March 3, 2015
Mortgage rates moved convincingly higher for the second straight day, bringing them back near the highest levels of 2015. Rates are dictated primarily by bond market trading, and traders are currently in a defensive stance ahead of the week's most significant events beginning tomorrow. "Defensive" in this context, means more willing to sell than to buy. Increased selling pressure causes prices to fall for the mortgage-backed securities that lenders rely on to generate rate sheets. The lower those prices, the worse rate sheets look for consumers.
Over the past two days, that defensiveness in the bond market has been exacerbated by some of the housekeeping-type trading associated with big corporate bond issuance. This is a bit of an esoteric concept when it comes to connecting it to mortgage rates, but what's important to understand is that unexpectedly large, new corporate bond issuance indirectly hurts rates as well. The net effect is a firm move to 3.875% as the most prevalent conventional 30yr rate for top tier borrowers, up from 3.75% last week.
The next three days bring events with even more power to shake things up. ADP's employment report will kick off this volatile little gauntlet early tomorrow morning--well before lenders put out their first rate sheets of the day. While it's certainly not unfair to hope that there is more life left in the long term rate rally, it is certainly unwise to bet on it in the short term. That means you could end up in the frustrating position of having locked your loan only to see rates improve. The trade-off is that if rates rise by as much as they could in this environment, NOT locking would result in feelings much worse than mere frustration.
Loan Originator Perspective
"The next few days are likely to be very volatile culminating with the jobs report on Friday. Tomorrow we get the ADP report which can move the markets if it is far off from expectations. I think the markets are waiting to see what Friday brings and not just with the number of jobs created, but the income component might be of more importance. The Fed has stated many times, they are waiting for inflation to pick up before starting the tightening cycle and wage inflation is one of the biggest drivers of overall inflation. Last months NFP report showed a month over month increase of .5% which was much higher than estimated. This month economists expect a .2% increase. A smaller increase would be good for rates, but a higher increase could very well break bonds out of the recent range to the wrong side for those floating. I think you can be safe floating overnight, but if you plan to lock before NFP I would strongly recommend you do so by end of day tomorrow." -Victor Burek, Open Mortgage
"Mortgage Rates began the day in the same territory as yesterday, but came under pressure in the afternoon. This validates my ongoing guidance for the week: if you cannot risk rates worsening, you should lock. Rates are sitting at the high end of the range, and if the next few days worth of data are not friendly the next move could be higher, quickly. Prepare for the worst, and hope for the best." -Brent Borcherding, brentborcherding.com
"It is getting harder and harder to stomach this bond market. Just when you think things are turning a corner they don't. That has been the story for sometime now. Tomorrows ADP data and more importantly Fridays Jobs report may be the game changer. Being that we have given up so much and are near solid support I would float into tomorrows ADP report." -Manny Gomes, Branch Manager Norcom Mortgage
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 has been and continues to be Europe.
- European bond yields trended constantly lower in 2014, thus playing a prominent role in keeping US rates lower than they otherwise might be. Many feel that Europe will continue to slide until their central bank engages in US-style quantitative easing. Some see this happening in early 2015. In any event, we're looking for a turn in Europe, first and foremost, before worrying about the longer-term trend in bond markets being at serious risk of reversing.
- It's impossible to know when Europe will turn a corner, and even then it's only the sort of thing we'll be able to observe in hindsight. That means every head-fake toward higher rates runs the risk of developing into a longer term rise, even if those risks vary greatly in terms of probability. Clients with longer term time horizons and who otherwise don't mind losing some ground in exchange for the chance at locking even lower rates are the only ones who should float. Clients who must close by a certain date or who can't afford to lose any ground on rates should generally be locking even though the longer term trend has been in their favor for over a year now.
- 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, 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).