Is Friday Our Lucky Day?

Last Friday was great and now this Friday is shaping up to be even better.

In the middle of the week, some economic news started a "buzz" on Wall Street that the recession might be dodged and the growth would be returning.  Stocks rallied and a booming stock market tends to hurt interest rates, which it did to some extent.

But today, the employment situation report has been released which shows very negative numbers for the economy.  Unfortunately for the economy, but good for mortgage rates. The reason?  When investors foresee economic weakness (such as a recession), they seek safer investments with a lower, but guaranteed return, such as treasuries and MBS (the Mortgage Backed Securities), which is what home loans turn into when they are sold between banks.  The more demand for them, the higher the prices get.  And if an investor is willing to pay a higher price for your mortgage, it means you get to pay a lower price, simple as that.

The benefit is shaping up to be pretty large today.  We'll be seeing rates in the mid 5% range on a conforming 30 year fixed.

As far as the consideration to lock versus float, there is no doubt that today will be the best day for it in the last two weeks.  However, will next week be better?  No one has a crystal ball, but here are a couple things to consider:

1. Lehman Brothers (the largest trader of mortgages) was able to easily raise over 3 billion in capital this week, a sign of liquidity in the mortgage markets.  Liquidity makes investors feel safer and thus might convince them to put their money into an MBS as opposed to a US treasury (which pays less, but is safer)
   
2. Stocks ran up from below 12,000 in the dow, so we may be a little artificially inflated on the economic hopes from earlier this week.  If Stocks have room to come down, then interest rates usually have room to improve.
3. The 10 year treasury, an alternative investment to the MBS, is getting very very low.  It's so low, that investors seeking fixed income may move money to MBS despite the risk just because the rate of return is higher.  Investors refer to this as "spread."  And we are at a very high spread level historically between MBS (mortgage rates) and the treasuries.
4. Mortgage rates will be at a 2 week low today.

So points 1 though 3 are all reasons to consider floating and waiting for the market to improve.  But point 4 may be the most important.  When rates near the outside edges of their trading ranges, it is common for the invisible force of "technical resistance" to bring them back towards the middle (think of pulling a rubber band away from the middle, the farther it's pulled, the greater the resistance).  Now, if the recessionary slide continues next week, we'll break through the resistance, but if the market gets any good news or if the mortgage market gets any bad news, it can snap that rubber back quite precipitously.

If you like the rate today, the safe bet is to lock.  even if rates improve, they wouldn't improve enough in the short term to make you cry about it.  But if you are an ardent market bear, and accept the risk of negative mortgage headlines, and believe the economy will just get more bad news next week, and you have the money to risk, you may benefit from floating.  Just remember, it's always seems more painful to have not locked when you should have as opposed to locking and then watching rates get a little better.