December 3, 2016 06:38 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 the first few paragraphs of each report. So old hands don't need to go beyond "The Longer Term" below.
Mortgage Rate Lock Recommendation
Dec. 2, 2016 - Float
Judging from early market trends, it looks as if mortgage rates might fall or hold steady today. However, those trends often change during the day, so a rise remains possible. Indeed, as recently as yesterday, those trends proved treacherous, when what looked likely to be a holding steady or modest rise turned into a sharp increase. Generally speaking, this current volatility and unpredictability make floating too dangerous to our cautious eyes, even on those too-rare days like today when rates look like they're moving down. But, if we were buying a home now, we'd be tempted to float and review the situation on Monday morning.
However, you might just think about adopting a longer Float strategy regardless of daily fluctuations if you have some weeks to go before you must lock. That's because some believe there's a chance of a more sustained market correction ahead, though that's far from a certain bet, and any such correction looks unlikely to see a return to pre-election conditions. What you choose to do will be largely down to your personal tolerance for risk.
If you do decide to float, 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. Either way, we are in a time of great unpredictability and volatility, so there's risk in doing anything – including nothing.
Read on for more ...
Today's big news was publication of the official employment situation report, which some see as the single most influential monthly statistical release. It is the only new "market moving indicator" (significant release of domestic economic data) on the calendar.
The number of new jobs added to nonfarm payrolls during November was 178,000. That compares with the 161,000 in September. Prior to this morning's publication, the consensus forecast amongst analysts had been for that number to rise to 170,000, according to Econoday. That was excellent news, as was the unemployment rate, which surprised everyone by tumbling to 4.6 percent from 4.9 percent. However, not all the numbers were welcome, and the labor participation rate and average hourly earnings both ticked down by the smallest perceptible amounts.
November vehicle sales emerged yesterday as individual manufacturers released their figures. Expressed as an annualized rate, sales that month were 17.87 million vehicles, down from 18.25 million one year earlier, but surprisingly stronger than many had expected. High discounts and other incentives may have contributed to that strength.
There are no auctions of U.S. Treasury bonds, bills or notes later, but two top Federal Reserve officers have speaking engagements. Fed speeches always have the potential to disrupt markets, and with the next decision concerning the organization's interest rates (and consequently many others) due in two weeks, investors will be closely watching what is said. However, most investors are close to certain a rise will be announced then, and have already accommodated that within their portfolio strategies.
By approaching 10:00am ET, yields on 10-year U.S. Treasury bonds, which are usually closely tied to mortgage rates, were appreciably lower and falling. 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 all lower across Asia and Europe. Twenty-three minutes after opening, the Dow Jones industrial average was down -0.10 percent. At 9:48am ET, crude oil prices stood at $51.05/barrel, compared with the $50.76/barrel seen at 9:49am ET yesterday. Oil is higher because the Organization of Petroleum Exporting Countries (OPEC) reached an agreement at their meeting in Vienna, Austria on Wednesday concerning supply restrictions, although in the past such deals have often proved short-lived.
Recent Mortgage Rates
Average rates for 30-year fixed rate mortgages (FRMs) soared yesterday by 11 basis points (a basis point is one-hundredth of 1 percent – see below for a longer explanation), according to Mortgage News Daily (MND). That sharp rise and Wednesday's modest one more than wiped out the gains early in the week. Hopes on Tuesday that rates were plateauing have been put on hold.
To add some context, that average yesterday evening was 65 basis points above its level one month ago today. So someone with a great credit score, small non-mortgage debts and a big down payment might have on November 2 been offered a rate of 3.59 percent. Yesterday, that same applicant would likely have had to pay 4.24 percent.
Why was yesterday's rise unexpectedly sharp? At 10:00am ET, 10-year bond yields had been only very slightly higher: up less than 1 basis point. As the day went on, anticipation of today's employment situation report grew, with most betting on a good outcome. Additionally, rates hadn't risen as sharply as yields on Wednesday, so there was some catching up to do.
The average rate nationwide for a 30-year FRM during the week ending December 1 was 4.08 percent with an average 0.5 point, according to Freddie Mac's weekly rates survey, published yesterday. It was 4.03 percent during the week ending November 23, and 3.94 percent seven days before that. This time last year, the average 30-year FRM came in at 3.93 percent. Freddie's weekly survey generally lags MND's daily reports.
Freddie Mac chief economist Sean Becketti commented in a statement accompanying the latest data:
"The 10-year Treasury yield remained flat despite an upward revision to third quarter GDP. The 30-year mortgage rate rose 5 basis points to 4.08 percent, rising a total of 51 basis points in three short weeks."
The Longer Term
The Mortgage Bankers Association must feel vindicated that its previously pessimistic seeming predictions for rates have suddenly become highly realistic. In its November Mortgage Finance Forecast, it reckons the average rate for 30-year FRMs will creep up during every quarter until the end of next year, reaching 3.9 percent in the last three months of this year. It additionally predicts rates will start 2017 with a quarterly average of 4.0 percent and end it at 4.4 percent. It expects further increases in later years, with rates reaching 4.8 percent by the end of 2018, and averaging 5.3 percent in 2019.
Even though it was published just last week, Fannie Mae's November Housing Forecast says, "Interest rate forecasts are based on rates from October 31, 2016." Given subsequent events, that seems almost perversely unhelpful. And, it means Fannie is still predicting that the rate for 30-year FRMs will average 3.5 percent in the current quarter. Meanwhile, its forecasts for that average have changed only slightly further into the future: 3.6 percent for the first half of 2017, 3.7 percent for the second half and 3.8 percent through 2018. If you believe those numbers, there's a bridge you may be interested in buying ...
In their November Outlook report, Freddie Mac's economists were more vague about future rates than they normally are. They forecast that 30-year FRM rate will be averaging 4.1 percent through 2017, including 4.2 percent in the last quarter of that year. That's close to where they are now.
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 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 – though that tendency may currently be suspended. 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.
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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