Rate Update: What will lead to more record low mortgage rates

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Jun 272020
 

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We hit record low mortgage rates a week ago on headlines about a possible second wave of the coronavirus. Rates had been trending higher this month after the amazingly strong May jobs report. That positive news was reinforced by private reports of increasing economic activity. The coronavirus news was a wet blanket that thrashed the stock market and caused flight to safety bond buying.

So, Treasury rates have returned to what I call their “covid range.” We saw little movement this week as investors seem to be waiting for more definitive information about the reopening of the economy. That’s been good news for mortgage rates because, as we’ve discussed before, mortgage rates have been suffering from a “risk premium” effect. That premium is slowly evaporating, and as it does, mortgage rates fall just a bit more.

If you haven’t refinanced yet or you’re thinking about buying a home, you may wonder if this means mortgage rates are destined to hit new record lows in the weeks ahead. Unfortunately, my crystal ball is clouded, so I can’t give you a definite answer. But we can discuss the factors that could lead to new record lows.

Simply put, it’s covid headlines.  Last week’s stock market swoon was driven by fears that the covid damage wasn’t done. Headlines about spiking virus cases will stoke that fear. For now, the fear seems to be balanced against the recent positive economic data, leaving rates stuck in their current range. Should the data begin to deteriorate, or should the headlines become more dire, rates could fall further.

But keep in mind that every new record low is a little harder to achieve.  For bonds, the rate is inversely proportional to the bond’s price. Thus, when we have record low rates, we have record high prices. Each time we hit a record high price, more bond investors are likely to view it as “the one,” sell their bonds and take their profits. If there are more sellers than buyers, rates rise.

Explaining the chances of lower mortgage rates

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Apr 212020
 

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A question I keep getting asked – are mortgage rates going to drop any further?  I wish I had a crystal ball so I could give everyone a definitive answer.  Instead, I’ve tried to educate the questioners about the finer points of the mortgage bond market, but I find they usually fall asleep before I get to the tenth slide.

So, after trying to answer this question so many times, I think I have winnowed out the minutiae and will try to defend a simple answer.  I think there’s about a 75% chance mortgage rates will go lower, and here’s why I believe that.

Mortgage rates tend to follow the 10-year Treasury bond.  I say “tend to” because the correlation isn’t perfect, and current times are a good example.  If mortgage rates had followed 10-year Treasuries perfectly to their current very low levels, 30-year mortgage rates would be around 2.5%.  Instead, they’re hanging in the mid-3% range.

That begs the question why.  We’ve discussed some of the reasons previously, but it seems the most tractable one is the CARES Act.  The Act gave homeowners with a mortgage the right to request a forbearance from mortgage payments for up to 12 months with seemingly no penalty to the homeowner.  Unfortunately, loan servicers, the companies to which you send your mortgage payment, still have to pay the investors who bought those mortgages, as well as pay property taxes and insurance premiums for homeowners who escrow.  The Mortgage Bankers Association estimates servicers may need to come up with $100 billion (that’s billion with a B) to cover the forborne payments, and the Act didn’t provide servicers with any assistance.  As a result, the bond market is requiring higher mortgage rates to account for this risk.

A number of Congressmen and Senators as well as trade associations have asked the Executive Branch to do what Congress failed to do – provide a borrowing program for mortgage servicers.  Rumor has it that the Treasury Dept has heard them, and something is in the works.

For mortgage rates, the questions then become:

  • whether markets think the program will be effective, thus relaxing what is essentially a risk premium currently built into mortgage rates; and
  • how quickly will it happen?

The risk for those waiting for lower rates is that the economy ramps up again, allowing rates to rise naturally, before markets eliminate the risk premium, allowing rates to fall.  But if your mortgage needs are more urgent, or you’re more risk averse, the current 3.5% mortgage rate really is pretty sweet.

Rate update: It’s the government’s fault

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Mar 262020
 

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By G. Steven Bray

Quite simply, mortgage rates are all over the place right now, and the market is a mess.  Despite conspiracy theories you may be reading on social media, the government isn’t keeping rates artificially high to help Wall Street make a fat profit.  In fact, it’s because of government involvement that rates are as low as they are.

Let’s take a short look back.  It was only about 20 days ago that mortgage rates hit all time lows.  Those lows lasted all of a couple hours one morning – and then rates started moving quickly higher.  I discussed in my last blog some of the reasons that happened. In the simplest sense, it was due to basic economics.  There were a LOT of mortgage bonds to sell due to the record low rates, and there were very few buyers of those bonds due to market turmoil surrounding the coronavirus.  In order to clear the market, mortgage rates shot up over 5% in short order.

Since then, rates have been extremely volatile, falling back below 4% some days, then jumping back above 5%.  But I said the government has been keeping rates low. How does that jive with the volatility?

Well, this weekend, the Federal Reserve basically wrote a blank check – indicating it would purchase an almost unlimited amount of mortgage bonds to restore liquidity to the market.  That means markets can trade on the certainty that there will be a buyer for mortgage bonds. Now, that doesn’t guarantee low rates because the Fed is not setting the rates of the mortgages it buys.  Instead, it allows the market to set rates knowing there will be a buyer.

The desired result – which I think we’re beginning to see – is more restrained volatility.  Thirty-year rates were back below 4% the last couple days for most lenders, and despite continued volatility, have remained there.

Mar 162020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Over the weekend, the Federal Reserve cut the federal funds rate to zero, and it seems the whole world is asking today, “Where can I get that free money?”  And, unfortunately, you can’t. The reasons are a little complex, but let’s see if we can break it down a little.

First, you have to realize that the federal funds rate, and in fact all the rates the Fed directly sets, are very short-term rates.  Mortgage rates are long-term rates. They respond to different factors, and often move higher when the Fed rates are moving lower.

So, mortgage rates have been on a wild ride the last couple weeks with rates falling to record lows, then bouncing 25% higher in just one week.  The reason they fell so quickly is the same as the reason the Fed acted this weekend: the pandemic is slowing our economy. But it looks like the virus is going to be with us for a while, so why didn’t rates remain at record lows?  Let’s analyze the causes and predict what will happen over the coming weeks.

Mortgage rates are a reflection of the price investors are willing to pay for mortgage-backed securities – basically, your mortgage bundled with a bunch of others as an investment.  That price is influenced by a number of factors. We discuss some of those factors regularly, such as expectations for economic growth and expectations of inflation. It’s economic growth expectations that caused rates to plummet a couple weeks ago.

But we had other negative factors come into play last week.

  • – One of those factors we call runoff.  As we’ve discussed before, investors buy mortgage bonds expecting to earn interest over a number of years.  When mortgages pay off early, such as through refinance, investors actually may lose money. In response, investors lower the price they’re willing to pay for mortgage securities, which results in higher rates.
  • – A second factor is basic economics:  supply and demand. The drop in rates generated an enormous number of mortgage applications.  We didn’t have enough investors to absorb all that supply. On top of that, investors didn’t seem to be the mood to buy much of anything last week as prices dropped in most markets.
  • – Finally, lenders’ systems were overwhelmed with the volume of new applications, and many of them raised their rates as a means of throttling that volume.

So, what’s next?  While the federal funds rate announcement isn’t going to lead to lower rates, one of the Fed’s other actions may.  The Fed is stepping into the market to buy a small amount of mortgage-backed securities. It appears this is returning liquidity to the market as rates have dropped a little today.

It probably will take a few weeks to dissipate the other negative factors, but I suspect the positive factors, slowing economy and negligible inflation, will still be in place.  And once that happens, we could see record low mortgage rates again.

Rate update: Virus outbreak leads to lower mortgage rates

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Jan 282020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Tragedy can lead to uncertainty, and uncertainty is good for lower interest rates. The outbreak of the coronavirus in China has unsettled global markets, and investors are running to the safety of Treasury bonds. Investors are concerned the virus will seriously impact global growth. One analyst already is predicting the virus will shave 0.4% off global GDP, and the outbreak seems to be growing.

The effect on stock and Treasury bond prices has been much more significant than the effect on mortgage rates. Even so, mortgage rates are the lowest they’ve been in over 3 years.

If you’ve been watching for low interest rates, don’t procrastinate. As quickly as these rates have appeared they could evaporate. If the number of new cases of the virus starts to decline, markets may conclude the effects will be limited, and rates will snap back.

In that case, we’re back to watching economic data and events, which ramp up this week. The Federal Reserve meets today and tomorrow. While no one expects the Fed to change its current policy – no rate hikes or cuts until inflation or unemployment change significantly – investors love to parse the post-meeting statements for hidden meanings.

Next week we get the ISM reports and the Jan jobs report. The service sector of the economy has remained strong despite the trade disputes, but pundits have been predicting its deterioration for many months. Should the ISM report hint a downturn, rates could improve further. Likewise, should the jobs report deviate from its current trend, that could gets rates moving.

Rate update: Markets shrug off war drums

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Jan 082020
 

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By G. Steven Bray

When I predict whether rates will rise or fall, I always issue the caveat “absent unexpected headlines.” Well, the past few days have provided a case in point. Rates dropped quickly following the US drone strike last week on the Iranian general and rose just as quickly today following the President’s address that suggested the crisis has passed.

Where does that leave us? Rates are stuck in the range again and waiting for inspiration. Potential sources for that inspiration are many, but let’s focus on a few of them.

First and foremost, if the Iranians don’t “stand down” as the President suggests, rates are certain to fall again. Renewed hostilities will make investors more cautious, and that caution will lead to lower interest rates.

Assuming that doesn’t happen, and markets currently seem confident it won’t, the next big event is this week’s jobs report. Recession whisperers were headliners on cable news last fall when it appeared the jobs market was softening. That changed with Dec’s blowout jobs report. Markets expect another strong report this Fri. Because of this expectation, its verification is unlikely to change rates much. Should the report disappoint, rates should improve a little.

Trade is the other major source of inspiration. The Senate is expected to pass the new trade deal with Mexico and Canada soon, and the President said he expects to sign a Phase 1 deal with China mid-month. Markets widely expect this to happen, so when it does, it’s unlikely to change market sentiment. Rates seem to be experiencing some slight upward pressure, and that probably would continue. However, should we experience a hiccup in either deal, we’d likely see at least a short-term drop in rates.

Fed’s plan for higher inflation could raise rates

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Dec 162019
 

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By G. Steven Bray

A recent story in the Financial Times indicated the Federal Reserve is considering a new policy that would encourage higher inflation to make up for periods of low inflation.

The Fed has been frustrated during this recovery by persistently low inflation, lower than its stated target of 2%. This is despite its efforts to prime the economy and expand the money supply and despite record low unemployment, which economic theory suggests should stoke inflation through higher wages.

But super-low inflation sounds good, right? Well, the Fed is concerned that inflation will turn negative, as it has in Japan. Persistently falling prices are a wet blanket on an economy, robbing it of growth, as consumers and businesses postpone purchases in anticipation of lower prices in the future.

So, why should you care? Interest rates primarily have two components. The first component reflects the cost of money, what you pay the lender for the use of its money. The second component reflects expected inflation. Positive inflation means the same amount of money in the future is worth less than it is today.

So, should the Fed announce it’s raising its inflation target, even if the change is not effective, lenders may raise interest rates to account for the possibility of higher future inflation.

Rate update: Trade deal blues

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Dec 132019
 

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By G. Steven Bray

In the last week, bond markets pretty much have confirmed that the only thing that matters is the trade dispute with China. Last Fri, we got a blowout jobs report. In previous times, rates might have jumped at least an eighth of a point in response. This time – nothing. Wed, Fed head Powell said the Federal Reserve won’t raise short-term rates unless inflation moves up significantly. Given that inflation seems mired below the Fed’s target rate, that comment should have caused jubilation in bond world leading to lower rates. Did it? Nope.

Now to be totally honest, both events did cause short term ripples within the markets, but rates never left their current range. It seems pretty obvious that traders are waiting for something before placing their bets on higher or lower rates.

That something is real factual news about the trade dispute. New tariffs are scheduled to begin this Sunday, and this time the tariffs target consumer products.

You can understand traders’ reluctance to pick a side. Many analysts believe the new tariffs, as proposed, will sap consumer demand. The American consumer has been the sustaining force in the economy this year. It doesn’t matter how good the economic data was last month. If the tariffs go into effect, it’s possible the data turns negative next month.

Now, it’s certain that the Trump Administration recognizes this. It’s also certain that the Chinese recognize the intense pain the tariffs could cause it’s already faltering economy. Thus, both sides have an incentive to announce a last minute reprieve, and it appears today they’ve done so. But the bigger question still remains: Will we get a trade deal?

Rate update: All I want for Christmas is a trade deal

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Dec 042019
 

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By G. Steven Bray

I hope you and your family had a blessed Thanksgiving. It was a fairly uneventful one for bond markets with interest rates sticking to their recent range. In fact, rates have been stuck in this range since Sep. Sure, rates move a little week to week in response to headlines and economic data, but I still think the next trend for rates ultimately depends on a trade deal with China, an imminent resolution to which is looking increasingly unlikely.

The main wildcard at this time is the global economy. Earlier in the year, rates dipped invitingly based on weak economic data coming out of Europe and China. There was great concern that the US economy would follow suit. Instead, the US economy, except for manufacturing, showed resillence and even robustness in sectors such as housing. Europe and China now seem to be bottoming out, and some analysts are predicting renewed global growth next year.

As we’ve discussed many times, a growing economy tends to push up interest rates, so that’s the background through which we have to consider our current situation. A trade deal, even a partial one, is likely to foster renewed optimism and, in turn, economic growth. On the other hand, should the trade dispute deepen, it’s likely the hand-wringing and talk of recession will start again. While that’s good for lower interest rates, we risk talking ourselves into a recession regardless of the strength of our economy.

Rate update: Two reasons interest rates will remain flat this week

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Nov 122019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

I’ve been writing for months about my concern about the Chinese trade dispute and its potential to move interest rates. Last week presented a poster child case for my concern. Rumors circulated that the US would rescind some tariffs and forego the planned Dec tariffs to induce the Chinese to sign phase one of a trade deal. Bond traders reacted swiftly to push rates to their highest levels in 3 months. Remember that resolving the trade dispute is considered good for the economy, and a healthy economy supports higher interest rates.

As we start this week, it looks like markets may be taking a breather. President Trump wouldn’t confirm the tariff rumors, and most of the other issues that had been weighing on rates – slowing world economies, Brexit, the impeachment battle – are far from settled. So, hitting pause makes sense while markets wait for a new source of inspiration.

I doubt we’ll get it this week, but we will have a couple candidates:

  • We’ll get two heavy-weight economic reports this week: the Consumer Price Index (CPI) measuring inflation and the Retail Sales Report. Inflation has remained muted this year, and few, including the Fed, expect that to change. Retail sales, an indicator of the consumer side of the economy, have remained solid despite the trade dispute, and most expect that to continue. If either report deviates significantly from expectations, expect interest rates to move accordingly.
  • Second, Fed head Powell has two days of Congressional testimony this week. Given that Powell had a press conference following the Fed’s meeting two weeks ago, I don’t expect he’ll reveal anything during his testimony that will move rates. However, markets will be vigilant just in case.