Hat tip to Matthew for a great piece on mortgage rates:
Mortgage rates have risen rather abruptly from their long term lows 2 weeks ago and are now at the highest levels in more than a month. Fortunately, the average lender is still easily able to quote rates in the high 3% range, which is still a significant savings for anyone who bought or refi’d in 2018 and even the first part of 2019.
That’s great and all, but what have rates done for us lately?
More importantly, what are rates going to do in the future?
Unlike forecasting the weather, the more of an expert someone is in the mortgage world, their ability to predict the direction of rates doesn’t meaningfully diverge from the layperson’s best guess. What we do know is that tomorrow’s Fed announcement is a big potential source of volatility, but NOT for the reasons most laypersons may assume!
I’m often asked if the Fed rate cut/hike will have an effect on mortgage rates. I’m also often asked to reiterate the correct answer to that question which is almost always “NO!”
The Fed only meets to potentially change rates 8 times a year. The bond market that underlies mortgage rates, however, can change 8 times in less than a second. Markets have LONG since priced in the Fed’s likely course of action (which is currently a high probability for a rate cut). If the Fed surprises markets and doesn’t cut rates, it will definitely cause some movement in financial markets, but there’s no telling where mortgage rates would be at the end of the day.
Part of the reason for that is the market’s bigger focus on the Fed’s updated forecasts. In other words, the (probable) rate cut is old news and has already been accounted for in today’s mortgage rate landscape. But if the Fed’s forecasts show deceleration in the pace of expected rate cuts versus the June forecasts, rates could rise.
A lot has happened since June, however, so it’s possible the forecasts will call for even lower rates over the next 3 years. Even if that happens, there’s still no telling what the reaction would be in longer-term rates like mortgages. After all, more rate cuts in 2019/2020 could act to keep the economic expansion going, and that’s bad for rates, all other things being equal.
The bottom line is that the Fed announcement is a multifaceted event that can move markets in different ways for different reasons, expected or otherwise. Investors burn the midnight oil trying to get ahead of the market reaction and surprises are still the rule. The safest bet is to be prepared for a reaction in either direction as opposed to crossing fingers for rates to move lower.
Loan Originator Perspective
Bonds continued to regain some of last week’s brutal losses today, and my pricing improved slightly. We’ll take whatever gains we can get prior to tomorrow’s FOMC statement. I don’t see us regaining our recent multi-year low rates anytime soon, so folks yearning for rates in low 3’s need to temper their expectations. Nothing wrong with locking here. – Ted Rood, Senior Originator
If Ivy said it, it must be so! P.S. 10-yr bond yield down to 1.54%:
While Wall Street panics about falling rates, Main Street is benefiting, especially in the housing market, according to housing guru Ivy Zelman.
She says every quarter-point cut in mortgage rates is equivalent to a 3 percent drop in the price of a home.
“Right now housing prices are down for the consumer more than 10%, so it makes it much more affordable,” Zelman, told CNBC’s Diana Olick on Wednesday. “We are seeing very good activity, especially in the low end of the market.”
Zelman is known for predicting the 2005 housing peak and the 2012 housing bottom. She is the founder or Zelman & Associates, a research firm that surveys housing market experts for institutional investors and corporate executives.
Interest rates have been falling in the U.S. and abroad as worries about a trade war and a global slowdown cause investors to ditch riskier plays and buy into bonds, a historically safer trade. The yield on the benchmark 10-year Treasury note was at 1.623% on Wednesday, below the 2-year yield at 1.634%, causing a key yield curve inversion that sent markets tanking.
Although stock market investors are worried tumbling rates and an inverted yield curve mean recession, Zelman said home buyers are not as “laser focused” on market headlines.
A bank in Denmark is offering borrowers mortgages at a negative interest rate, effectively paying its customers to borrow money for a house purchase.
Jyske Bank, Denmark’s third-largest bank, said this week that customers would now be able to take out a 10-year fixed-rate mortgage with an interest rate of -0.5%, meaning customers will pay back less than the amount they borrowed.
To put the -0.5% rate in simple terms: If you bought a house for $1 million and paid off your mortgage in full in 10 years, you would pay the bank back only $995,000.
It should be noted that even with a negative interest rate, banks often charge fees linked to the borrowing, which means homeowners could still pay back more.
According to The Local, Nordea Bank, Scandinavia’s biggest lender, said it would offer a 20-year fixed-rate mortgage with 0% interest. Bloomberg reported that some Danish lenders were offering 30-year mortgages at a 0.5% rate.
“It’s never been cheaper to borrow,” said Lise Nytoft Bergmann, the chief analyst at Nordea’s home finance unit in Denmark. It may seem counterintuitive for banks to lend out their money at such low rates – but there is a rationale behind it.
Financial markets are in a volatile, uncertain spot right now. Factors include the US-China trade war, Brexit, and a generalized economic slowdown across the world – and particularly in Europe.
Many investors fear a substantial crash in the near future. As such, some banks are willing to lend money at negative rates, accepting a small loss rather than risking a bigger loss by lending money at higher rates that customers cannot meet.
“It’s an uncomfortable thought that there are investors who are willing to lend money for 30 years and get just 0.5% in return,” Bergmann said.
“It shows how scared investors are of the current situation in the financial markets, and that they expect it to take a very long time before things improve.”
Mortgage rates were already in great shape on Friday after having fallen to the lowest levels since November 2016. Rather than draw inspiration from the week’s big ticket events (Fed announcement and jobs report), the biggest source of inspiration was a flare-up in trade tensions following Trump’s announcement of new tariffs on Chinese imports. Trade war drama flared over the weekend as China’s central bank set the country’s currency at the weakest levels in more than a decade.
What does Chinese currency have to do with US mortgage rates? Quite a lot, really! The outright level of Chinese Yuan versus the US dollar is not what’s important here. Rather, it was the fact that such a move was directed by the Chinese government in an obvious retaliation to Trump’s trade war escalation. In other words, if the US is going to raise tariffs, then China is going to cheapen its currency so the US will be able to keep buying Chinese goods. Simply put, this is another major escalation of the trade war. That’s clearly negative for the global economy and economic weakness helps rates move lower.
While 30-yr jumbo rates at 3.68% (with no points) might only be mildly interesting to those who have been around (mortgage rates have been in the threes and foursfor the lasteight years), the segment of the market that might be energized are the move-up-or-down buyers who have felt locked in because of their low rate.
Those who purchased/refinanced with a 3-something rate can now move and get the same rate, or better!
That means, all other things being equal, if the Fed were to say “we’re done cutting for now and will keep rates at these levels for the next 6 months,” you’d see an immediate and rather large move higher in rates. In other words, we’re already counting on another 1-2 Fed rate cuts simply to sustain the low rates that are already here. If those cuts don’t come, rates will move back up.
It sounds precarious, doesn’t it?
Eventually, people will start wondering, “Are home prices going to come down?”
Homes priced under a million should be fine for now; it’s the higher-end that could struggle.
But the detached homes in San Diego County that have sold over $1,000,000 have been in a fairly tight range of $525/sf to $575/sf for years now.
If sellers can just live with the same money as the last guy got, we should muddle along….for now.
The housing market has been looking slightly better over the last few month and Freddie Mac July economic report reflects that fact. They also maintain a fairly rosy picture of the economy as a whole.
They note that the 30-year fixed-rate mortgages (FRM) dipped below 4.0 percent at the end of May and has remained there “amid concerns over trade disputes, a possible economic slowdown, and market anticipation of a Federal Reserve interest rate cut.” This has caused a spike in mortgage applications for both purchase and refinancing and they predict that low rates, along with a thriving labor market, will help sustain the housing market, not just short term, but for at least the next year and a half.
They have, in fact, revised down their quarterly forecasts for mortgage rates over that period, forecasting an annual rate for the 30-year fixed-rate mortgage of 4.1 percent this year and an even lower 4.0 percent in 2020.
As to other rates, while not predicting a cut in the Federal Funds rate after today’s Federal Open Market Committee (FOMC) meeting, they still expect “cuts” in the second half of the year and project an effective rate of 2.3 percent in the third and fourth quarters with an average of 2.4 percent for the year, unchanged from their earlier forecast. The average next year will be 2.3 percent in 2020 and they see no further FOMC cuts.
The lower rates will turn investor interest towards more lucrative stocks and away from government bonds they say, and forecast that the 10-year Treasury rate will decline to 2.3 percent in 2019 and stay at the same level in 2020. Also, maintaining the spread between government bond yields, they see the 1-year Treasury rate to be 2.2 percent in both 2019 and 2020.
They say the strong homebuilder confidence and lower mortgage rates will lead to a recovery of housing starts and sales from their 2018 slump and that housing starts will end this year at 1.26 million and increase to 1.34 million in 2020. Home sales will be 6.0 million in 2019 due to the continuing shortage of inventory but will return to 2017 levels of 6.12 million next year.
The recent home price reports have sent mixed signals, but the report’s authors expect home prices to rise by 3.4 percent this year. They have revised their expectations for next year down to a 2.6 percent appreciation rate.
Mortgage rates plunged today as the bond market extended its positive reaction to yesterday’s Fed announcement. The Fed doesn’t set mortgage rates, but the market’s expectation of Fed rate-setting policy has a major impact. In other words, because the Fed generally confirmed the market’s suspicion that rate cuts could be warranted in 2019, traders were willing to push rates even lower than they already had in advance of Fed day.
Some lenders had already adjusted rate sheets yesterday afternoon to account for the bond market improvements that were already in place. In those cases, the surge to lower rates wasn’t quite as epic. But for lenders who kept the same rates intact all day yesterday, there was a huge shift this morning, with the average lender improving by an entire eighth of a percent (0.125%). Moves of that size only happen a few times a year, and we’ve definitely gone entire years without seeing it happen at all.
The average lender was quoting rates in the high 3’s this morning–mostly in the 3.75-3.875% range. As the day progressed, bonds bounced and multiple lenders adjusted rates back toward higher levels. Simply put, bond markets are conveying that all of yesterday’s improvements remained intact, but today’s gains were erased. If lenders aren’t caught up with that reality by this afternoon, they will be by tomorrow morning (unless bonds undergo a big move overnight).
Loan Originator Perspective
Bonds rallied sharply this AM, then sold off ferociously in after hours trading. It’s not unusual to see large losses follow rapid rallies. Today represented a great short term lock opportunity for those close to closing. It’ll be interesting to see tomorrow’s pricing after today’s huge swings. -Ted Rood, Senior Originator
The market usually feels some impact this time of year from the graduation season, and it’s understandable. People who have kids, or anybody who is related to people with kids in eighth grade, twelfth grade or seniors in college will be distracted for a few days. And if you count those graduating from pre-school too, then about 24% of the population (4/17) will have a graduation ceremony get in the way of homes selling.
Realtors are in that group too, so there are fewer agents on the ground working those sales.
But it should also mean the next few weeks will be fruitful with rates back in the 3s, and if the Fed lowers next week (unlikely but possible), we could have one heck of a summer!
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