A bad day for rates – mostly because they look like they will keep going up in 2017. Elective sellers won’t budge until they get 1-2 years’ worth of proof that the market won’t support their price.
Mortgage rates skyrocketed (relatively) following today’s rate hike from the Fed. It wasn’t the rate hike itself, however, that markets find most troubling. In fact, the hike was almost universally expected. Rather, this was one of the 4 Fed meetings of 2016 that included updated economic projections (sometimes referred to as “the dots” due to the dot-plot chart the Fed uses to show where members see the Fed Funds rate in coming years).
Today’s dots showed that the Fed now sees an additional rate hike in 2016 compared to the last set of projections. Longer term rates like mortgages and 10yr Treasuries had already adjusted for today’s hike, but they had not yet adjusted for any change in the dots. With time running out for traders to take advantage of liquidity ahead of the holidays, the race was on to sell bonds as quickly as possible. When traders sell bonds, it pushes rates higher.
Nearly every lender raised rates this afternoon–some of them multiple times. At first that took the form of mere increases in upfront costs (i.e. the contract rate itself wasn’t moving higher), but subsequent reprices added up to an eighth of a point in rate for several lenders. From a range of 4.125-4.25%, top tier conventional 30yr fixed quotes moved up to a range of 4.25-4.375%–well into the highest levels in more than 2 years.
To recap: this isn’t happening because the Fed hiked. This is a reaction to the shift in rate hike expectations among Fed members. It means they’re having a Matrix-eque moment where they’re “starting to believe.” In this movie, the belief isn’t about Kung Fu and dodging bullets, but rather about the ability to continue gently raising rates.
From Dec. 15th:
Don’t believe anything you read about mortgage rates today… well, except this. In fact, you’re welcome to believe anything you read as long as it acknowledges the fact that rates have risen nearly a quarter of a point from last week, pushing them well into the highest levels in more than 2 years. The average top tier conventional 30yr fixed rate is quickly approaching 4.5%. Nearly every lender that was at 4.125% last week is now at 4.375%. Lenders who were at 4.25% last week are mostly up to 4.5%.
The overall spike in rates since the election is now on par with the 2013 taper tantrum. You’ll hear time and again “don’t worry… rates are historically low…” and my personal favorite “for every .125% in rate, the payment only rises $7 per $100k borrowed.” All of that is true, except perhaps for the “don’t worry” part. Some borrowers may need to worry about no longer qualifying due to debt-to-income guidelines.
Rates haven’t risen a mere .125%, after all. That’s just today’s increase. Added to recent losses, the damage is between .75 and 1.0% now. Let’s take a more average loan amount of $250k and see what happens when the rate goes up 0.75. The increase is over a hundred dollars a month.
Many of the people interviewed by financial journalists have a hard time relating to most of the people that will end up being exposed to their opinions. $100/month may not sound like the end of the world to the CEO of some financial firm, but it is more than enough to tip the scales for prospective homebuyers. They’ll have to adjust their price range at least $20k to get back to the same payment. If that’s not an option for the area, then they’re no longer a prospective homebuyer, or they’ll be forced to move out of the area. This dynamic is not congruent with “not worrying.”
Oh, and you’ll also need to worry if rates will continue to move higher. That’s possible, although for technical reasons, the higher rates go, the more challenging it will be to continue higher. It’s also possible that markets are riding on a cloud of optimistic euphoria and that the cloud will dissipate as the new year begins. It’s possible this rise in rates is a necessary ingredient in longer term trends. In other words, rates have to rise so they can fall again. Last but not least, it’s possible I don’t know everything and rates will go much higher than they are currently, but if that happens, it will increasingly have consequences for the economy.
Loan Originator Perspective
Trend is not our friend. In this market, you have to lock as soon as possible. Even if we get a small rally, lenders will be hesitate to pass along improvements. Way too much volatility.