Mortgage Rates At Six Month Lows

Mortgage rates shifted a bit higher today but still remained steady after a dramatic turn of events in the last week.  Even though there was no significant news, this can probably be explained as a correction to what has brought the rates down to these new levels in over six months.  The most prevalently quoted conforming 30yr fixed rate for best-case scenarios remains at 4.25%. 

When it comes to mortgage rates, it's good to remember that we're dealing with numbers that are directly related to movements in financial markets.  Prices of Mortgage Backed Securities (MBS) are the key determinant in lenders' rate sheets.  MBS tend to move in close proximity with other fixed-income investments like Treasuries, though not in perfect lock step that proximity is why many believe Treasuries dictate mortgage rates.  In a way, Treasuries actually do determine mortgage rates, but only when MBS are moving in close proximity.  There are days (and sometimes weeks and months) where MBS will move in a different direction and by different amounts.

Because of that relationship, and because Treasuries speak more to the broader momentum in the world of interest rates, we can observe certain behaviors that give us more info about how mortgages might behave in the coming days and weeks.  Recently the most widely traded benchmark for longer term rates--the 10yr Treasury--has been having a tough time getting under the 2.57-2.60 area.  That's like the 'warning track' in the 4 month range of 2.60-2.80.  It coincides with mortgage rates at 4.25%.

The fact that rates have pushed into 4.25% to some extent is indicative of broader bond markets pushing more aggressively on that longer term range.  10yr yields spend more time trading under 2.60 this week than they have all year.  But until and unless rates are convincingly breaking lower--until they're clearly past that warning-track that goes to 2.57, it makes sense to stay cautious about a common market phenomenon: a correction.

In summary, a continued reluctance of the 10yr Treasury to break below 2.58 and remain there this week tells me there is a pronounced risk of recoil higher in rates. While I would love to be proven wrong about this, the prudent thing to do in this environment is to lock in these rates now if you are closing within 30 days. For those on a longer time horizon for a closing, a “gut check” on your risk tolerance is in order