August 11, 2015
Mortgage rates dropped quickly today, bringing many lenders back to quoting conventional 30yr fixed rates of 3.875% for top tier scenarios. The motivation came from China. What's up with that?
It is not at all common to see China mentioned as a source of low mortgage rates in the US. It is more common for China to be mentioned as a part of big global economic picture, and it's that big picture that brought mortgage rates along for the ride today. The big picture took cues from the fact that China moved to substantially devalue its currency.
On the surface, we might wonder why cheaper goods coming out of China would be a bad thing for the global economy, but the effect on international trade wasn't the market's primary concern today. Rather, it was the underlying message that China is concerned enough about its economic prospects that it has to add this somewhat radical move to other somewhat radical moves already undertaken in recent weeks. Bottom line, this adds to doubts over the sustainability of global economic growth. One of the ways investors can bet on slower economic growth is to buy bonds, which results in lower rates.
When it comes to the implication on lock/float strategy, today makes it hard to go wrong. Locking multi-month lows is never a bad idea. Conversely, today's move has a chance to kick off a bigger move lower. So floating could make sense for those who understand the risks and are ready to cut losses if the recently positive trend turns around.
Loan Originator Perspective
"The currency wars just picked up with China drastically cutting the value of their currency to make their exports more appealing to consumers. This was good news for interest rates around the globe. Until yesterday, I favored locking once within 30 days of closing. Today, I think floating is the way to go to see how this plays out. Weaker currencies around the globe, might cause pause for the Fed to hike rates here as a stronger US dollar will spur deflationary fears and hurt our exports." -Victor Burek, Churchill Mortgage
"In yesterday's commentary, I wondered what might motivate rates lower, and we got our answer today: China currency devaluation and continued economic malaise. The news delighted bond markets, and pricing is approaching early June's levels. Unlike some geopolitical drama, China's woes aren't going to vanish in the next few days, which bodes well for rates. My float boat is preparing to sail, at least for borrowers with a modicum of risk tolerance!" -Ted Rood, Senior Loan Originator
Today's Best-Execution Rates
- 30YR FIXED - 4.0%
- 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 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..."
- Bottom line, locking is always the safest bet and it was the only bet from late April through early July. Since then, there's been room for other points of view. We should know a lot more about how valid those points of view are as August and September progress.
- 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).