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Most of this has to do with the timing and intensity of yesterday’s market movement. MBS weakened at a gentle pace throughout the day. The losses were sufficient for several lenders to adjust rates higher, but most lenders kept rates unchanged from the morning. Therein lies the problem. While it’s true that bond markets are in stronger territory versus yesterday’s latest levels, they’re still not quite back to the levels in effect yesterday morning when lenders put out mortgage rate sheets. Long story short, most lenders didn’t adjust rates to account for yesterday’s weakness and are simply getting caught up today.
3.625% is once again the most prevalent conventional 30yr fixed rate for top tier scenarios, although 3.5% is by no means extinct. Tomorrow brings the much-anticipated vote on membership in the European union for the U.K. (aka “Brexit”). As far as we know right now, the biggest risks from an interest rate standpoint won’t materialize until Friday morning, but we could see the effects as early as tomorrow afternoon.
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 held surprisingly steady today, even though underlying bond markets were in noticeably weaker territory. As bonds weaken, rates normally move higher, but there’s been a bit of a disconnect recently. In light of our discussion last week, perhaps it isn’t so surprising. We had anticipated that mortgage rates would start out with an advantage this week because they didn’t move much lower at the end of last week even though bond markets were stronger. In other words, bond markets are suggesting rates should be right about where they were on Thursday afternoon, and that’s exactly where they are.
Naturally, this means that we no longer have the same sort of implicit advantage we enjoyed on Friday afternoon heading into the weekend. As such, it’s definitely safer to lean back toward locking. The most prevalently-quoted conventional 30yr fixed rate remains 3.625% on top tier scenarios, with a smattering of lenders still down at 3.5%.
While it is true that rates can exhibit this “sideways at the lows” behavior before continuing to even lower levels, it’s just as much of a risk that rates are running into a bit of a floor here. As such, locking is an easy call here, given that rates are at 3-year lows. Risk tolerant borrowers would also be justified in waiting to see how things shake out (i.e. waiting to lock) as long as they accept the possibility of being forced to lock at a slightly higher rate if markets move against them. Yes, that sounds obvious, but the point is to decide on a limit of rate movement before accepting the defeat. For instance, if my rate is x today, I will lock if rates move to x+.125%.
With the impressive run we’ve seen so far in addition to the outright levels being close to the year’s lowest, there’s limited incentive to delay locking. To be sure, rates can definitely continue to move lower, but past precedent suggests the current scenario is typically a better locking opportunity.
Tomorrow brings the important Employment Situation report–the most important piece of economic data in the US on any given month. It always has plenty of potential to move bond markets (and thus, rates), although the generally strong level of job creation is old news to some extent. Financial markets may instead focus on other aspects of the report, like the average hourly wage component, because it speaks to inflation. Inflation is the last major hang-up for the Fed when it comes to continuing to hike rates. If market participants view the Fed as more likely to hike, present day interest rates will likely rise in advance of the next Fed meeting.
Bonds are currently pointing to slightly higher rates, yet the average lender is unchanged compared to yesterday’s latest levels. This has to do with today’s trading momentum in bonds. They pointed to higher rates in the early morning, but recovered just before mortgage lenders sent out rate sheets. As such, lenders were perhaps a bit more conservative than they might have been if markets were simply unchanged versus yesterday. Several hours later, bond markets began slipping, again pointing to slightly higher rates. A small minority of lenders may adjust rates between now and the end of business today, but not enough to push the average off course.
This discrepancy between what markets are saying and what lenders are offering is useful. It lets us know that–all things being equal–rates will be slightly higher tomorrow if bond markets don’t budge from here. The catch is that they usually do budge, but the point is that the imbalance tips the scales just slightly in favor of locking. And the scales were already looking a bit tippy.
With rates near recent lows and some apparent resistance to further improvement, locking is a more compelling option than it had been a few weeks ago. What about floating? There’s a place for that strategy as well, as long as you understand the risk that markets could move against you and you’re prepared to lock at a higher rate if markets move too much.
Mortgage rates were little changed today, keeping them in line with the lowest levels in nearly 3 years. Specifically, there have only been 2-3 days with better rates since May 2013, depending on the lender. That puts the average lender at 3.625% in terms of conventional 30yr fixed rate quotes for top tier scenarios. Some of the more aggressive lenders continue to offer 3.5%. These rates are a mere quarter point higher than the all-time lows seen from late 2011 through early 2013.
With that in mind, locking is never a bad idea–especially if you had previously held off in hopes that rates would improve. The more aggressive approach would be to acknowledge that rates have been in a downtrend since at least mid-March, and resolve to lock when that trend ends. The trade-off for the chance to lock at rates that are slightly lower than today’s is that you might end up being forced to lock at rates that are slightly higher than today’s.
At current levels, there are a separate set of considerations for different loan types–especially FHA. Understanding this requires a bit of background on the financial markets that underlie mortgage rates. Simply put, most mortgages are designed to fit in a certain bucket with other mortgages that share similar attributes. Rates haven’t ever been low enough for long enough to create enough demand for a bucket that can accept FHA rates lower than 3.25%. As such, many of the better-priced FHA lenders have been stuck at a lower bound of 3.25% for quite some time, and that will continue to be the case unless the broader rate spectrum moves even lower and looks like it will hold its ground. With all of that in mind, for borrowers who are being quoted 3.25% on FHA loans, there’s obviously far less incentive to floating your rate.
On a final note, keep in mind that 30yr fixed FHA loans have mandatory mortgage insurance for any loan-to-value. As such, conventional borrowers with good credit typically have lower payments even though top tier conventional rates are slightly higher.
Mortgage rates moved decisively lower today, following a speech from Fed Chair Janet Yellen. While she accomplished it in several ways, Yellen’s overarching message was that the Fed is in no hurry to raise rates. Keep in mind, the Fed Funds Rate is not the same as mortgage rates. In fact, the two can move in opposite directions at times. In general though, when the Fed is perceived as providing more accommodation (via low rates or various bond buying programs), it’s good news for all sorts of financial markets, including the market for mortgage-backed-securities (MBS) that ultimately dictate mortgage rates.
In other words, easy Fed policy is a rising tide that lifts most boats. Stocks and bonds received a big boost, to be sure (MBS are part of the bond market). In fact, the MBS gains were so steep that most lenders didn’t adjust rates to fully account for the market movement. This is typical when volatility increases, for better or worse. If markets are able to hold current levels, rates would continue to drop. As it stands, the most prevalent conventional 30yr fixed quote on top tier scenarios is now easily back down to 3.75%, with many lenders pushing back into 3.625%. Just last week, there were quite a few lenders up at 3.875%. To be fair, there are still some out there today, but that won’t continue to be the case unless bond markets take a sudden turn for the worse tomorrow.
As far as the risk of sudden turns for the worse, this is one of those rare opportunities where the average lender could endure a bit of bond market weakness tomorrow without a significant change in rates. It’s one of the only situations where floating could be argued to have a better than 1 in 2 chance of paying off. That said, days like today carry increased risks of movement in the other direction in the near term. In other words, you might have to wait for volatility to shake out before taking advantage of the next opportunity to lock.
Mortgage rates moved higher again today, casting a bigger shadow on last week’s improvements. Rates haven’t yet returned to the higher levels seen at the beginning of last week, but they’re quickly closing the gap. Still, the notion of “higher rates” is relative when most lenders are still quoting the same contract rates today vs yesterday. It’s only when we look at the upfront costs (or credit, depending on the scenario) that we see a deterioration. The average lender continues quoting conventional 30yr fixed rates in a range of 3.75-3.875%.
When it comes to the road ahead, yesterday’s weakness alone was enough to call last week’s positive trend into question. Naturally, today’s weakness only adds to the negative vibes. To be sure, there is more room for rates to rise without setting off the most serious warning bells regarding the longer term trend, but the momentum is negative enough that it doesn’t make sense to roll the dice without considering the risks. For those who choose the riskier path, be sure to set stop-loss level (i.e. locking to avoid further losses if rates rise to x.xx%).