August 5, 2015
Mortgage rates continued their retreat from recent lows for a 2nd straight day after this morning's data suggested the service sector was at its strongest levels in 10 years last month. The Institute for Supply Management (ISM) is responsible for two of the most important economic reports each month. The Manufacturing version was out on Monday and was much weaker than expected. Today's Non-Manufacturing version (hence 'service sector') more than made up for that weakness.
The only problem is that bond markets don't like super strong economic data, and bond market trading levels drive mortgage rates. When the economy is stronger, all sorts of things start happening that are bad for low rates. Investors become willing to take more risk, thus favoring things like stocks as opposed to bonds. The Fed is less interested in providing accommodative policy, thus increasing short term costs for banks that use that cheap money to buy bonds. In both cases, less demand for bonds means those bonds must offer investors higher yield (or "interest rate") to entice buyers.
It's that simple really. Monday looked one way, and then a combination of yesterday's Fed comments and today's data not only made Monday not look so bad, it even made today look better by comparison. Keep in mind though, that's "better" for the economy, which is "worse" for rates. Far fewer lenders remain at 3.875% today, in terms of conventional 30yr fixed quotes on top tier scenarios, but there are still some. Most are now soundly back to 4.0%, with a few of the weaker lenders already back to 4.125%
Whether it's been higher over the past two days, or lower on Monday, rate movement has been more volatile this week. The moves have not only been more varied, but also bigger. This is pretty typical of the first week of any given month where Friday contains the most important economic report: The Employment Situation (aka "jobs report," "nonfarm payrolls," or "NFP"). NFP can cause massive movement in either direction. If you have a lockable loan and are not prepared to lose a lot of money in exchange for a 50/50 chance at saving a lot of money, your best bet is to lock by Thursday. There's a better than 50/50 chance that this particular instance of the report will cause more market movement than normal.
Loan Originator Perspective
"Rates took a beating the last day and half, but are putting up a fight to end the day. With how much lenders took away on their pricing the last 2 days, I think it is worth the risk to float overnight. If you want to lock today, wait until later as many lenders have already improved pricing. If you do float, be prepared to lock early in the morning as I wouldn't advise floating into Friday when we get the non farm payrolls report. " -Victor Burek, Churchill Mortgage
"Rates wandered higher again today despite ADP's employment projection missing expectations. It's never reassuring when rates rise despite soft economic news. I don't expect much, if any, improvement until Friday's NFP report is released, and even then it might take a big miss to help us. As I said yesterday "Happy with your rate? Why not lock?" My sentiment hasn't changed since then." -Ted Rood, Senior Originator
"This mornings ADP number was not enough to mount a bond market rally. It appears August has been a sell month so far for for bonds. That may continue come this weeks NFP report or the tide may shift in favor of lower rates. Either way the risk is to high and locking makes the most sense." -Manny Gomes, Branch Manager Norcom Mortgage
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).