Monthly Archives: August 2014
Mortgage rates barely budged today. A few lenders were a bit higher than yesterday. A few more were a bit lower, but most hadn’t moved enough to be considered anything more than unchanged. Most borrowers would see the exact same quote today compared to yesterday. 4.125% remains the most prevalently quoted conforming 30yr fixed rate, but 4.0% is as close as it’s been since May 28th.
The lack of material improvement in mortgage rates is notable today, considering the underlying markets that most directly affect rates would indicate some improvement. This is one of the few instances where mortgage-backed-securities (MBS) will be in better shape without any noticeable effect on loan pricing. This phenomenon actually isn’t that uncommon on the day before a 3-day weekend, and especially when it happens to be the last business day of the month.
Keep in mind that by accepting locks, lenders are increasing the amount of commitments they have in the marketplace. Generally speaking, it’s riskier to increase the level of commitment ahead of long weekends, especially when geopolitical risk is a market-moving consideration. Any major change in markets over the long weekend runs the risk of making lenders sorely regret offering locks at what would then be an “out of market” rate come Tuesday.
Mortgage rates fell for a sixth straight day today. Yet again, we’re seeing little attention paid to the events in the US that NORMALLY influence interest rates. Case in point, stronger economic data typically pushes rates higher, and three out of three economic reports were stronger than expected today. The dark horse market consideration continues to be Europe. Specifically, expectations for further accommodation from the European Central Bank combined with real economic deterioration in the Eurozone are motivating record low rates in European bond markets and US markets are interconnected enough to get some of that benefit.
The cumulative effect of the 6 days of improvement brings rates even closer to their lowest levels of the year. The most prevalently-quoted conforming 30yr fixed rate for top tier borrowers remains 4.125%, BUT we’re about as close to 4.0% coming into play as we have been all year. It’s worth noting that on the past 2 occasions that rates have entered this territory, they moved higher shortly thereafter. The third time could always be the charm, but if you have a short term time horizon, the risk of floating still outweighs the reward. Longer term time horizons have more room for personal preference as it will take a major change in markets before we could rule out further progress based on the Europe effect.
Mortgage rates are driven by movements in financial markets–most directly by MBS (mortgage-backed-securities, which actually dictate how much mortgage debt is worth to investors). MBS are always trading with some level of correlation to broader bond markets where 10yr Treasuries are one of the best big-picture reference points.
As is always the case when it comes to financial markets, there’s rarely ever a single answer that explains why things are the way they are. This is certainly true of the current situation with mortgage rates. That said, if we had to pick one predominant answer to all of the above questions, the only obvious candidate would be–in a word–Europe.
European market considerations have taken US markets on several wild rides since 2010. This came to a head in 2012 with the 2nd Greek debt crisis. That wasn’t just about Greece though. Because the Eurozone countries share a currency, if Greece defaulted on its obligations, it would affect the currencies value, making it significantly more likely that the next weakest country would share a similar fate. From there, the fear was that an irreversible domino effect would wreak havoc on the global economy and financial system.
That Greek drama ushered in all-time low rates in the US, because in 2012, it coincided with a time in the history of domestic monetary policy where markets saw the Fed’s only two choices as “hold steady” or “more easing.” In other words, QE and other easy money policies were at no risk of being reversed. The Fed’s foot never left the vicinity of the gas-pedal. Treasuries hit all-time lows and Mortgage rates fell into the low 3’s.
It wasn’t until mid-2013 that the Fed’s metaphorical foot moved to the vicinity of the brake pedal and the conversation opened in earnest about the circumstances that might result in hitting the brakes. The “taper tantrum” ensued, but for all the wailing and gnashing of teeth, the Fed did a reasonable job of snapping investors’ mindsets back to reality. Investors, themselves, did a brutally efficient job of bracing for the expected slow-down in Fed accommodation.
They did such a good job, in fact, that when the slowdown in accommodation finally got underway, rates had moved high enough already that there was no additional selling pressure. The paradoxical improvements in rates in early 2014 were a result of expectations being so widespread that rates would go higher. When everyone in the room is taking the same side of a bet, no one makes money. So the entire month of January was spent moving sharply lower in rate–effectively resetting a new baseline for 2014.
And oh what a baseline it was! Compared to the volatility of 2013, rates were barely budging in 2014! There was no reason for them to move in either direction until inspiration of one form or another came along. It finally did in early April. That was when a Friday jobs report came out in line with expectations–something that rarely results in an abrupt improvement for rates–yet rates IMPROVED ABRUPTLY. The culprit was news that had come out around the same time suggesting the the European Central Bank (ECB) had begun modelling a €1 trillion QE program.
Europe hasn’t done QE yet–at least not in the same way we’ve done it in the US. So this was big news. The European economic weakness that brought about this news wasn’t nearly as relevant as the potential presence of an extra €1 trillion in the global monetary system. If we’ve learned anything from the various instances of domestic QE, it’s that these big injections are worth something in and of themselves when it comes to trading levels. As such, they’re immediately worth something to rates.
Of course, this was only the first phase of real QE consideration in Europe, but the ensuing weeks and months would show they were indeed serious about it. Even as recently as this past weekend, the ECB President had reiterated the council’s commitment to “do what it takes,” and promised that work was continuing on their asset purchase program.
In short, this has created tidal momentum in global rates markets, and it has made no sense for domestic bond markets to try to swim against it any more than they already are. The benchmark European 10yr government debt is currently trading around 0.94%! Compare that to US 10yr Treasuries at 2.40%! These rates are no longer simply reflecting that “good old stuff” from days past (economic outlook and inflation), but are now serving as tactical betting tables for Central Bank policy.
In other words, investors are not buying and holding German/European debt because they want to earn 0.94% interest over time. They’re buying it because the trend is for that rate to move lower as European QE becomes more of a reality, and any drop in rate tomorrow or beyond equates to solid short-term profit for investors that buy those bonds today (as rates fall, the PRICE of the bonds rises, so investors are essentially buying low to eventually sell high).
US Treasuries don’t get nearly as much benefit from this phenomenon, but their movement certainly correlates heavily with European debt. For Treasuries, this is really the only big-ticket inspiration in town in 2014. So they’ve moved lower in rate despite improvements in economic data and stocks. MBS are yet another degree removed from European influence. They benefit, to be sure, but not as much as Treasuries.
Those benefits for domestic bond markets have been compounded by geopolitical risk in Ukraine (which incidentally also drives demand for core European bonds, further helping rates fall). Geopolitical risk also has a distinct tendency to benefit sovereign debt markets over things like mortgage-backed-securities–offering yet another reason for Treasury rates to be falling faster than mortgage rates.
To conclude, Europe is a wet blanket on domestic interest rates. The proportions may not be epic, but they’ve been utterly persistent. The nature of the degrees of separation between the source of the market movement and MBS has meant that US mortgage rates have only managed to trickle modestly lower in the last few months. But the good news is that until something changes about the situation in Europe, it would be very hard for rates to embark on any significant move higher. That’s a really long way of saying that the best 30yr fixed rates are in the low 4’s until they aren’t any more. On the upside, it also leaves the possibility open for an ongoing trickle to get us back into the high 3’s. This isn’t necessarily likely, but it’s possible, and that’s a lot more than we might have hoped for 9 months ago when the threat of moving out of the 4’s instead meant “low 5’s.”
Home prices continued to increase in June but the Home Price Index (HPI) released by Black Knight Financial Services showed continued slowing in the rate of price growth. The national HPI rose by 0.8 percent to $241,000. While month-over-month increases have varied widely – dipping as low at 0.1 percent in December 2013 only to hit 0.7 percent a couple of months later, the annual rate of increase has been steadily moderating for months.
In September of last year the HPI was 9 percent higher than a year earlier, by April the annual increase was 6.4 percent. Today Black Knight said the year-over-year increase in June was 5.5 percent. For the year-to-date the increase in the HPI has been 4.3 percent. Prices nationally are now 10.4 percent below the peak of $268,000 reached in June 2006.
The 20 largest states and 40 largest metropolitan areas all had month-over-month price gains with largest in Nevada. Reno had the largest gain among all metropolitan areas, 1.9 percent. Colorado and Texas continued their almost monthly pattern of establishing new price peaks as did their major cities Denver, Austin, Dallas, Houston, and San Antonio.
Besides Nevada where prices rose 1.4 percent from June, other states with large increases were Michigan (1.3 percent) and Rhode Island, Massachusetts, Florida, and Colorado each with gains of 1.2 percent. The lowest rates of increase were in North Carolina and Washington, DC (+0.1 percent) Virginia and Arkansas (+0.2 percent), and Maryland, Missouri and Arizona (+0.3)
While Reno’s price gains topped all metros it was followed by New Haven and Greely, Colorado at 1.5 percent and Norwich, Detroit, and Vallejo, California all at 1.4 percent. At the bottom were four cities in North Carolina where prices declined from the previous month, Greensboro (-0.4 percent), Durham, Wilmington, and Winston (-0.2 percent).
The Black Knight HPI combines the company’s property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 18,500 U.S. ZIP codes. The Black Knight HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales.
- 30-year fixed-rate mortgage (FRM) averaged 4.10 percent with an average 0.5 point for the week ending August 21, 2014, down from last week when it averaged 4.12 percent. A year ago at this time, the 30-year FRM averaged 4.58 percent.
- 15-year FRM this week averaged 3.23 percent with an average 0.6 point, down from last week when it averaged 3.24 percent. A year ago at this time, the 15-year FRM averaged 3.60 percent.
- 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.95 percent this week with an average 0.5 point, down from last week when it averaged 2.97 percent. A year ago, the 5-year ARM averaged 3.21 percent.
- 1-year Treasury-indexed ARM averaged 2.38 percent this week with an average 0.5 point, up from last week when it averaged 2.36 percent. At this time last year, the 1-year ARM averaged 2.67 percent.
Today’s move completely undoes last week’s improvement. That said, most of that improvement was seen on Thursday and Friday, so it’s not quite as dramatic as it might seem. In fact, with the exception of the last three days, today’s rates are still the lowest in over a month. The most prevalently-quoted conforming 30yr fixed rate remains 4.125% for the best scenarios. 4.25% is still quite common and 4.0% is fading from view.
After hitting the lowest levels in over 2 months on Friday, mortgage rates bounced almost all the way back to Thursday’s levels. That’s somewhat significant as the drop between Thursday and Friday was one of the strongest moves lower in months.
The original impetus for Friday’s strength had been headlines suggesting the armed conflict in Ukraine was taking a turn for the worse. When markets arrived this morning to see that didn’t turn out to be the case, some of the “panic premium” began evaporating. As the day progressed, there was a stark absence of disconcerting headlines, and it’s those negative headlines that fuel investor demand for the types of safe-haven securities that benefit mortgage rates.
The most prevalently-quoted conforming 30yr fixed rate for top tier scenarios remains 4.125%. Many scenarios are still at 4.25% depending on the lender. The prospects for widespread availability of 4.0% die down with today’s move, but apart from yesterday, we’re still as close to that as we’ve been since late May.
If you have the stomach to absorb further increases in rates, floating isn’t out of the question as we’re still near the lower side of a longer-term trend leading lower. Just realize that if rates continue high enough to break that trend, you could be forced to lock at a loss. For shorter term scenarios or longer term scenarios that are happy with current rates, it’s also a good idea to lock near long-term lows if the opportunity presents itself, and today’s rates are still among the best of the year.
There were numerous headlines swirling mid-morning concerning military violence between Ukraine and Russia. Financial markets responded in a big way with stocks losing quit a bit of ground by noon and US Treasuries falling to their lowest levels since June 2013. MBS, however (the mortgage-backed securities that dictate mortgage rates), were not able to experience quite as much benefit, essentially meaning that Mortgage rates didn’t improve nearly as much as other sectors of the bond market.
Part of this underperformance in the mortgage market is a simple fact of life when the rest of the financial world is responding to unexpected geopolitical headlines. Treasuries will always glean the most benefit when investors are seeking safe-haven demand amid risks of war, and other serious events around the globe. And while lenders clearly weren’t able to pass on as much of the improvements as they otherwise might, we still saw enough of an improvement to bring rates to their best levels since late May.
Today’s improvements further solidify 4.125% as the most prevalently quoted conforming 30yr fixed rate for flawless scenarios. 4.25% is starting to fade from view at this point, and 4.0% wouldn’t be out of the question if we see just a bit more improvement (though it has a ways to go before challenging 4.125% in terms of prevalence.
So with all the improvements over the past week now adding up to what are effectively the best rates of the year, what should you do if you’re considering locking/floating? First of all, it’s much better to regret a bad float decision vs a bad lock decision. Beyond that, it’s all about setting rules for yourself. There’s no question that we have some pervasive momentum toward lower rates at the moment, but there is a question as to how far it will run before turning course. It’s not a horrible decision to see if you can keep riding this wave of improvement as long as you commit to locking at a loss if the market moves against you by a certain amount. For instance, if your rate quote rose by .125%, all other things being equal, that might be your limit. Others might have more risk tolerance.
The major word of caution is that all the recent improvements have been extremely hard-fought. We’re seeing mortgage rates have a very hard time moving lower at any sort of reassuring pace. The only reason we can say rates are the best in over two months is the combination of an excessively narrow range, and slow, steady improvements that finally crossed their last line in the sand with Today’s rally. Bottom line: the trends that have taken rates lower are still intact, but it’s never a bad idea to lock when rates are near their lowest levels in over a year.
The U.S. Federal Reserve is expected to move in baby steps when it starts to bump up borrowing costs from a record low, but it won’t do so until the second quarter of next year, according to the latest Reuters poll of economists.
Recent data on employment, manufacturing and services suggest the economy is on a firm footing, but the Fed has said monetary support is still needed given what it calls the “significant” slack in the labor market.
The central bank has held the overnight federal funds rate near zero since December 2008, and is close to winding down a lengthy program of bond purchases that will have swelled its balance sheet to more than $4 trillion.
But it is not likely to raise the fed funds rate until the second quarter of next year, most likely in June, according to the median forecast of 74 analysts polled in the past week.
That projection, unchanged from a survey last month, suggests a somewhat earlier move than predicted by a smaller sample of the Wall Street primary bond dealers who deal directly with the Fed, in a poll earlier this month. [FED/R]
Interest rate futures are pricing the first rate hike in the third quarter of next year.
When the Fed does get moving, it will proceed cautiously.
“There’s quite a few worries for them still in the cards. That should keep them hiking rates quite a bit slower than we’ve seen in previous hiking cycles,” said Gennadiy Goldberg, a strategist at TD Securities in New York.
The latest survey showed that rates would be at 1.00 percent at the end of next year, 2.25 percent at the end of 2016 and 3.25 percent a year after that. The Fed sees 3.75 percent as appropriate for the economy over the longer run.
Yet all anecdotal evidence suggests that Fed Chair Janet Yellen is in no hurry to raise interest rates, preferring to fight inflation than another economic downturn.
The poll also found analysts had grown more optimistic about U.S. economic growth in 2014 after a strong second quarter, with forecasts for the year rising to 2.0 percent from 1.7 percent in July.
The median projection for 2015 remained at 3.0 percent but the forecast for 2016 dipped to 2.9 percent from 3.0 percent.
Growth in non-farm payrolls was seen averaging around 210,000 jobs per month over the rest of this year and 215,000 per month during the first half of next year before slowing slightly. So far this year, payroll growth has averaged 230,000 per month.
The unemployment rate for 2014 was forecast at an average of 6.2 percent, where it stood last month and unchanged from last month’s poll. It was seen falling to 5.7 percent in 2015 and to 5.5 percent in 2016, unchanged from the previous poll.
The survey projected inflation as measured by the consumer price index would run close to 2 percent across the forecast horizon, with core inflation rising to 2.1 percent in 2015 and 2016. The Fed targets 2 percent inflation, although it focuses on the PCE prices index, which tends to run below the CPI.
Despite the unemployment rate falling and inflation rising toward the Fed’s target, Yellen has in the last six months managed to shift investors’ attention to stagnant wage growth.
But a majority, 32 of 41 economists who answered an extra question, said the Fed will proceed to hike its interest rate even if wage growth does not accelerate as expected.
“While the Fed would like a faster increase in wages, if all other indicators are showing sustained health in the labor market and substantive reductions in labor market slack, the FOMC would be hard put to find a reason not to hike rates,” said Terry Sheehan, economic analyst at Stone & McCarthy.
Mortgage rates moved moderately lower today as bond markets benefited from overseas risks. These risks take several forms at the moment, ranging from the risk of further economic deterioration in Europe to the geopolitical risks associated with several armed conflicts around the globe. In general, bond markets benefit (meaning rates move lower) in response to increased risk. Unfortunately for the secondary mortgage market, it’s US Treasuries that see the lion’s share of benefit from such periods of waxing risk, but mortgage rates have been able to tag along to some extent.
The most prevalently-quoted conforming 30yr fixed rate for flawless scenarios is now back to 4.125%, though 4.25% remains nearly as common. In general, MBS (the mortgage-backed-securities that govern rate changes) have been unwilling to return to late-May and late-June levels to the same extent as US Treasuries. As such, they’ve been holding in an excruciatingly narrow range just above the lows of the year.