August 24, 2015
Mortgage rates did manage to move lower again today. And that move does bring them to the best levels in more than 3 months. But apart from that, the day was a bit of a let-down. Here's why.
Mortgage rates are primarily dictated by the prices of Mortgage-Backed-Securities (MBS), a type of bond that's similar to US Treasuries in many ways. When economic data is bad or if financial markets are panicking, investors often buy bonds because they offer a safe haven relative to equities (stocks). More buyers result in higher prices and lower rates. It's not a 1:1 relationship, but over certain time frames, this is why we often see stocks and bond yields falling together. Investors are selling stocks and buying bonds (which makes yields fall).
Since mid July, bonds (aka "rates") have already been improving rather nicely. I've commented over the past few days that the willingness of rates to keep improving depended on an ever-larger supply of global market drama. While this morning delivered (and thus kept mortgage rates moving lower), it also found its limit (stock selling bounced). After global equities markets bounced, so did bonds, and many mortgage lenders recalled rate sheets for a mid-day reprice (they raised rates).
The net effect is still positive--just not nearly as positive as you might expect when you see the news about how much stocks lost today. The silver lining is that today's modest improvement solidifies 3.875% as the most prevalently-quoted conventional 30yr fixed rate for top tier scenarios. Given that further improvements will continue to require a bigger, nastier supply of global financial drama, no one could argue with locking rates right now. That said, it's also true that no one could argue that more drama is possible.
Loan Originator Perspective
"What a crazy day in both bond and equity markets. Global contagion was
the watch word of the day, as stocks around the world logged severe
losses. Domestic bond markets benefited early this morning, but by noon
the gains were a distant memory and pricing worsened for most lenders.
It's a scary time for all markets, and increased volatility often means
secondary desks are reticent to pass along gains to rate sheets. There
may be some opportunity for floaters with nerves of steel to profit
here, but I hesitate to recommend anything other than locking, since
rates are still near their best levels since May." -Ted Rood, Senior Originator
"Lenders were quite conservative with passing along this mornings gains
with MBS. If you missed the opportunity to lock in ahead of the reprices
for the worse that were reported, I would float overnight to see if the
rates rally will continue. We have nice support just overhead on the
10 year note around 2.04. If Asia sells off again tonight, we could see
a repeat of what happened this morning. If you do float, be prepared
to lock early tomorrow incase we get a repeat of today." -Victor Burek, Churchill Mortgage
"Mortgage Rates improved, slightly, today. I strongly suggest locking
and it is because I believe you have the opportunity take advantage of
both possible outcomes. Mortgage Rates are the lowest they've been in
3+ months, so locking ensures you've captured that. If today was a
pre-cursor as to what comes next...rates won't get slightly better they
have the potential to get significantly better over the next few weeks.
If they do in fact improve drastically, you'll be able to float down or
renegotiate your rate. Its a rare opportunity." -Brent Borcherding, brentborcherding.com
"I think it is now safe to say we are in a down trend for rates and
possibly at the lower end of that trend for the time being. In other
words if you have been floating and are closing soon pat your self on
the back and lock in. If you just went into contract and have 30+ days
to close you can carefully float but do not go on vacation and throw
caution to the wind for things can turn around quickly." -Manny Gomes, Branch Manager Norcom Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 3.875
- FHA/VA - 3.75%
- 15 YEAR FIXED - 3.125 - 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).