Last updated: March 15 2016
Lock if closing in 7 days: Rates may be heading up
Lock if closing in 15 days: Rates may be heading up
Float if closing in 30 days: Rates may be heading down
Judging from market trends at 10:00am (ET), it looks likely mortgage rates will rise today. However, it’s important to recognize such early trends can change quickly, as they did yesterday, which was the latest of a number of recent occasions when that happened. There are no guarantees in the current, unpredictably volatile environment, and especially on a day like today when a major announcement could see significant movements up or down. If we were buying a home in March or April, we would be conservative and lock our rate were we to be closing within the next 15 days, but cautiously float it if we had longer to wait. Read on for more.
There’s a very small chance of a very big surprise at 2:00pm (ET). The Federal Reserve’s Federal Open Markets Committee (FOMC) has been meeting yesterday and this morning, and that time this afternoon is when it’s due to make an announcement concerning its deliberations. 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. Even though few expect a rise, markets may be jittery today. Watch out in particular for Fed chair Janet Yellen’s press conference at 2:30pm (ET), when her every word will be scrutinized for hints about future policy, and sharp movements in mortgage rates are possible regardless of whether an actual rate increase occurs. Unfortunately, nobody knows what she’ll say, and therefore the direction of any such movement.
There were three releases of important domestic economic data published earlier this morning, any of which might normally move markets and mortgage rates. However, their effect may be lost if the Fed springs any surprises this afternoon.
- February’s consumer price index (CPI) – Month over month (M/M), the headline CPI fell -0.2 percent in February. It had held steady in January, and the consensus forecast among analysts prior to publication, according to Econoday, was for today’s number to be -0.3 percent. If you strip out food and energy prices, the CPI rose +0.3 percent in February, the same as in January. These data, which are very slightly better than expected, are crucial, because inflation is one of the FOMC’s two key considerations when deciding its interest rates.
- February housing starts – The number of new residential construction projects started in February was 1,178,000 homes, when expressed as a seasonally adjusted annualized rate. It had been 1,099,000 units in February, and the analysts’ consensus prior to publication was for 1,146,000 units. So today’s figure is better than expected, though that may be offset by the number of new residential building permits issued, which disappointed.
- February’s industrial production – This performed badly during last fall, but began to recover through the winter. That recovery seems to have wobbled in February, when industrial production fell again by -0.5 percent. A reduction wasn’t unexpected but the extent of it was: the analysts’ consensus had been for a -0.2 percent fall. It had risen +0.9 percent in January.
The weekly Energy Information Administration (EIA) petroleum status report will be published later this morning, but after this blog’s deadline. It too is capable of moving oil prices, other markets and mortgage rates.
For a second day in succession, stock markets in Europe and Asia were mostly drifting earlier, with small losses predominating. About 30 minutes after opening, the Dow Jones industrial average was very slightly down (-0.04 percent) on yesterday’s close but on an upward trajectory. The oil price then was up, at $37.36/barrel, which compares with $36.38/barrel at roughly the same time yesterday. As recently as February 10, it was below $30/barrel.
By about 10:00am (ET), yields on 10-year U.S. Treasury bonds, which are usually closely tied to mortgage rates, were up. 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
Unexpectedly, average rates for 30-year fixed-rate mortgages (FRMs) rose by 1 basis point (one-hundredth of 1 percent) yesterday, according to Mortgage News Daily. That leaves them at the same level as Friday’s average, which was their highest since January, but they remain exceptionally low in a historical context. At 10:00am (ET) yesterday, all the signs suggested a further fall in those rates, but trends reversed during the day.
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.
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.
That advice applies to all readers, even on those days when LendingTree suggests only those with longer to wait before they must lock might prefer to continue to float. That recommendation is not based on any special insights concerning how mortgage rates might move, but merely on the calculation that there’s a greater chance – amid the current volatility – of worthwhile falls within 30 days than 15. Such falls may not occur at all, and it’s perfectly possible rises will predominate over that period.
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.