but I sure wouldn't be hoping for anything drastic. " -Ted Rood, Senior Loan Originator
"The October Jobs Report came in hot this morning beating all expectations handily and confirming that a December Fed rate hike is practically assured. The ensuing selloff in the Bond Market was swift but could have been much worse since much of the decline in bond prices had already taken place. With the uncertainty of the first hike all but removed now I think markets are likely to settle in to a sideways trading range. So, for longer term lock periods I think floating is possible but I still recommend locking it up for shorter term (30 days or less) closings. And, be ready to pull the trigger fast if something fundamental changes. As always,your tolerance for risk should drive your decision making." -Hugh W. Page, Mortgage Banking Officer, Seacoast Bank
"Today's job report shocked the market and sent bonds tanking. They have been on a loosing streak all week and today was no exception. We just may have reached a point where buyers may jump back in and buy at these levels. If the 10 year treasury yield can close below 2.33 on Monday we may be able to begin floating again." -Manny Gomes, Branch Manager Norcom Mortgage
"Hopefully you are locked up. If not, your pricing today will be worse. I typically see lenders take away more from rate sheets than the price drop justifies, so if you can tolerate the risk, I would think floating over the weekend might be justified. But as I said yesterday, only float if you can afford to be wrong." -Victor Burek, Churchill Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 4.0-4.125%
- FHA/VA - 3.75%
- 15 YEAR FIXED - 3.25%
- 5 YEAR ARMS - 2.75 - 3.25% depending on the lender
Ongoing Lock/Float Considerations
- 2015 has been largely about rates rising unevenly from a long-term low brought about by the onset of quantitative easing in Europe. In May and June, the Fed increasingly began telegraphing a 2015 rate hike. At that point, the "rising rate environment" seemed like a sure thing, but the Fed's plans hit several snags. Economic data began deteriorating at home and abroad, causing markets to rethink the higher rate rhetoric. Mortgage rates hit 6 month lows at the end of October, just as the Fed surprisingly changed it's policy statement to specifically suggest December as a rate hike possibility (something they haven't done since 1999).
- In the bigger picture, financial markets are still at a crossroads. This is true for both stocks and rates, with each trying to determine if it will move back to 2015 highs or if the late summer swoon 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).