August 29, 2016 01:57 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.
Aug 29 2016
Judging from early market trends, it looks likely mortgage rates will fall today. However, those trends frequently change during the trading day and occasionally become decoupled from those rates, so a holding steady or rise remain possible. If we were currently buying a home, we'd float today, but keep a close eye on developments over the rest of the week, with a special eye on this Friday's all-important monthly employment situation report. But, barring shocks, those who are more cautious are unlikely to miss out on much if they prefer to lock.
Figures for just one domestic "market moving indicator" were published this morning, those for personal income and outlays. The month-over-month (M/M) change in personal incomes in July was +0.4 percent. The same change in June had been +0.3 percent (revised), and, prior to this morning's publication, the consensus forecast among analysts for the new figure was +0.4 percent, according to Econoday. July's M/M change in consumer spending was +0.3 percent, which compares with +0.4 percent in June, and an analysts' consensus forecast of +0.3 percent. These figures were good, but precisely as expected, so any reaction in markets may be small.
At approaching 10:00am ET, yields on 10-year U.S. Treasury bonds, which are usually closely tied to mortgage rates, were lower and continuing to fall. 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, as they did slightly on Friday. The U.S. Treasury will be auctioning some short-term bills later today, but these (unlike long-term bond auctions) rarely affect mortgage rates.
Earlier, major foreign stock-market indexes in Europe were all down, while those across Asia were mixed. Twenty-two minutes after opening, the Dow Jones industrial average was up by +0.41 percent. At 9:44am ET, crude oil prices stood at $46.80/barrel, compared with the $47.50/barrel seen at 9:53am ET on Friday.
Recent Mortgage Rates
On Friday, average rates for 30-year fixed-rate mortgages (FRMs) held steady, according to Mortgage News Daily, confounding those (including this writer) who had expected a sharper reaction to Fed chair Janet Yellen's speech that morning. This average has now been yo-yoing within a tight range for several weeks. Although there's been a lot of up-and-down movement recently, yesterday's rate was just 4 basis points (a basis point is one-hundredth of 1 percent – see below for a longer explanation) above the low seen over the last month, and 2 basis points below the high. Indeed, it's been within 1 basis point of its Friday level ever since August 15. So, whether you've locked or floated, you won't so far have lost or gained much.
The average rate nationwide for a 30-year FRM during the week ending August 25 was unchanged at 3.43 percent with an average 0.6 point, according to Freddie Mac's latest weekly survey. It was the same 3.43 percent during the week ending August 18, and 3.45 percent seven days before that. This time last year, the average 30-year FRM came in at 3.84 percent.
Freddie Mac chief economist Sean Becketti remarked in a statement accompanying the latest data:
Treasury yields were little changed from the prior week and the 30-year fixed-rate mortgage held steady at 3.43 percent this week. This marks the ninth consecutive week that mortgage rates have been below 3.5 percent. Markets are erring on the side of caution ahead of the second estimate for second-quarter GDP and Fed Chair Janet Yellen's speech on Friday.
The Longer Term
In its latest (August) Housing Forecast, Fannie Mae predicts the rate for 30-year FRMs will average 3.4 percent for the last two quarters of this year, and then inch up to 3.5 percent through the whole of 2017.
In their August Outlook report, Freddie Mac's economists again reduced their forecasts for future rates. In July, they'd predicted 30-year FRMs would average 4.0 percent during 2017, but that's now down to 3.7 percent.
The Mortgage Bankers Association also lowered its expectations of rate rises in its August Mortgage Finance Forecast. However, it remains much more pessimistic than the others, and now 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.
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.
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.
Recent Mortgage Rate Articles
Recommended Mortgage Rate Articles