Mortgage rates have seen better days. If the past 2 months of calamitous volatility and almost daily cost hikes weren’t enough, today brings the Conventional 30yr Fixed best-execution rate to 4.25%–levels not seen since late 2011. A move of this magnitude was one of the risks heading into today’s incredibly important FOMC events, but despite understanding that it was a possibility, it’s magnitude can still seem surreal when compared to rate offerings not even two months ago.
During that time, while we may have been historically privileged to witness 30yr Fixed Rates in the low 3’s, we’ve also endured the sharpest rise in rates of the past 10yrs. The reasons behind this, in a general sense, are vastly complex. The following two articles are recent attempts to explain some of what is going on:
From those starting points, further explanations are redundant. The only way to better come to terms with this pain is to understand the history of the modern era of low interest rates. What follows is far from complete, and quite long, but for those looking to understand their pain, it’s worth the read:
Brief History of All-Time Low Interest Rates
Rates moved lower and higher in fits and starts from the onset of the financial crisis in 2008. Until then, 3% had been the lowest 10yr yield seen since the 1950’s. The apex of the panic in 2008 crushed 3% and took 10yr yields to 2.06%. As the world began emerging from shell-shock into 2009, rates surged higher, though mortgage markets stayed more even-keeled. Even then, they rose appreciably as the panic subsided (and inflation fears emerged).
It wasn’t long before the skeptics who’d argued that the global economy was due more pain were proven right. Europe entered the fray in 2010 and rates once again fell to generational lows (Treasuries only made it back to 2.34 that time, but mortgages were lower, as they were increasingly closing the horribly wide gap that existed between themselves and Treasuries heading into the crisis).
Once again, global markets perceived the turn of a corner into late 2010 and rates again shunned anything under the 3% long term floor (which, of course, was already broken in 2008 and 2009). In fact, in the process of that “shunning,” 3% now looked like a line in the sand–the crossing of which indicated further follow-through higher in yield. 3.0% (and the mortgage rates in the upper 4% range associated with it) now looked like a line in the sand, with moves below only reserved for panic. With Europe maybe not imploding and the domestic economy creating jobs for the first time since the crisis hit, panic was on hold.
It returned in mid-2011 but this time the domestic economy wasn’t in nearly as bad shape. THIS was an important paradigm shift because it set the precedent for the tepid economic recovery being associated with low rates. The rates were like a gift from an anonymous benefactor to anyone who didn’t follow financial markets closely. In fact, the benefactor was far from anonymous, and there were actually two: Eurozone panic (part deux) and the Fed’s exceptionally aggressive acceleration of monetary policy rhetoric (introduction of a calendar date to the FOMC statement).
These factors combined with the realization that hitting the debt ceiling and credit downgrade of the US were merely of political consequences ushered in a new golden era of low rates. Europe would go on to be seen as a threat to global macroeconomic stability even into 2013, but especially in 2011 and 2012. Central bank liquidity was seen as un unending well of support for low interest rates, and 10yr Treasury yields ultimately sank below 1.5% in mid-2012.
EVER SINCE THEN, rates have trended higher in general! The US presidential election and uncertainty over the Fiscal Cliff gave the appearance that the trend higher would be contained, but soon into 2013, those were forgotten memories. European headlines now had varying effects–at times acting their former part, but at others, seemingly having less of an effect than they used to. Things were actually changing, and Chairman Bernanke’s press conference on March 20th is proof positive of that fact.
In that press conference, Bernanke actually spoke about adjusting the pace of asset purchases–the same concept today credited with mortgage rate destruction. At that time, his words were surprisingly familiar to the words that suddenly seemed surprising in late May (although it may be overly technical for the average mortgage rate watcher, I went into excruciating detail on that March 20th press conference HERE).
Unfortunately for our collective low-rate paradigm, Cyprus was keeping rates in check and markets weren’t ready to take Bernanke at his word, at least not unless the impending Employment Situation Report confirmed the economy could deliver the sustained improvements he was seeking. Even more unfortunate was the fact that the Jobs report not only failed to confirm, but it was absolutely awful. Suddenly, March 20th was forgotten, and markets went about their low rate business with mortgage rates falling almost all the way to 2012’s all-time lows.
At that point, the worst thing that could have happened for interest rates would have been for the following Jobs report to “revise” the awful one into better shape. It would also be bad if the new report itself was in line with the higher revision. If that happened, it would suddenly paint a very clear, very stable picture–not of boomy economic prosperity, but of a certain stability that might be sufficient to reignite the notion of the Fed reducing asset purchases.
On May 3rd, that “worst case scenario” Jobs report was printed (“worst case” for rates, as it was actually much stronger than expected for the economy, and revised the previous two releases into much improved territory). Exactly one week later, the aforementioned notion was clearly reignited as the Wall Street Journal printed a story on the Fed “Mapping an Exit From Stimulus.” Markets freaked, and rightfully so. Bernanke had, of course, already mapped much of the exit back in March 20th, though no one was listening.
Markets were ready to listen now. It was hard to accept at first. Markets obviously digested the reality in phases, but the question was legitimately asked: wait… if a, b, and c are happening, and x, y, and z are no longer happening, then that means….(dramatic pause) oh no… We may have actually seen a long term interest rate low in 2012.” Forgive the adaptation, but the ensuing volatility is wholly evident on the pages of this daily commentary. The two links near the top of today’s commentary are poster children for that cause.
Today then is an eery culmination of sorts. The Fed had a chance to push back more forcefully on the notion that asset purchases would soon be curtailed, and instead they almost perfectly confirmed that which had already been said (if you see harsh treatment of the Fed’s double-talk in the media, please understand that markets are coping with anger and confusion. The Fed’s been quite clear and market participants feel duped because the signs were easy to miss).
Add to that the fact that Fed policy now has TWO dissenters on today’s vote, not to mention that Bernanke himself reiterated previous “taper talk” (taking it to the next level, actually by envisioning a full exit by mid 2014), and interest rates freaked right the heck out.
Why is that stuff so important?
The cash flows guaranteed each month for mortgage and Treasury markets have a tremendously positive effect on interest rates. Any adjustment to the timing of that recurring monthly influx of cash and the amounts will have an immediate and massive impact. Until May, markets have had a metaphorical push-pin on a calendar marking the date through which they expected full Fed support of rates markets. The pin was some time in 2014.
Because those monthly payments into the system were such a big part of the system any movement of that pushpin would have drastic consequences. If Bernanke were to say that the Fed would buy through 2015 (something that’s not even in the realm of possibility, but just given for instance) rates would have plummeted. As it stands, the May 3rd employment report served to dislodge the pushpin from that firm 2014 territory. The rest of May marked a scramble to place the push pin at a new location on the calendar. The May 22nd FOMC Minutes caused the hand holding the pushpin to begin hovering over 3 month range centered on September, and now today’s Announcement plunges the pin deep into the corky underpinnings of rates market’s calendar of expectations.
That pin placement has been almost 2 months in the making. Everything since May 3rd has almost looked like an “oh crap” moment by those in the know, with oddly aggressive Fed speakers and interestingly timed Wall-St Journal articles. Whether intentional or coincidental, it was a massive undertaking to get rates from near all-time lows at the end of April to 1yr+ highs today.
The near term outlook is tremendously uncertain. Did we rise so far, so fast that we’ll now get some of this back? Maybe. Is it even possible that rates could go higher from here? Yes. Does this mean we can rule out ever seeing mortgage rates in the 3’s again? Not necessarily.
The best best is to stick with the ongoing theme shared in this commentary since early 2013: this is a rising rate environment. And whereas the previous flat-to-falling rate environment may have rewarded patience and floating, this environment has rewarded defensiveness and locking. If it seems like I’ve been significantly more lock biased in 2013, this is why (even though the uptrend officially began in late 2012).
In terms of that uptrend, we’re now testing the limits of its pace. In other words, if rates are as high next week as they are today, we’ll actually have moved too high, too fast to still consider ourselves in the same uptrend and would need to reevaluate. The logical hope is that the Fed, and the markets “realize” that rates this high are not likely conducive to ongoing economic stability. The major risk there is that the economy might not convey that reality until anyone looking for a mortgage right now has long since given up or needlessly watched rates rise a bit further.
There will be a lot of watching and waiting over the next few days and weeks. The upcoming Employment report in early July is tremendously important. The most critical time for the near term history of longer term interest rate movements will likely be in one of the upcoming Fed meetings, either in late July or more likely in mid September. Until then, we can merely look for pockets of opportunity and hope markets are kind enough to allow for some measure of correction without carrying rates back to levels that suggest getting out before it’s too late.
Today’s Best-Execution Rates
- 30YR FIXED – 4.25%
- FHA/VA – 3.75%
- 15 YEAR FIXED – 3.375%
- 5 YEAR ARMS – 2.625-3.25% depending on the lender
Ongoing Lock/Float Considerations
- After rising consistently from all-time lows in September and October 2012, rates challenged the long term trend higher, but failed to sustain a breakout
- Uncertainty over the Fed’s bond-buying plans is causing immense volatility in rates markets and generally leading rates quickly higher
- Fears about the Fed’s bond-buying intentions were proven well-founded on May 22nd when rates rose to 1yr highs after the Fed indicated their intention to taper bond buying programs sooner vs later
- The June 19th FOMC Statement and Press Conference confirmed the suspicions. Although tapering wasn’t announced, the Fed made no move to counter the notion that they will decrease bond buying soon if the economic trajectory continues
- (As always, please keep in mind that our Best-Execution rate always pertains to a completely ideal scenario. There are many reasons a quoted rate may differ from our average rates, and in those cases, assuming you’re following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).