February 22, 2017 05:01 PM 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
Feb. 22, 2017 - Float
It looks as if mortgage rates might fall today. However, that prediction is based on early market trends, and those frequently change speed or direction during the day, so a holding steady or rise remain possible. Still, if we were currently buying a home, we'd float our rate now, but would check back tomorrow morning to see how things look then.
If You're Floating Strategically
For months 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 began Dec. 27, and average rates for 30-year fixed-rate mortgages (FRMs) have since bottomed out at 27 basis points (a basis point is one-hundredth of 1 percent – see below for a longer explanation) below that day's level. Yesterday, they were 13 basis points lower, so some of those gains have been slowly slipping away amid both rises and falls.
So far in February, there have been eight business days on which rates rose, and seven on which they fell, according to Mortgage News Daily (MND). Overall, they've dropped just 4 basis points during that period, but that disguises some larger variations, and the difference between the lowest and highest days this month is 14 basis points. In other words, there have been repeated swings of late, which makes forecasting into the future beyond a day or so challenging.
So many observers would urge you to grab your gains (lock) soon in case upward movements continue and quickly wipe out gains. Meanwhile, others might advise you to continue to float in the hope falls will predominate in coming days and weeks. 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. For what it's worth, if we were in your shoes, we'd lock the next time rates look likely to rise significantly, but we're notoriously cautious.
If you do continue floating beyond then, 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 getting trapped in a destructive upward spiral that doesn't end before you're forced to lock.
Read on for more ...
The Federal Open Market Committee (FOMC, the Federal Reserve body that determines that organization's interest rates – and therefore many others) publishes the minutes of its last meeting at 2:00pm (ET) this afternoon. Analysts and investors always pore over these minutes in great detail, so there's a real chance of one previously unknown nugget disrupting markets and mortgage rates. Having said that, top Fed officers have had numerous speaking engagements recently (one has such an engagement this lunchtime), so the potential for surprises today may be lower than is often the case.
Once again, only one "market moving indicator" (release of important domestic economic data) was published this morning. Expressed as a seasonally adjusted annualized rate, the number of existing (not new-build) homes sold in January was 5.690 million. That compares with 5.490 million in December, and an analysts' consensus forecast (what was expected by analysts before this morning's announcement) of 5.580 million, according to Econoday. So today's figure was good and better than expected, something that might exert some upward pressure on mortgage rates as markets digest the number.
The U.S. Treasury will be auctioning two-year notes later this morning. Demand for these shorter-term instruments doesn't often affect mortgage rates much, but you can't rule out the possibility they might. Other possible causes of changes in those rates today include domestic political news that affects the economy, foreign economic news (the upcoming French presidential election is still causing jitters) and general market sentiment.
By approaching 10:00am ET, yields on 10-year U.S. Treasury bonds, which are usually closely tied to mortgage rates, were appreciably lower, but recovered a little as the existing home sales figure was released. 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 mostly higher across Asia but mixed in Europe. Twenty-five minutes after opening, the Dow Jones industrial average was down -0.10 percent. At 9:47am ET, U.S. crude oil prices stood at $53.59/barrel, compared with the $54.38/barrel seen at 9:39am ET yesterday.
Recent Mortgage Rates
Average rates for 30-year FRMs rose 3 basis points yesterday, according to MND. That followed two successive days of falls, which in turn followed a week of rises. Together these reflect the seesawing of rates that's become typical recently.
To add some context, the average yesterday was 62 basis points above its level on the day before the presidential election. So, based on a nationwide average, a "top-tier borrower" (someone with a great credit score, small non-mortgage debts and a big down payment) might on Nov. 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 4.21 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 Feb. 16 was 4.15 percent with an average 0.5 point, according to Freddie Mac's latest weekly rates survey. It was 4.17 percent during the week ending Feb. 9, and 4.19 percent seven days before that. This time last year, the average 30-year FRM came in at 3.65 percent. Although Freddie Mac's weekly figures are accurate over the long term, they often lack the timeliness and granularity of other sources, even on their day of publication.
Freddie Mac chief economist Sean Becketti commented in a statement accompanying the latest data:
For the last 46 years, the 30-year mortgage rate has been almost perfectly correlated with the yield on the 10-year Treasury, but not this year. From Dec. 29, 2016, through today, the 30-year mortgage rate fell 17 basis points to this week's reading of 4.15 percent. In contrast, the 10-year Treasury yield began and ended the same period at 2.49 percent. While we expect mortgage rates to fall into line with Treasury yields shortly, this just may be a year full of surprises.
The Longer Term
The Mortgage Bankers Association's February Mortgage Finance Forecast is unchanged in respect of mortgage rate predictions. It 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 5.1 percent by the end of 2018, and averaging 5.3 percent through 2019.
Fannie Mae's February Housing Forecast predicts rates for 30-year FRMs will average 4.2 percent during the first three quarters of 2017. It says they'll rise to 4.3 percent in the last quarter of this year, and hold at that level for the first six months of 2018. They're then expected to rise to 4.4 percent.
In their January Outlook report, Freddie Mac's economists forecast that 30-year FRM rate will average 4.4 percent through 2017, and 4.8 percent during 2018. Both those forecasts are higher than they were in December.
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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