September 15, 2015
Mortgage rates had been holding their breath and waiting calmly for Thursday's big announcement from the Fed. Today saw the breath-holding come to an end as the true anxiety set in. There are plenty of explanations for today's relatively sharper market movements online and on the TV, but let's not over-complicate things.
Market sentiment is easily anthropomorphized, so think about how humans might behave and react as an event with tremendous stakes approached. Even if most people could contain their anxiety right up until the event itself, we've also witnessed a great many people who grow increasingly edgy on the approach. Some level of increasing anxiety is perfectly normal. It could be expressed in several different ways, but certainly we've all seen (or perhaps 'been') the person who "just has to get out of here."
This roughly characterizes quite a few investors in the bond markets that determine mortgage rates. They want to get to the sidelines before the Fed. As far as bond markets are concerned "sidelines" means "selling bonds," which in turn implies higher rates. These extra anxious folks had an outsized effect on rates today, largely because the high-anxiety among the rest of the marketplace didn't make anyone feel like buying extra bonds right now. All sellers and few buyers means prices tumble and rates rise.
The damage varied by lender, but in almost any case, conventional 30yr fixed rate quotes are back up to 4.0% at least. Even after today's losses, the lock/float decision remains this simple: if you're not willing to take a massive roll of the dice by floating all the way to Friday, you should already be locked.
Loan Originator Perspective
"We are seeing a defensive position taken today by bond traders leaving interest rates higher day over day. If multi-billion dollar bond traders are hedging their bets and taking an approach that rates will rise, I would think we should follow suit. Locking to protect whats still available is the only intelligent action today. Speculating that rates will improve is not a losers bet, but certainly one that is clearly too risky today. Depending on your time line to close you can potentially play the game, but loans closing inside of 45 days should be taking defensive action today and locking." -Constantine Floropouos, Quontic Bank
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).