Last updated: March 15 2016
Float if closing in 7 days: Rates may be heading down
Float if closing in 15 days: Rates may be heading down
Float if closing in 30 days: Rates may be heading down
Market trends at 10:00am (ET) suggest mortgage rates might fall again today or possibly hold steady. However, it’s important to recognize such early trends can change quickly, as they have done a few times recently. There are no guarantees in the current, unpredictable and volatile environment. But, if we were buying a home in March or April, we would cautiously float our rate today. Read on for more.
The drought of economic data, which has been going on for a week, finally ended today with a relative downpour of five reports. Any of them could move markets and mortgage rates, but the first two are the ones that do so most frequently. Actually, there were few surprises today, so their impact on markets may turn out to be somewhere between slight and zero.
- Producer price index (PPI) for final demand (FD) – Month over month (M/M), PPI-FD fell -0.2 percent in February, which was precisely in line with the consensus forecast among analysts prior to publication, according to Econoday. It had been up +0.1 in January. If you strip out food and energy prices, the PPI-FD didn’t move in February.
- Retail sales in February – These came in down -0.1 percent M/M, which again was precisely in line with the analysts’ consensus forecast. Retail sales were up 0.2 percent in January.
- March Empire State manufacturing survey – This poll of business sentiment by the New York Fed of executives in manufacturing companies in New York state has had grim results since last summer. The index finally returned to positive territory today, though it was up by just +0.62. That compared with -16.64 in February. The analysts’ consensus forecast for today’s number had been -11.25.
- January business inventories – These were up +0.1 percent, which was precisely the same rise seen in December. Analysts had expected them to hold steady. Rising inventories held through the supply chain can be a sign of economic strength when companies stock up in anticipation of sales. But they can equally comprise unsold and unwanted items, and that seems a more likely reading of the present situation.
- March housing market index – This is a poll of members of the National Association of Home Builders that asks them about their industry’s and the wider economy’s prospects, and anything over 50 on this index is positive. Today’s number was 58, the same as February’s. The analysts’ consensus forecast had been for 57.
The Federal Reserve’s Federal Open Markets Committee meets today and tomorrow. The committee determines the Fed’s own rates (and therefore many others) and it’s highly unlikely but not impossible that a hike will be announced tomorrow. Expect markets to be jittery and more unpredictable than ever as the time of that announcement nears. Just to add to the uncertainty, the Fed’s meeting is occurring in the midst of similar ones by other central banks. It follows on from a shock stimulus package unveiled last week by the European Central Bank, and the Bank of England and the Bank of Japan will also be considering their respective monetary policies this week.
Stock markets in Europe and Asia were mostly drifting earlier, with small losses predominating. About 40 minutes after opening, the Dow Jones industrial average had lost -0.42 percent. The oil price then was also down, at $36.38/barrel, which compares with $36.98/barrel at roughly the same time yesterday. Still, as recently as February 10, it was below $30/barrel.
By about 10:15am (ET), yields on 10-year U.S. Treasury bonds, which are usually closely tied to mortgage rates, were moving down. 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. During unstable times, such as these, they are even less reliable, and we’ve seen the relationship between bond yields and mortgage rates grow more elastic in 2016 than previously.
Recent Mortgage Rates
Average rates for 30-year fixed-rate mortgages (FRMs) decreased by 1 basis point (one-hundredth of 1 percent) yesterday, according to Mortgage News Daily. That leaves them high by very recent standards, but exceptionally low in a historical context.
The average rate nationwide for a 30-year FRM during the week ending March 10 was 3.68 percent with an average 0.5 point, according to Freddie Mac’s latest weekly survey. It was 3.64 percent during the week ending March 3, and 3.62 percent seven days before that. This time last year, the average 30-year FRM came in at 3.86 percent.
In a statement accompanying those data, Freddie Mac chief economist Sean Becketti observed:
The 10-year Treasury yield ended the survey week exactly where it started, however the solid February employment report boosted the yield noticeably on Friday and Monday. Our mortgage rate survey captured the impact of this temporary increase in yield, and the 30-year mortgage rate rose 4 basis points to 3.68 percent. This marks the second increase this year. Nonetheless, the mortgage rate remains 33 basis points lower than its end-of-2015 level.
As (so far with masterly understatement) the Wall Street Journal warned early in January, this could be a “volatile year in global markets.” There’s always a risk in choosing to float or lock your rate, but it’s more acute in volatile environments. True, there are opportunities for rich rewards if rates fall substantially, but there is also a continuing danger of being trapped in an upward cycle that doesn’t end before you have to lock your rate.
So those who are cautious may wish to lock today, trading the possibility of further falls in rates for the security of fixing what should still be an exceptionally good mortgage deal in historical terms. 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.
The Bigger Picture
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 loans and drives up rates. That’s not to say the Federal Reserve doesn’t indirectly influence mortgage rates nor that the FOMC’s announcement on tomorrow won’t be important.
The Longer Term
Looking beyond, one hopes, the period covered by these mortgage rate lock recommendations, some economists are predicting a new worldwide recession, which might see mortgage rates fall even further. There are plenty of voices predicting doom and gloom. Last week, chief of the Bank of International Settlements (“the central bankers’ central bank”) Claudio Borio added his, remarking, “The tension between the markets’ tranquility and the underlying economic vulnerabilities had to be resolved at some point. In the recent quarter, we may have been witnessing the beginning of its resolution.” He went on, “We may not be seeing isolated bolts from the blue, but the signs of a gathering storm that has been building for a long time.”
However, not all experts are so pessimistic, at least when it comes to the American economy. Earlier this month, global bank Credit Suisse published its analysis: “A string of positive U.S. economic data releases have strengthened the argument that consumer demand will keep the U.S. from falling into recession in the coming months.” And, last week, a note from Comerica Bank’s economics team said:
The quality of U.S. economic data has shifted in recent weeks from being generally a little worse than expected to being generally a little better than expected … We have started to dial back our probability of near-term recession for the U.S. from an uncomfortable high of about 33 percent a month ago to about 25 percent in early March. If the recent data pattern continues, we will dial it back further next month.
Still, Fannie Mae’s predictions for average rates for 30-year FRMs changed considerably in the latest (February) edition of its Housing Forecast. It now expects that rate to average 3.8 percent throughout 2016. Fannie reckons it could increase to 3.9 percent in the first quarter of 2017, and remain there until it rises to 4.0 percent in the last quarter of next year. That’s very different from its January forecast, which predicted that rate would average 4.0 percent in the current quarter, 4.1 percent in the following two, and 4.2 percent in the last quarter of 2016. You may prefer to see the newer numbers as a sign of how difficult it is to forecast rates in a volatile environment, rather than as a reliable guide to the future.