Mortgage rates enjoyed another strong day, falling to the best levels in exactly 2 weeks. Rates were actually set to move higher early this morning, but a much weaker-than-expected reading on Q2 GDP helped drive demand for bonds. Better buying pushes bond prices higher and rates lower. The strength in bond markets gave lenders the peace of mind needed in order to offer even better terms than yesterday. The most prevalent conventional 30yr fixed rate is quickly returning to 3.375% on top tier scenarios.
Next week brings important economic data, including the big jobs report on Friday. The overall tone of that data should help determine whether rates will continue building on the past 2 days of positive momentum. The conservative approach would be to lock in the gains with rates at 2-week lows. The aggressive approach would be to wait until we have clear evidence AGAINST the possibility that a new trend toward lower rates has begun. As of today, there is no such evidence, but it could come at any time.
WASHINGTON — Long-term U.S. mortgage rates fell this week to the lowest level since May 2013, driven down by financial tumult in Europe.
Mortgage giant Freddie Mac says the average 30-year fixed rate mortgage fell to 3.41 percent from 3.48 percent a week ago. A year ago, the 30-year rate stood at 4.04 percent. The 15-year mortgage rate dropped to 2.74 percent, down from 2.78 percent last week and 3.20 percent a year ago.
After Britain's recent vote to leave the European Union, worried investors fled to the safety of U.S. Treasury bonds. Long-term mortgage rates tend to track the yield on 10-year Treasury notes, which fell to 1.37 percent Wednesday from 1.75 percent before the Brexit vote.
The 30-year fixed rate is now close to its all-time low of 3.31 percent in November 2012.
To calculate average mortgage rates, Freddie Mac surveys lenders across the country at the beginning of each week. The average doesn't include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1 percent of the loan amount.
The average fee for a 30-year mortgage remained at 0.5 point this week. The fee for a 15-year loan was unchanged at 0.4 point.
Rates on adjustable five-year mortgages averaged 2.68 percent this week, down from 2.70 percent last week. The fee remained at 0.5 percent.
Mortgage rates moved lower today, largely because they needed to get caught up with yesterday afternoon's movement in bond markets. As a reminder, mortgage rates are most directly affected by mortgage-backed-securities (MBS), which tend to move in the same direction as US Treasuries. Both MBS and Treasuries improved significantly after yesterday's Fed announcement, but lenders have been cautious in adjusting rate sheets to match market movements for a variety of reasons. When they saw markets were still in good shape when it came time to send out this morning's rate sheets, lenders had a bit more love to share.
As such, we find ourselves well into the lowest rates in more than three years, even if the pace of improvement is lagging the drop in US Treasury rates. For what it's worth, 2016's mortgage rate improvements have kept up with Treasuries much better than in 2012--the last time markets were moving abruptly for somewhat similar reasons. The average lender is now down to 3.5% in terms of conventional 30yr fixed quotes for top tier scenarios. Further improvements from here will be hard fought, so it makes good sense to consider locking to avoid a temporary pull-back ahead of next week's vote on the British referendum on remaining in the European Union.
Mortgage rates didn't move any lower today, but they earned an important distinction nonetheless. As of today, you'd have to go back 3 full years to see rate sheets any lower, on average. May 10th, 2013 was a very bumpy day for rates, and it capped a week that served as the starting point for the 'taper tantrum' (several months of rapidly increasing rates as markets adjusted to the idea that the Fed would be ending its bond buying program). With a range of 3.5 to 3.625%, today's top tier conventional 30yr fixed quotes are right in line with those seen on May 9th.
There was no meaningful inspiration for bond markets today, but it is somewhat reassuring that they've continued to hold ground even as stocks have moved much higher in recent days. While it's never a 1:1 relationship, higher stock prices often accompany a move toward higher rates as investors sell bonds (bond prices and rates have an inverse relationship).
Given that rates are at 3-year lows and that we've had a tough time breaking any lower from here, there's certainly no reason to second guess locking. Conversely, given that we've managed to stay low in spite of some headwinds, risk-takers are justified in floating, but should always set a limit as to how much higher rates could go before they lock at a loss.
Loan Originator Perspective
"I am optimistic that rates could test new lows in the near future, but I still went ahead and lock loans that are closing in May. I think short term, you should take the recent gains, lock in and move on. Longer term closings, those in June or after, I think floating is the way to go. " -Victor Burek, Churchill Mortgage
"Rates hovered near unchanged today, despite large corporate bond offerings and a treasury auction. While "not losing" is a positive, both treasury and MBS prices are well above their 25, 50, and 100 moving day averages. This typically results in a selloff at some point, the only question is when. My May pipeline, and most of June's is locked, borrowers sleeping well at night. Floating may return some additional gains, but borrowers need to realize rates move both ways!" -Ted Rood, Senior Originator
Today's Best-Execution Rates
Ongoing Lock/Float Considerations
February 8, 2016 by Michael Kraus
Foreign stocks got hammered in the overnight session last night, and that momentum has carried into U.S. equity markets this morning, leading to a sharp sell-off. Once again Treasuries are benefiting as a safe haven investment, and are rallying this morning. The yield on 10-year Treasuries is around 1.77% as of writing, which looks to be the lowest yield we’ve seen in more than a year. Mortgage backed securities, which typically move with Treasuries, are also rallying this morning, and mortgage rates continue to fall. Last week Freddie Mac’s Primary Mortgage Market Survey showed the average rate on a 30-year fixed-rate mortgage with 0.6 points was 3.72%, the lowest reading since April of 2015. Rates have declined since the beginning of the year, when the Freddie Mac showed the average 30-year rate to be 3.97%.
As always, you need to be aware that the Freddie Mac surveys are collected early in the week (the results are issued on Thursday), and don’t reflect events that occurred at the end of the week. Unless there is a big bounce back in stocks this week (and the accompanying sell-off in bonds), we should see even lower rates this week.
Last week, in many ways, was just more of the same. Further questions were raised about the health of the global economy. Stocks rallied midweek, only to sell off again at the end of the week, ending up more or less where they started. Oil prices followed pretty much the same arc. 10-year yields were consistently around 1.90%, give or take a couple of basis points.
Last week’s domestic economic data also continued trends seen in prior weeks/months. Manufacturing reports showed weakness, and that weakness might be making its way into the service sector, as ISM’s non-manufacturing Survey showed weakness. Most measures of inflation remained subdued.
The most anticipated bit of news last week was January’s employment numbers, which were mixed. The headline number came in under expectations, but within the range of expected outcomes. 151,000 jobs were added in January, compared with the expectation of 188,000 jobs gained. December’s headline number was revised down from +292,000 jobs to +262,000 jobs. However, the underlying data showed more strength than the headlines. The unemployment rate fell from 5.0% to 4.9%. The workforce participation rate ticked up from 62.6% to 62.7%. Average hourly earnings were up 0.5% from last month, and are up 2.5% on a year-over-year basis.
So what to make of all this? Good question, and a good segue into the next section.
So the question is, how will all of what’s going on impact the Fed, and will it cause them to slow the pace of rate hikes moving forward, or not? Last week we heard from several Fed members (Lael Brainerd – dove, William Dudley – dove, and Loretta Mester – hawk), and they all noted the risks that global headwinds pose to the domestic economy, and I think we could characterize all their comments as being somewhat more dovish than anticipated. Some Fed members had indicated at the end of 2015 that it would likely be appropriate to hike 3-4 times over the course of 2016. We’ll see if recent developments will force them to back away from that plan. We hear from Janet Yellen twice this week, so perhaps she will shed some light on what the Fed is thinking.
For what it’s worth, the Fed Funds futures show just a 4% implied probability of a hike at the next Fed meeting in March. Looking as far forward as December, the futures only show a 25% chance of a hike. The markets are clearly not buying the idea of 3-4 hikes this year.
As evidenced by yesterday’s game, the markets are not always correct. Tim Duy, from last Friday “Solid Jobs Report Keeps Fed in Play”:
“Bottom Line: This jobs report complicates the Fed’s decision making process. They are stuck with instability in the financial markets as the economy reaches full employment. They are concerned that in the absence of temporary factors, inflation will quickly jump higher if the economy continues on this trajectory. While they would like unemployment to settle somewhat below NAIRU* to eliminate lingering underemployment, they don’t want it to settle far below NAIRU. They don’t believe they can easily tap the breaks to lift unemployment higher. Recession is almost guaranteed to follow. Hence they would like to be able to rates rates gradually to feel their way around the darkness in which the true value of NAIRU lies. They fear that if they delay additional tightening, they will pass the point of no return in which they are forced to abandon their doctrine of gradualism. The Fed’s policy challenge just became a little bit harder today.”
I think it is also important to remember that the Fed is always concerned with its own credibility. They do not want to be seen as easily swayed by recency bias, and they want to be perceived as having a plan. If they were to reverse course so quickly after raising rates, it could be seen as lowering confidence in the Fed. This isn’t a particularly good reason to take a course of action, but it is a factor.
*NAIRU is the non-accelerating inflation rate of unemployment. Basically, if unemployment falls below this level, inflation is expected to increase. Depending upon the economist you prefer to read, this number is believed to be somewhere between 5-6%, and likely fluctuates depending upon a host of factors.
Yeah, it is. Mortgage rates are about 40 basis points higher than record lows. Is it possible rates continue to fall? Sure it is. It’s also possible that the market rebounds and they return to the levels that we saw around the beginning of the year. I realize that’s not particularly insightful, but I think it illustrates the point: anything could happen, and anyone who tells you they know what is going to happen should be suspect. As recently as two months ago, the members of the Federal Reserve, ostensibly some of our best and brightest, thought that we could see 3 or 4 rate hikes this year. That seems really unlikely now.
If you’re trying to time the market, you’re likely to fail. If you’re ready for a new mortgage, rates are very advantageous right now. If you’re seriously considering buying a home or refinancing, but aren’t quite ready to make the leap, you may want to accelerate your timeline. The markets are very volatile, and rates are subject to change quickly.