January 16, 2017 07:54 AM Eastern
If this is your first time viewing the following 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 or frequently is all in earlier paragraphs of each report. So old hands don't need to go beyond "The Longer Term" below.
Mortgage Rate Lock Recommendation
Jan. 13, 2017 - Lock
It looks as if mortgage rates might move up today, possibly significantly. However, that prediction is based on early market trends, and those frequently change speed or direction during the day (as has happened on each of the last three days), so a holding steady or fall remain more than possible. Still, if we were currently buying a home, we'd lock our rate now.
In recent days, markets and rates have been exceptionally unpredictable: For example, yesterday morning saw the 10-year Treasury yield slump to its lowest level since November 30, but by late afternoon mortgage rates (which are usually closely tied to that yield) were higher than they had been at Wednesday's close. So all forecasts should be taken with an even bigger pinch of salt than usual.
If You're Floating
For some time now, we've been suggesting that braver readers might consider floating – regardless of daily fluctuations – in anticipation of a possible fall in mortgage rates. Well, that fall has been happening since Dec. 27, and average rates yesterday evening were 25 basis points (a basis point is one-hundredth of 1 percent – see below for a longer explanation) lower than they were on that date. However, 2017 has so far seen (mostly larger) falls alternating with (mostly smaller) rises, so gains are far from secure.
The questions now for those who are floating are:
- For how long might these downward movements continue?
- Do recent rises suggest instability in – or even herald a reversal of – that falling trend, or were they merely blips?
Observers are divided on those. Some would urge you to grab your gains (lock) soon in case rates begin to rise again in a sustained way. Meanwhile, others would advise you to continue to float in the hope recent falls have been just the start of continuing gains. Given the unpredictability and potential volatility currently in markets, only you can decide whose advice to take. And what you choose to do will be largely down to your personal tolerance for risk.
If you do continue floating, it's often a good idea to set an upper limit on the rate you're comfortable paying, and to resolve to lock and cut your losses when that limit is reached. Use the LendingTree mortgage calculator to model how rate changes affect your monthly payments. Setting a cap may help you avoid a more destructive upward spiral.
Read on for more ...
Two "market moving indicators" (releases of important domestic economic data) are on the calendar today:
- Producer price index (PPI) – The month-over-month (M/M) change in this during December was +0.3 percent. It had been +0.4 percent in November. The producer price index for final demand (PPI-FD), which may be more important, was up +0.3 percent in December, compared with +0.4 percent in November. That will raise few cheers.
- Retail sales – Retail sales in December showed a M/M change of +0.6 percent. They had risen +0.1 percent the previous month, and, prior to this morning's publication, the consensus forecast among analysts had been for a rise to +0.7 percent. So, while good, today's number was below expectations. However, if you strip out autos and gas prices, there was no change in December, which is more disappointing.
Nevertheless, markets seem to be finding the good in these data, and CNBC is at the time of writing putting this morning's rise in Treasury bond yields down to these numbers.
The U.S. Treasury has no auctions of bonds, bills or notes scheduled for today, and only one senior Federal Reserve officer has a speaking engagement. He'd have to say something unexpected for his remarks to impact mortgage rates. Other movements are likely to come from continuing market sentiment and foreign news.
By approaching 10:00am ET, yields on 10-year U.S. Treasury bonds, which are usually closely tied to mortgage rates, were significantly higher. 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. Twenty-nine minutes after opening, the Dow Jones industrial average was up +0.13 percent. At 9:53am ET, crude oil prices stood at $52.92/barrel, compared with the $53.38/barrel seen at 9:46am ET yesterday.
Recent Mortgage Rates
Average rates for 30-year fixed rate mortgages (FRMs) rose 2 basis points yesterday, according to Mortgage News Daily (MND). So they were down last Tuesday, up Wednesday, down Thursday, up Friday, down Monday, up Tuesday, down Wednesday and up Thursday. You might notice a pattern there. Overall, the downs were much greater than the ups, but this pendulum effect suggests some fragility in the downward trend.
To add some context, the average yesterday was 52 basis points above its level on the day before the presidential election. So, based on a nationwide average, someone with a great credit score, small non-mortgage debts and a big down payment might on November 7 have been offered a rate of 3.59 percent on a 30-year FRM. Yesterday, that same applicant would likely have had to pay 4.11 percent. Still, he or she could have paid 4.38 percent in mid-December, according to MND figures.
The average rate nationwide for a 30-year FRM during the week ending Jan. 12 was 4.12 percent with an average 0.5 point, according to Freddie Mac's latest weekly rates survey, published yesterday morning. It was 4.20 percent during the week ending Jan. 5, and 4.32 percent seven days before that. This time last year, the average 30-year FRM came in at 3.92 percent.
Freddie Mac chief economist Sean Becketti commented in a statement accompanying the latest data:
After absorbing a mixed December jobs report; the 10-year Treasury yield fell 8 basis points. The 30-year mortgage rate moved in tandem with Treasury yields falling 8 basis points to 4.12 percent, the second decline since the presidential election.
The Longer Term
In its December Mortgage Finance Forecast, the Mortgage Bankers Association reckons the average rate for 30-year FRMs will creep up during every quarter until the end of next year, starting 2017 with a quarterly average of 4.3 percent and ending it at 4.7 percent. It expects further increases in later years, with rates reaching 4.9 percent by the end of 2018, and averaging 5.3 percent in 2019.
Fannie Mae's December Housing Forecast predicts rates for 30-year FRMs will average 4.1 percent during the first three quarters of 2017. It says they'll rise to 4.2 percent in the last quarter of that year, and hold at that level for the first nine months of 2018. They're then expected to rise to 4.3 percent.
In their December Outlook report, Freddie Mac's economists remained more vague about future rates than they sometimes are. They forecast that 30-year FRM rate will average 4.2 percent through 2017, and 4.5 percent during 2018.
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 continuing risk in choosing to float or lock your rate. True, there are opportunities for rewards should rates fall, 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 future falls in rates for the security of fixing what could still be an exceptionally good mortgage deal – though only by historical standards. Those who like to gamble might prefer to wait awhile before locking, hoping there will be additional 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 usually 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 7.00 percent (let's hope it wasn't!) and that rate subsequently dropped by a single basis point. Your new rate would be 6.99 percent.
What is a market moving indicator? It's simply a release of domestic economic data designated by Bloomberg as such. As the name implies, it's a report that at least sometimes moves markets, and therefore may shift mortgage rates.
"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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