What Might Move Mortgage Rates in the Week Ahead?
The road got a little bumpy, but last week came to a close with consumer borrowing costs once again priced near record lows. We were expecting the ups and downs of related markets to play a larger role in the behavior of mortgage rates, but in the end, lender loan pricing strategies did not follow the directional guidance offered by mortgage-backed securities (MBS) prices in the secondary mortgage market. Instead, the movement of mortgage rates was more reflective of competition and "turn times" in the primary mortgage market. This has been a theme lately...
What do we think will move mortgage rates in the week ahead?
Based on shifting tones in the investing marketplace, it's tempting to say mortgage rates might finally re-attach to the movement of MBS prices in the secondary market, but we were proven wrong when we made that assumption last week. Maybe not totally though, perhaps our forecast was just a tad early.
One of the biggest reasons mortgage rates have managed to hold steady near record lows is market participants (Do you have a 401(k)? Yes? Then you are a market participant!) have been unusually uncertain about the health of the economy. In an effort to protect their principal investment from unexpected events in the marketplace, these investors have allocated their funds into "risk averse" assets like U.S. Treasuries and Agency Mortgage-backed Securities.
We refer to this as a "flight to safety". This happens when investors are nervous about owning risky assets like stocks but do not want to miss out on earning a return on their funds, so they move their money into risk-free U.S Treasury debt and agency MBS to provide a safe-haven AND an investment return. To remind readers, as benchmark Treasury yields fall, prices of mortgage-backed securities move higher, which allows lenders to offer lower mortgage rates. As Treasury yields rise, mortgage-backed security prices are pressured lower, which forces lenders to push mortgage rates higher.
The "flight to safety" has been a staple in our commentary over the last few months. Uncertain times have led a huge herd of investors into risk averse assets, helping drive mortgage rates to record low levels. More lately it's felt like nothing has been able to break the "flight to safety", demand for mortgage-backed securities has been huge!
With that in mind...
When asked "What Will Move Mortgage Rates in the Week Ahead?" our answer is NOTHING! That is unless the herd of investors who've parked their money in "flight to safety" assets start to favor riskier investments like stocks. It going to take a big old rally in stocks to convince the "flight to safety" crowd that it's time to come out from under their risk averse rock. This was proven today. Stocks rallied considerably, yet both Treasury yields and mortgage rates barely budged!
The best 30 year fixed mortgage rates remain in the 4.375% to 4.625% range. The "best execution" rate for a well-qualified borrower is still 4.50%, for both conventional and FHA/VA. No borrower should be quoted a rate over 5.25%
Please don't read the above comments as "nothing will move mortgage rates from record lows this week". In fact, we aren't sure how much longer this resilience will last. We're feeling more defensive than we have in weeks. Mortgage-backed securities are extremely expensive, the major lenders look to be near full-capacity, and stocks are gaining technical momentum. If stocks extend their recent rally, the "flight to safety" will eventually be put to the test and so will record low mortgage rates, which are still attainable.
Remember: the "flight to safety" is the glue holding mortgage rates near record lows, if it breaks down, mortgage rates will surely rise for floaters and fence sitters looking to close in the next 30 days.
HERE is an economic calendar for the Week Ahead