Mortgage Rates Flat

Mortgage rates were flat today, after weaker-than-expected construction data prompted a positive bounce for bond markets.  Before this morning's data, rates were at risk of coming out slightly higher compared to yesterday's close, but overall, it was a quiet day.

Lou Barnes of Premier Mortgage Group had a great letter this week.  Several of his points stated

• Have fun with this one - the Fed hikes, and mortgage rates fall. True. And again! Long-term rates have fallen after each of the three increases in the cost of money since the election.
• Before the whys and wherefores, get one thing straight: if it were not for the Fed marching the overnight rate upward, long-term rates would be falling more -- maybe a lot, a half-percent or more from here, unwinding the entire post-election rise and then some.
• Hatred of the Fed is a branch of market dislike for regulation and government in general, which distorts much analysis of cause and effect, especially in perverse trading like this. Charlatans are selling the story that long-term rates are falling in a pre-recession signal that the Fed is overdoing its increases. Nonsense.
• The Fed is not even trying to slow the economy. Its hikes to date have had no effect on credit conditions -- nor will the next four or so .25% hikes. Long-term rates are trying to fall for unusual but simple reasons: inflation is low and possibly falling again, and the ECB and BOJ continue their hysterical purchases of long-term IOUs.
• The Fed is not going to leave long-term rates alone. Chair Yellen’s post-meeting press conference and accompanying forecast materials were unmistakably hawkish. But, there are big hawks and then little hawks. When the Fed raises the cost of money it is said to “tighten,” as in credit conditions. Yellen was asked about that and replied, “We’re not targeting financial conditions. We’re trying to set a path of the Fed funds rate.”
• Huh? Just as she has said for years, the Fed is not trying to slow the economy (not yet). It is trying to remove excess stimulus for two reasons: so it could cut its rate if it had to in an unexpected slowdown, and in the alternate -- an unexpected inflationary acceleration -- would not shock the economy with a big and fast increase.
• Nevertheless, a hike is a hike is a hike. It will be very difficult for long-term rates to stay here while the Fed jacks the overnight rate. Watch the spread: the Fed funds rate is now in a band 1.00%-1.25%, and the 2-year T-note is up to 1.32%, 10s as above 2.15%. A narrowing “2s-10s” spread is a classic pre-recession signal, but not this time. This time a narrowing will be a warning of higher mortgage rates to come.
• The Fed had bigger news. It will begin earlier than expected to unload the bonds and MBS it bought in the QE series. Many in markets thought the Fed would suspend rate hikes out of caution while embarking on the unprecedented unwind of its balance sheet. Uh-uh. The Fed will begin to trim in September, and its “damned little dots” forecast if anything is more forthright to add another .25% hike this year and three in 2018 and three in 2019 -- to a plateau nearly 3.00% for overnight money.
• The Fed will not sell the bonds it owns, just stop buying new ones as old ones mature at a pre-announced rate of decline in holdings. Yellen was uncharacteristically overconfident while describing the balance sheet unwind.
• The Fed is doing the right things. I am skeptical of its ability to manage an inflation rate close to 2%, but gotta try. In addition to watching 2s-10s and 10s-mortgages, keep an eye on the wild cards: new Fed governors (three coming soon), Yellen’s replacement, and foreign central banks, not least the black box of black boxes, China.

By holding flat, rates remain very close to the best levels seen in more than 8 months. This also keeps rates in a gentle downtrend over the past 3 months.  Risk-tolerant clients are typically best-served by floating their rates while these trends remain intact.  If rates break above the trend, it would serve as a cue to lock. 

In summary, I am still finding most clients are favoring locking in at current pricing.  I have never been a fan of locking on Friday and that continued today.  With a lack of data next week, I think it would be worth the risk to float and evaluate what happens Monday morning.   Even though there may be more of a risk, I feel that the risk may be less than some may think.