September 29, 2016 07:45 PM Eastern
Mortgage Rate Lock Recommendation
If this is your first time viewing this daily report, you'll probably benefit by reading all the way to the end. That would give you the whole picture on the trends you need to know about, and an idea of what you should be looking for each day. But the information that changes daily is all in the first few paragraphs of each report. So old hands don't need to go beyond "Your Dilemma," below.
Sept 29 2016
- Lock – Rates may be moving up
Judging from early market trends, it looks as if mortgage rates might hold steady today or even rise a little. However, those trends often slow, accelerate or change direction, so a fall remains possible. It's possible that we'll look back and see yesterday and today as the end of the (so far week-long) slide in rates, but it's too soon to be sure of that. If we were currently buying a home we'd adopt our usual caution, assume the worst, and lock our rate today. However, those who are braver could legitimately take a chance by floating, especially if they have longer to wait before they have to lock.
After a lean period for domestic "market moving indicators," three were published this morning:
- GDP – Today's figure is the third and final reading of gross domestic product growth during the second quarter of 2016, and is expressed as a quarter-over-quarter seasonally adjusted annualized rate. It came in at +1.4 percent. The second reading had suggested growth of +1.1 percent, but many analysts expected that to inch up as a result of strong consumer activity. Prior to publication this morning, their consensus forecast was +1.3 percent, according to Econoday.
- International trade in goods – The trade gap (the difference between imports and exports) narrowed to -$58.4 billion in August. That followed an unexpectedly and exceptionally good July when it narrowed to -$59.3 billion. The analysts' consensus forecast had been for today's figure to be -$62.3 billion, which would still have been better than June's -$65.6 billion.
- Weekly jobless figures – The number of new claims for unemployment insurance during the week ending September 24 was 254,000. It had been 251,000 over the previous seven days, and the analysts' consensus forecast earlier was for a rise to 260,000. All these numbers are exceptionally low by historical standards.
So all today's data were better than expected, something that would normally exert an upward pressure on mortgage rates. News that the Organization of the Petroleum Exporting Countries (OPEC) has reached an agreement to limit oil production also buoyed mortgage rates. The U.S. Treasury has a couple of auctions of bills scheduled for later, but the longer of these has a six-month term, which is likely to limit their potential to affect mortgage rates. Four senior Federal Reserve Board officials have speaking engagements today, but few expect their remarks to contain surprises, given the Fed made major official announcements only eight days ago.
At approaching 10:00am ET, yields on 10-year U.S. Treasury bonds, which are usually closely tied to mortgage rates, were higher – but not as high as they had been earlier, suggesting weak momentum. While those yield trends on those bonds at that time of the morning frequently turn out to be accurate predictors of the direction of travel for the day's mortgage rates, they slow, accelerate or reverse sufficiently often that they can't be relied upon as a basis for making important financial decisions. And in any event the relationship between those and mortgage rates can sometimes become elastic.
Earlier, major foreign stock-market indexes were higher across Asia and Europe. However, 26 minutes after opening, the Dow Jones industrial average was down by -0.04 percent. At 9:49am ET, crude oil prices stood at $47.16/barrel, compared with the $45.33/barrel seen at 9:47am ET yesterday.
Recent Mortgage Rates
Average rates for 30-year fixed-rate mortgages (FRMs) held steady yesterday, according to Mortgage News Daily (MND). That followed five consecutive business day of falls, which saw the average reach its lowest point in the last month. Indeed, you have to go back almost two months to find lower averages. We're now back within the narrow range within which mortgage rates moved after the "Brexit" (British exit from the European Union) shock, but before they were pushed up by speculation the Federal Reserve would raise its benchmark interest rate in September. That speculation has now been laid to rest, but you'd be brave to assume other factors won't soon push them up or down outside that range. And as MND warned on Monday night, "... keep in mind that the longer streaks like this go, the more susceptible they are to corrections."
The average rate nationwide for a 30-year FRM during the week ending September 29 was 3.42 percent with an average 0.5 point, according to Freddie Mac's latest weekly survey, published this morning. It was 3.48 percent during the week ending September 22, and 3.50 percent seven days before that. This time last year, the average 30-year FRM came in at 3.85 percent.
Freddie Mac chief economist Sean Becketti remarked in a statement accompanying the latest data:
Investors flocked to the safety of government bonds causing the 10-year Treasury yield to continue its descent following the FOMC's decision to leave rates unchanged. The 30-year fixed-rate mortgage responded by dropping 6 basis points before landing at 3.42 percent -- a ten-week low. The course of the economy is uncertain, yet consumers continue to be a bright spot. The September consumer confidence index is up 3 percent to 104.1, exceeding forecasts and reaching a new cycle high.
The Longer Term
In its latest (September) Housing Forecast, Fannie Mae predicts the rate for 30-year FRMs will average 3.4 percent this quarter, and rise to 3.5 percent in the next. It then expects them to stay at 3.5 percent through the first two quarters of 2017, and average 3.6 percent during the last half of that year.
In their September Outlook report, Freddie Mac's economists predicted rates for 30-year FRMs would average 3.6 percent through 2016. They think they'll average 3.7 percent during 2017.
The Mortgage Bankers Association maintained its pessimistic expectations of rate rises in its September Mortgage Finance Forecast. It reckons that same average rate will creep up during every quarter in the foreseeable future, reaching 3.7 percent in the last three months of this year, starting 2017 with a quarterly average of 3.9 percent, and ending it with one of 4.4 percent.
You may prefer to see all these numbers as a sign of how difficult it is to forecast rates in this challenging economic environment, rather than as reliable guides to the future.
There remains a risk in choosing to float or lock your rate. True, there are opportunities for rewards should rates fall further, but there is also a continuing danger of being trapped in an upward cycle that doesn't end before you have to lock.
So those who are cautious may wish to lock today, trading the possibility of further falls in rates for the security of fixing what could be an exceptionally good mortgage deal. Those who like to gamble might prefer to wait awhile before locking, hoping there will be further falls ahead. Only you can decide on the risk with which you personally are comfortable.
If you do choose to continue to float, it's usually a good idea to set yourself a top limit on the rate you're prepared to pay, and above which you won't go. That would allow you to cut your losses in the event rates enter an upward spiral that lasts beyond when you have no choice but to lock.
Why Mortgage Rates Move
Unlike most other interest rates, those for mortgages (except ones for existing adjustable-rate mortgages) are largely determined by the supply of money into the market from investors and the demand for such loans from consumers. That supply is heavily affected by the amount of risk investors are prepared to sustain in their portfolios. When spooked by economic uncertainty, they tend to buy safer assets, including mortgage securities, which can result in an increased supply of product (cash) that drives down the price (rates). When they're more confident, they tend to invest in riskier but more profitable assets, which reduces the supply of money for home loans, and pushes up rates. A second influence is perceptions of how inflation rates are likely to move over the long term, but that tends to be a less important factor in daily and short-term movements. None of this is to suggest the Federal Reserve doesn't affect mortgage rates; merely that it does so only indirectly by influencing investor sentiment.
The relationship between 10-year Treasury bonds and mortgage rates is more complicated. Investors generally view those bonds and mortgage securities as similarly secure havens for their money when they're spooked – with bonds the safer of the two. That means they tend to buy or sell both at the same time, depending on their level of confidence in the U.S. and global economies. So many lenders refer to those particular Treasury yields when setting their rates. Usually, the relationship between 10-year Treasury yields and mortgage rates is surprisingly close, though rates tend to be less volatile, and sometimes the two drift apart a little.
Some Questions Answered
Why, counterintuitively, do bond yields fall when prices for Treasuries rise? It's because you're buying a fixed return on your investment, and the more you pay for the right to that same fixed amount of money, the lower the yield you're going to get. That's a mathematical inevitability.
Why go on about "analysts' consensus forecasts" when reporting economic data? Well, they're often relevant. That's because investors frequently trade ahead of actual data based on those forecasts. So sometimes the difference between what's reported and what was expected can be as important as that between the new number and the one for the previous reporting period.
What is a basis point? Yes, it's 1/100th of 1 percent, but, when it comes to percentage points and basis points, these numbers are often mind-numbingly confusing. To give a purely theoretical example, suppose the best mortgage rate you could have gotten yesterday was 6.00 percent (let's hope it wasn't!), and that rate subsequently dropped by a single basis point. Your new rate would be 5.99 percent.
"Locking" your mortgage means that you and your lender have agreed on an interest rate and price for your home loan. Once your loan is locked, that's the rate and price you get, regardless of what happens in the financial markets. If rates go up, you're protected but if rates go down, you won't benefit either -- you close your loan at the rate you've locked and you can’t change it. Locks have expiration dates ranging from 30 to 60 days or more, and the longer your lock period, the more it costs. If you don't close your loan on time, you could end up paying a higher interest rate.
You can lock in your loan at any time during the process. Until you lock your interest rate, you are said to be "floating" your mortgage. The only rule is that you have to lock in before you can close on your purchase or refinance.
The decision to lock or float your loan can have a long term impact so it’s important you make the right choice. That’s why we offer a quick rundown of the key factors that drive mortgage rates today and everything you need to know.
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