So Rates Rose & You Didn't Lock In?
A: So many readers have emailed me about what to do now that rates just made a big run over the past few weeks and whether they should rush in now to lock in. My answer to them is NO! Here is why.
I write about interest rate trends as a very short term trend. I have NO IDEA where rates are going to be in 6 months! So, don't even ask. However, I do have a very good idea where rates are most likely headed in the next 1-2 weeks; making this component of urbandigs.com great for serious buyers and sellers.
If you read the site, then the run up in rates was not a surprise. So lets move on to what to do now. The 10YR woke up to reality and surged to an entirely new trading range which is currently trying to discover its boundaries. The 10YR yield reached a recent trading high of 5.316% back on June 13th. Six days later you can ask your mortgage broker how bad it was for their buyer clients who got the unfortunate news before locking in their rate.
But since then, we have fallen nicely a total of about 24 basis points, or 0.24%, over a 6-day period and are still drifting lower. This WILL provide relief to the mortgage markets toward the end of this week and beginning of next! According to Michael McGivney of Wells Fargo, a direct lender, here are current rate quotes for three popular loan products:
LOAN AMOUNT - $750,000
30YR Fixed - 6.875%
7YR ARM (principal + interest) - 6.375%
5YR ARM (principal + interest) - 6.25%
Lets see where these loan product rates are next Tuesday, and whether they reacted to the correction in 10YR yields at a lag! Here is a 5-Day chart of the 10YR yield showing the fall from the 5.31% tradable high reached on June 13th:
For Buyers Who Recently Signed & Didn't Lock In - Try to wait until this time next week! I think you MISSED the boat to lock in your rate 4 weeks ago in anticipation of your new home purchase, and there is more risk than reward in rushing to lock in after the move already occurred. The better play is to wait a week and watch 10YR yields for any sharp reversal in the downward trend. As long as there is no reversal to the downward trend, mortgage rates should see relief in the days to come!
The Bigger Picture Thought - With the overnight fed funds rate at 5.25%, there is talk on the street that the 10YR might be in a generally upwards trend, as long as the fed is clearly on hold. There very well could be a run up in 10YR yields so that it trades above the overnight rate. However, this is a longer term trend to watch out for and NOT something that should be taken into account if you have to make the rate lock in decision soon! When it comes down to days, look at the trend in the 10YR over the past week or two for a quick guide.
I also wonder how low yields really can go given that oil & food prices are STILL trending higher! With oil nearing $70/barrel, it should help provide a floor to dropping yields.
Posted by Jim
Tue Jun 19th, 2007 07:01 PM
I got to hand it to you Noah, you have balls to just come out and predict what will happen in a week. Dangerous game. I know it follows the ten yr bond from reading your site, but what if it doesnt. What do you see as could happen to push rates back up again or negate the relief you mentioned for next week?
Posted by Mike
Wed Jun 20th, 2007 08:00 AM
I do not understand your comment on the overnight rate. Its been 5.25% for a year. Your comment sounded like it just got that high so the 10yr might go above it. That was a bit misleading.
Posted by Noah
Wed Jun 20th, 2007 08:47 AM
Jim - well the big move already happened. I was prediciting rising rates back when 10YR yields were at 4.5%. They were at 4.76% or so when I told readers to LOCK IN.
Since, they surged to 5.316% and retraced back to 5.1% or so. Lending rates you see now reflect the surge to highs a week or so ago.
In terms of NOW, for those that missed their chance to lock in rates earlier, its better to wait a week to see if the latest retracement will offer some relief in the mortgage markets in the coming days.
Posted by Noah
Wed Jun 20th, 2007 08:59 AM
Mike - Sorry if it was misleading. Whats changed is market psychology towards future fed policy. Yes, its been 5.25% for a while but put yourself back 8-10 months ago and around when fed paused and soonafter there was plenty of talk that the next move would be an EASE.
This was reflected in longer term yields via an inverted yield curve, with the bond market predicting an economic slowdown. Recall that 6-8 months ago everyone was discussing 2-4 rate cuts starting in early 2007. I never thought so given inflation pressures.
NOW, its becoming very clear that the fed will be on hold for quite a while, making traders feel that the 10YR is in a gradual uptrend to trade ABOVE the overnight rate of 5.25%. I spoke to a few old traders who now run hedge funds, as I do every week, and this is a growing feeling now that rate cuts seem OFF the table to the tradable markets and the longer term yields, 5YR & 10YR, are starting to normalize. No more inverted yield curve. Make sense?
Posted by Marmotton
Wed Jun 20th, 2007 09:14 AM
If you're buying a co-op, locking in a rate too early also does not make sense even if you are already under contract: as summer months approach, co-op boards meet less frequently and your closing date may be later than you think (it took 3months for us before we could close). You have to have a mortgage ready on the day of the closing and if your lock-in period (usually 60-90 days) expires beforehand, you are left with extending the rate lock-in period for a daily fee (costs may vary) or getting a new mortgage. Of course that's if rates are higher at that time. It also takes time to redraft all the mortgage paperwork days before a closing, so even if rates are lower, you may still have to keep your higher-rate mortgage.
So basically, one has less control than one thinks on what the rate at closing.
Posted by Noah
Wed Jun 20th, 2007 09:29 AM
Jim - As always, inflation data higher commodity prices, surging stock prices will all help push yields higher.
Right now is the HARDEST part of the predictions game because the move I was expecting already happened! And it was a big move of 75 basis points over the past 2 months on the 10YR!
Now that it happened, its clear the yield is trying to establish a new trading range that is VERY hard to predict. I do think higher commodity prices will help put a floor to how low yields will go, however, if yields hang around the 5.1% mark, there should be at least some relief in mortgage markets over the next week; albeit not huge!
If yields do linger around 5.1% or so, expect 30YR fixed maybe to fall to about 6.75% or so. However, if yields surge back up, this whole theory goes out the window. Ill be watching to try to see where the new tradable range ends up.
Posted by Sang
Fri Jun 22nd, 2007 02:06 AM
So who woke the 10yr up? Many speculate that China's policies have something to do with it... we shall soon see when releases May's TIC data,
http://www.businessweek.com/investor/content/jun2007/pi20070620_210310.htm?chan=search
If this was in fact due to China, then one could extrapolate a little further into the future- rates will continue to rise.
Once the market realizes that China is seriously beginning to diversify its trade surplus into other asset classes, the interest rates will have to rise to reel demand back.
Many of the bullish traders in Gold see such a scenario as more likely than not.