Mortgage Rates at Crossroads. Is the Correction Done or Just Beginning?
Mortgage rates rose last week. The best par 30 year fixed conventional mortgage rates moved about 0.125% higher to 4.375%. While 4.25% par quotes were still on the table at some of the smaller, more aggressive, nimble lenders, 4.125% just about disappeared.
After a summer of "record lows" and non-stop rallying, consumer borrowing costs seem to be reversing course. Now what?
The week ahead offers several opportunities for mortgage rates to react to economic data and events.
Tomorrow we get data on the strength of the American consumer with Retail Sales. On Wednesday the Federal Reserve will release Industrial Production stats. On Thursday we get producer level inflation data and Weekly Jobless Claims. The week comes to a close on Friday with the Consumer Price Index and Consumer Sentiment.
HERE is the full economic and events calendar
This is what we wrote last week:
We might have seen the lowest rates we're ever gonna see, if that is the case, then those rates are already behind us so it doesn't matter. But I think rate watchers with waiting time should sit back for now and see how this latest shift in benchmark yields plays out. If push comes to shove and we need to pull the emergency chute, we will alert. In the meantime, let's see how the market reacts to higher yields.
This outlook isn't necessarily bright but it does tell you that we felt like last week's reprices for the worse were a bit excessive. We were willing to take on a little more risk and "wait it out" to see how the market reacted to higher borrowing costs. This paid off for floaters, mortgage rates improved notably today, your lender should've reduced costs by about 0.25% of the loan amount (in closing costs). 4.25% is being offered by a few more lenders and we've even heard scattered reports of 4.125% being on the board again.
DON'T GET IT TWISTED THOUGH: WE REMAIN ON HIGH ALERT!!!
View it as professional traders attempting to spark some excitement. See it as profit churning, but investing sentiment currently favors riskier assets. Stocks might rally just because it is the path of least resistance and the easiest way to create an acceptable return. Even though this type of rally would be built from glass, it would still come at the expense of bonds, and mortgage rates. And once bonds start selling, they tend to snowball. This technical characteristic of bonds (extension risk) makes floating very risky business because you might have to wait longer than you expected for mortgage rates to correct back to current levels, if they do at all.
What we witnessed over the summer was a major extreme. Stocks went stagnant and bond yields plummeted as PANIC re-entered the market. Mortgage rates set news lows as lenders priced loans aggressively to compete for production. Perhaps we got too comfortable with new record lows? Perhaps what we've seen over the past two weeks is a correction to a less extreme interest rate range?
That perspective implies current rate quotes might be as good as it gets in the future. Yes you read that right, CURRENT LEVELS, not the lows we saw two weeks ago. As in, if we're playing the range, we might be at the aggressive side of a new range right now. With that in mind, if you're saving money and are happy with your closing costs, lock your loan! Don't wait around for mortgage rates to hit 4.125% again because it might not happen.
Plain and Simple: Considering how well our technical support levels have held up, I am not ready to sound the ALARM BELLS yet, but we remain in a state of HIGH ALERT. Rates improved today, if push comes to shove, you can lock tomorrow if Retail Sales are better than anticipated and bonds sell off. We think it's worth the risk of floating on a day to day basis though, just to see how the market reacts to higher yields. We can't rule out the possibility that the "correction" is done already. But we must stay defensive...