As expected, mortgage rates held steady this last week, with a very slight improvement Monday and Tuesday of this week, supporting the notion that bonds are oversold but won’t recover until the New Year.
The Electoral College vote did not appear to have any measurable impact on the market, so we presume that the market has fully priced in the uncertainty at this point of a dramatic change in the political climate.
If you look at the chart above, you’ll see the slight down tick of rates reflected in the Treasury Bond yield (the red line) and the Fannie Mae 60-day yield (blue line) over the last week. It hasn’t shown up in the rate locks consumers got because that is a backward-looking index and hasn’t been reported yet this week.
But when business is down…
However, lenders are seeing very empty pipelines, and that’s not good for business, so we are seeing margins compress. Look at the chart below. The blue line represents the margin that lenders charge over and above what we might consider their wholesale cost of a loan. This last summer when they were swamped margins rose to nearly historical highs. Now that lenders are hungry for business, margins are slowly dropping.
The red line is a 30-day moving average that smooths out the peaks and valleys in order to make long-term trends more obvious.
If projections for industry volume for 2017 are correct (most industry leaders expect there to be far fewer loans made due to higher interest rates) we should see margins fall a little further.
The rate interest rate you pay, as you can probably see now, depends on what investors need to earn on their investment, what Fannie Mae and Freddie Mac need to earn to stay in business, and the margin lenders demand.
If Treasury and mortgage-backed security yields drop after the New Year, and margins continue to drop, you should expect to see lower mortgage rates as a result.
What About the Fed?
The Federal Reserve Open Market Committee raised short-term interest rates this month. As a reminder, they do this to cool the economy in order to fight future inflation. Economic growth that is too fast would cause inflation, which would tend to drive interest rates up. Raising the short-term rates tightens the flow of money into the economy, thus slowing down growth.
The discussion of the Fed’s control of short-term rates is a double-edged sword with regard to mortgage rates. It is only an issue because they see growth being too fast, which is inflationary and thus bad for mortgage rates, but when they act by raising short-term rates they reduce pressure on growth (and thus inflation) which is good for mortgage rates.
So, what’s next?
The Feds announced in their press conference that they projected raising short-term rates three times next year. This is not a commitment, as they said the same thing a year ago, and only raised them once – at the very end of the year. But the announcement itself was bad for mortgage rates, because it implies to investors that the Fed’s economists – generally some of the brightest minds in the room – see the potential for inflation next year and the need to fight it.
Enter Fannie Mae, who also has some very bright economists. In a report released December 20th (yesterday as of this writing) Fannie Mae economists said they expect a decline in economic growth, and expect that the Feds will back off from their projected increases just as they did this year.
If they do, their decision to not raise rates will be accompanied by statements saying they believe economic growth has moderated, which should calm down concerns about inflation, thus pushing investors to accept a lower yield.
Nevertheless, the economists at Fannie Mae see 30-year fixed mortgage rates at about 4.2% by the end of next year, about where they are now. But no one has ever predicted mortgage rates that far out in advance with much confidence or accuracy.
We shall see. 2017 will be an interesting year.