Image Credit: https://en.wikipedia.org/wiki/Unemployment_in_the_United_States
Get out your calendar. Flip, swipe, or glance back at May 29th. That’s where we have to go to see mortgage rates any lower than they are today. After a delightful, but incredibly boring streak of mostly good days, rates finally swung for the fences. Actually, that might be a bit of a stretch depending on your perspective, but consider the following.
Mortgage rates tend to be broken up in .125% increments. For the past several weeks (or more, depending on the lender), rates haven’t moved enough for the actual interest rate to change. Instead, the upfront costs act like fine-tuning adjustments for any given rate. In other words, you might be quoted 4.125% on two different days, but with $1000 origination one day and only $500 the next. The rate is the same, but paying less for it means the effective rate is lower (fewer dollars out of your pocket over time). In that case, we’d say “rates fell” because the effective rate is lower, even though the contract rate (the thing that ends up on Good Faith Estimates and ultimately the Note) remained the same.
With all that having been said, after multiple weeks of unchanged contract rates, we’ve finally seen lenders move down an eighth (.125). Sure, they were pretty close before, but today’s solid move left no doubt. Since July 16th, we haven’t seen the effective rate change more than 0.02%, and that only happened a few times. Today’s drop was 0.06%–certainly enough for a ‘swung for the fences’ metaphor.
Today’s gains came courtesy of an exceptionally weak reading on wage growth. It was less than a third the pace of the previous quarter, and way below expectations. A lack of wage growth is one of the key reasons the Fed could hold off on raising rates. And although the Fed Funds Rate doesn’t control mortgage rates in the short term, it tends to move the same direction over time. As such, big news for the Fed’s rate hike plans is usually also big news for rates across the board. It was certainly a home run for rates today.
As with many home runs, this one didn’t end the game. Next week brings a slew of important data, culminating in Friday’s big jobs report. That data will have a chance to confirm the alarming shift seen in today’s data, or to offer a counterpoint. The path of rates should take guidance from that data, which is much more than we’ve been able to hope for. In fact, until July, we’ve pretty much been moving higher in rate regardless of the data. Now it feels like we have a fighting chance at more meaningful improvements. In some ways, they’re already here, considering the average conventional 30yr fixed quote came down to 4.0% today for top tier scenarios. An increasing number of lenders are back to 3.875%.
Loan Originator Perspective
“If you floated overnight, you should be seeing better lender pricing today. I never like to advise locking on a Friday, but that is what I am recommending. Today’s improvement does come on the back of some significant wage data that was very weak and month end buying of bonds, but next week we get the payrolls report. It is very common for us to sell off some heading into that data. I think it is prudent to lock in todays gains.” –Victor Burek, Churchill Mortgage
“Wow, talk about a Happy Friday! Rates rallied sharply today on the news that wages are growing far less than expected, which may impact the Fed’s looming rate hike. Some of the improvement may also be month end bonds purchases, but stagnant wages mean lower inflation and lower rates. I’ll float most new applications this weekend, but nothing wrong with locking on the best rates since early June!” –Ted Rood, Senior Originator
Today’s Best-Execution Rates
- 30YR FIXED – 4.0%
- FHA/VA – 3.75%
- 15 YEAR FIXED – 3.125-3.25%
- 5 YEAR ARMS – 2.75 – 3.25% depending on the lender
Ongoing Lock/Float Considerations
- 2015 began with a strong move to the lowest rates seen since May 2013. The catalyst was Europe and the introduction of European quantitative easing. The next four bullet points are currently more of a reflection about the first half of the year. July still has a chance to be the month where rates held their ground against 2015’s initial push higher.
- It’s a highly uncertain time for global financial markets. There is much debate over whether or not the global economy is turning a corner (for the better), thus justifying a widespread move to higher rates. That’s made 2015 significantly more volatile than 2014 for markets. This means lender rate sheets may change appreciably from day to day, and sometimes even several times in the same day.
- Bottom line: European Quantitative Easing helped push global rates to all-time lows in April. Now, the big risk for mortgage rate watchers is that we might have turned a long term corner. That risk is being compounded by speculation about the Federal Reserve raising rates by the end of 2015.
- May and June have amounted to the 2nd major move higher bounce so far this year. Every time this happens, we have to consider the possibility that this will be a big-picture, long-lasting correction. Until such a thing can be ruled out, Locking makes far more sense. July has thus far provided an opportunity to consider such a big-picture correction might be on hold.
- As always, please keep in mind that the rates discussed generally refer to what we’ve termed ‘best-execution‘ (that is, the most frequently quoted, conforming, conventional 30yr fixed rate for top tier borrowers, based not only on the outright price, but also ‘bang-for-the-buck.’ Generally speaking, our best-execution rate tends to connote no origination or discount points–though this can vary–and tends to predict Freddie Mac’s weekly survey with high accuracy. It’s safe to assume that our best-ex rate is the more timely and accurate of the two due to Freddie’s once-a-week polling method).