Rates are always last week's news. The reason is that Freddie Mac posts the country's weekly average 1-week in arrears. (They also post rates with an average in .7% in points paid to get the rate...meaning when they post about rates, they are telling you the average rate if you want to buy your rate down. I do not advocate buying points in a rate environment that is historically the lowest we've ever seen). Back to my point, media outlets usually make it a 1-day per week story. And, in the past 18 months there has not been really a negative trend for mortgage rates. Thus, it's not a sexy story to say: Rates are still low.
You can't look at rates weekly if you want to be sure you are getting the best that is available. Rates move by the minute...not the hour, not the day and certainly not by the week. Here is a good place to see national averages on a daily basis if you can't follow rates thru the day as I post them on myindymortgage.com: Check out this site at Rates
People think that mortgage rates are tied to the 10-Year Treasury. And, if you use this indicator more times then not you are going to guess right on which way mortgage rates are trending. The fact is, rates are tied to Mortgage Backed Securities. They are a bond, just like treasuries, that promise a yield (a return on your investment---an interest rate). So, if I give the Federal Govt $1000 on a 10 year treasury, I will receive in return all my principle back ($1000) after 10 years plus the yield, or interest rate, on that $1000 annually. The idea behind bonds is to provide a rate of return that keeps up with inflation---it is to ensure your money does not lose value.
The 10 year was yielding just under 2.5% back on Nov 4th. See the chart below. In 7 trading days since, yields have gone up to over 2.9% --- or a 0.4% increase.
The spread between a 10 year treasury and mortgage rates are commonly found to be 1.5% to 2%. It makes sense why: if you invest your cash with the Federal Government, it's less risky as our FED has not defaulted on our debt obligations before. If you invest in the American Public, you are betting that a mortgage payment will be made there needs to be a greater return on our investment as there is history where mortgage payments have not been made (we are in such a period and have been since 2006 where foreclosures are up). Thus, if a 10-year is yielding 2.48 on Nov 4th and rates are 4.25% on a 30 year fixed...it stands to reason if the 10-year goes up .4% that mortgage rates will follow in a similar spread.
Look at the 4% Fannie Mae Bond (a fancy name for the bond that yields a mortgage rate of about 4.5%). The price of the bond has dropped since Nov 4. And when bond prices drop...rates go up:
We have all heard of paying points. 1 discount point is equivalent to about 100 basis points. We have seen 250 basis points deteriorate in the past 7 days...or about 2 discount points. And in a rate environment where rates are historically low...I don't advocate paying points. Thus, if we lock today we are locking about .375% worse than we were less than 2 weeks ago.
I have heard this several times in the past 2 weeks: I thought the Federal Government was going to do another round of debt purchases (called Quantitative Easing 2) and the result would mean sustained low rates---or even lower rates. Unfortunately...the message we hear in the media lacks validity. The idea behind buying US Treasuries is to increase the supply of money, to increase inflation, improve the stock market and to lower the unemployment rate. When the goal is to make sure that the economy picks up, that inflation is spurred...Bonds are affected negatively. Bond traders are no longer satisifed with yesterday's rate of return, yesterday's yield...and will ask for a higher interest rate to combat the effects of inflation.
Another point is that each day the US FEDs step up and buy 5 Billion in treasuries, they do so in a market where there has been between 25 Billion to 30 Billion for sale. It's supply and demand here guys...if there is too much of a product and not enough buyers for that product, what happens? Yep, prices drop to make the product more attractive (a sale!!!!!). People step in and buy when there is a sale. Well, with bonds as the price drops the yield increases...in short, rates go up.
There is a push by republicans to get Mr. Bernanke to stop these asset purchases and let the market flow freely. For now, commentary from former Chairman Mr. Greenspan and the oversupply of bonds is driving prices down, rates up and you'll see this played out in the media next week while you are eating your turkey.
What we can watch here in the short term is this...prices have dropped on bonds extremely far and extremely fast. Over the past 18 months when we see something like this, there is often a bounce (a run on purchasing bonds). The bounce causes prices of bonds to increase and yields to fall. We'll need a few days of watching this play out to see if we bounce...or if we continue to slide and see rates climb. Rates are still low...just not at all time lows.
To my clients...if you like your rate in the mid to upper 4's...lock it. If the slide continues...we could be talking a 5% rate soon and your rate may look like a steal. If the bounce happens...we could revisit mid to lower 4% rates. I personally will be watching this for you...and will give my daily recommendation on myindymortgage.com (the twitter feed on the right side of the page).
Happy Thanksgiving!
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