I tell clients often: I’m much better at predicting the past than the future.
Some of this rate warning is past tense, as the interest rate move upward began last Tuesday, but it did not affect mortgages until just this past weekend. Also, Freddie Mac is the dominant surveyor of mortgage rates, but it is pokey and won’t announce until Thursday. And risk is still rising.
[graphiq id=”d8CHQpBDOkd” title=”30-Year Fixed Rate Mortgage Rates for the Past 6 Months” width=”600″ height=”490″ url=”https://w.graphiq.com/w/d8CHQpBDOkd” link=”http://mortgage-lenders.credio.com” link_text=”30-Year Fixed Rate Mortgage Rates for the Past 6 Months | Credio”]
January 2016 mortgage rates dropped due to overseas troubles
As everyone knows, mortgage rates stone-dropped in January from roughly 4.125 percent to 3.625 percent (at the lowest fees, and depending on property, loan quality, down payment…). The world is back just above 3.75 percent as of Monday.
The January dive in rates was borne of serious economic trouble overseas, which turned up in stock markets (not the other way around).
None of that overseas trouble has resolved, nor will it, but markets adjusted and now are done with the panic part. Here in the U.S., we are creeping back to where we were before January: an unprecedented divergence between us and the outside world, the U.S. doing far better.
Treasurys vs. mortgages — the shift
An important marker of panic in January is receding. The U.S. 10-year Treasury note is the safest place in the world to put long-term money, and when panic spreads, global money runs to 10s. Those 10-year notes also define U.S. mortgage rates, 30-fixed mortgages usually 1.80 percent or so above Treasury 10s. In January, 10s made it all the way down to 1.65 percent — and the spread to mortgages widened to 2.00 percent.
Foreign money in a panic runs to Treasurys, not to MBS. The marker of overseas panic was the widening spread, Treasurys falling out from under mortgages. Last week the spread closed, Treasury yields rising, now 1.90 percent — but mortgages, not so much. Now they will move together again.
We are not done with international divergence
And we are not done with divergence, U.S. versus the world. On Thursday, the European Central Bank will meet and is expected to add to stimulus: buying more European bonds and pushing negative rates to deeper negative. That helps us!
Crazy: A U.S. homebuyer gets a better deal because of the ECB? True.
China will remain a wild card, intermittently helpful to us, especially if-when China must devalue the yuan. Bad news out there anywhere will help us.
The Fed meets March 16
All of those foreign forces are downward, but the strongest force is here, and upward. The Fed meets on March 16. Not likely to raise the overnight cost of money, but all it has to do is to talk. U.S. markets in January became convinced that the Fed will do nothing for the rest of the year.
That’s a very vulnerable position. It could be correct, if the outside world enters a new, really bad fainting spell. More likely, it will stumble along.
Here in the U.S., December-January economic data looked weak, and now it does not. Not strong, either, but good enough to push the Fed into a rate hike or two as insurance, and markets are not prepared for that.
Floating a home-purchase rate, unlocked, has considerably worse odds today than anytime in the first eight weeks of the year.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
