Mortgage Rates

If this is your first time viewing the following daily report, you'll probably benefit by reading all the way to the end. That would give you the whole picture on the trends you need to know about, and an idea of what you should be looking for each day. But the information that changes daily or frequently is all in the first few paragraphs of each report. So old hands don't need to go beyond "The Longer Term" below.

Mortgage Rate Lock Recommendation

Dec 1 2016 - Lock

Outlook

Judging from early market trends, it looks as if mortgage rates might hold steady or rise again today. However, those trends often change during the day, so a fall remains possible. Indeed, as recently as Tuesday, those trends proved treacherous, when what looked likely to be a rise turned into a fall. Even so, we'd lock our rate if we were currently buying a home. Current volatility and unpredictability make floating too dangerous to our cautious eyes, even on those too-rare days when rates look like they're moving down.

However, you might just think about adopting a Float strategy if you have some weeks to go before you must lock. That's because some believe there's a chance of a more sustained market correction ahead, though that's a far from certain bet. Still, the last couple of days of falls might make you think it's a less wildly optimistic scenario than it appeared last week. What you choose to do will be largely down to your personal tolerance for risk.

If you do decide to float, it's often a good idea to set an upper limit on the rate you're comfortable paying, and to resolve to lock and cut your losses when that limit is reached. Use the LendingTree mortgage calculator to model how rate changes affect your monthly payments. Setting a cap may help you avoid a more destructive upward spiral. Either way, we are in a time of great unpredictability and volatility, so there's risk in doing anything – including nothing.

Read on for more ...

Today

Tomorrow sees the publication of the official employment situation report, which some see as the single most influential monthly statistical release. That timing and the status of employment figures mean today's only "market moving indicator" (significant release of domestic economic data) may attract more attention than usual. New claims for unemployment insurance during the week ending November 26 numbered 268,000. They'd stood at 251,000 the previous week, and, prior to this morning's publication, the consensus forecast among analysts had been for that to inch up to 253,000. Although today's number is undeniably disappointing, it's worth noting that all these figures are extraordinarily low by historical standards. Also today, last month's vehicle sales will emerge as individual manufacturers release their figures.

There are no auctions of U.S. Treasury bonds, bills or notes later, but two top Federal Reserve officers have speaking engagements. Fed speeches always have the potential to disrupt markets, and with the next decision concerning the organization's interest rates (and consequently many others) due in two weeks, investors will be watching closely what is said. However, most investors are close to certain a rise will be announced then, and have already accommodated that within their portfolio strategies.

At approaching 10:00am ET, yields on 10-year U.S. Treasury bonds, which are usually closely tied to mortgage rates, were slightly higher. While those yield trends on those bonds at that time of the morning frequently turn out to be accurate predictors of the direction of travel for the day's mortgage rates, they slow, accelerate or reverse sufficiently often that they can't be relied upon as a basis for making important financial decisions. And in any event, the relationship between those and mortgage rates can sometimes become elastic.

Earlier, major foreign stock-market indexes were mostly higher in Asia but all lower across Europe. Twenty-four minutes after opening, the Dow Jones industrial average was up +0.24 percent. At 9:49am ET, crude oil prices stood at $50.76/barrel, compared with the $48.39/barrel seen at 9:44am ET yesterday. Oil is higher because the Organization of Petroleum Exporting Countries (OPEC) yesterday reached an agreement on supply restrictions at their meeting in Vienna, Austria, although in the past such deals have often been short-lived.

Recent Mortgage Rates

Average rates for 30-year fixed-rate mortgages (FRMs) rose yesterday by 3 basis points (a basis point is one-hundredth of 1 percent – see below for a longer explanation), according to Mortgage News Daily (MND). That modest rise followed somewhat bigger falls on Monday and Tuesday. You may be tempted to see this week's movements as a sign rates are plateauing, but it's much too soon to call a trend.

To add some context, that average was still yesterday evening 53 basis points above its level at the start of November. So someone with a great credit score, small non-mortgage debts and a big down payment might on November 1 have been offered a rate of 3.60 percent. Yesterday, that same applicant would likely have had to pay 4.13 percent.

The average rate nationwide for a 30-year FRM during the week ending December 1 was 4.08 percent with an average 0.5 point, according to Freddie Mac's weekly rates survey, published this morning. It was 4.03 percent during the week ending November 23, and 3.94 percent seven days before that. This time last year, the average 30-year FRM came in at 3.93 percent. Freddie's weekly survey generally lags MND's daily reports.

Freddie Mac chief economist Sean Becketti commented in a statement accompanying the latest data:

The 10-year Treasury yield remained flat despite an upward revision to third quarter GDP. The 30-year mortgage rate rose 5 basis points to 4.08 percent, rising a total of 51 basis points in three short weeks.

The Longer Term

The Mortgage Bankers Association must feel vindicated that its previously pessimistic-seeming predictions for rates have suddenly become highly realistic. In its November Mortgage Finance Forecast, it reckons the average rate for 30-year FRMs will creep up during every quarter until the end of next year, reaching 3.9 percent in the last three months of this year. It additionally predicts rates will start 2017 with a quarterly average of 4.0 percent and end it at 4.4 percent. It expects further increases in later years, with rates reaching 4.8 percent by the end of 2018, and averaging 5.3 percent in 2019.

Even though it was published just last week, Fannie Mae's November Housing Forecast says, "Interest rate forecasts are based on rates from October 31, 2016." Given subsequent events, that seems almost perversely unhelpful. And it means Fannie is still predicting that the rate for 30-year FRMs will average 3.5 percent in the current quarter. Meanwhile, its forecasts for that average have changed only slightly further into the future: 3.6 percent for the first half of 2017, 3.7 percent for the second half and 3.8 percent through 2018. If you believe those numbers, there's a bridge you may be interested in buying ...

In their November Outlook report, Freddie Mac's economists were more vague about future rates than they normally are. They forecast that 30-year FRM rate will be averaging 4.1 percent through 2017, including 4.2 percent in the last quarter of that year. That's close to where they are now.

You may prefer to see all these numbers as a sign of how difficult it is to forecast rates in this challenging economic environment, rather than as reliable guides to the future.

Your Dilemma

There remains a continuing risk in choosing to float or lock your rate. True, there are opportunities for rewards should rates fall, but there is also a continuing danger of being trapped in an upward cycle that doesn't end before you have to lock.

So those who are cautious may wish to lock today, trading the possibility of future falls in rates for the security of fixing what could still be an exceptionally good mortgage deal by historical standards. Those who like to gamble might prefer to wait awhile before locking, hoping there will be additional falls ahead. Only you can decide on the risk with which you personally are comfortable.

If you do choose to continue to float, it's usually a good idea to set yourself a top limit on the rate you're prepared to pay, and above which you won't go. That would allow you to cut your losses in the event rates enter an upward spiral that lasts beyond when you have no choice but to lock.

Why Mortgage Rates Move

Unlike most other interest rates, those for mortgages (except ones for existing adjustable-rate mortgages) are largely determined by the supply of money into the market from investors and the demand for such loans from consumers. That supply is heavily affected by the amount of risk investors are prepared to sustain in their portfolios. When spooked by economic uncertainty, they tend to buy safer assets, including mortgage securities, which can result in an increased supply of product (cash) that drives down the price (rates). When they're more confident, they tend to invest in riskier but more profitable assets, which reduces the supply of money for home loans, and pushes up rates. A second influence is perceptions of how inflation rates are likely to move over the long term, but that usually tends to be a less important factor in daily and short-term movements – though that tendency may currently be suspended. None of this is to suggest the Federal Reserve doesn't affect mortgage rates, merely that it does so only indirectly by influencing investor sentiment.

The relationship between 10-year Treasury bonds and mortgage rates is more complicated. Investors generally view those bonds and mortgage securities as similarly secure havens for their money when they're spooked – with bonds the safer of the two. That means they tend to buy or sell both at the same time, depending on their level of confidence in the U.S. and global economies. So many lenders refer to those particular Treasury yields when setting their rates. Usually, the relationship between 10-year Treasury yields and mortgage rates is surprisingly close, though rates tend to be less volatile, and sometimes the two drift apart a little.

Some Questions Answered

Why, counterintuitively, do bond yields fall when prices for Treasuries rise? It's because you're buying a fixed return on your investment, and the more you pay for the right to that same fixed amount of money, the lower the yield you're going to get. That's a mathematical inevitability.

Why go on about "analysts' consensus forecasts" when reporting economic data? Well, they're often relevant. That's because investors frequently trade ahead of actual data based on those forecasts. So sometimes the difference between what's reported and what was expected can be as important as that between the new number and the one for the previous reporting period.

What is a basis point? Yes, it's 1/100th of 1 percent, but, when it comes to percentage points and basis points, these numbers are often mind-numbingly confusing. To give a purely theoretical example, suppose the best mortgage rate you could have gotten yesterday was 6.00 percent (let's hope it wasn't!) and that rate subsequently dropped by a single basis point. Your new rate would be 5.99 percent.

What is a "market moving indicator?" It's simply a release of domestic economic data designated by Bloomberg as such. As the name implies, it's a report that at least sometimes moves markets, and therefore may shift mortgage rates.