Mortgage Rates – New Year, New Attitude?

Casey Fleming

What have mortgage rates been up to so far in 2017?  Are interest rates up, down, or sideways?  In a previous column, I wrote that interest rates would jump up if Donald Trump won the election, and probably settle down once the news had been digested.  Let’s see how I did.

As we know by now, interest rates jumped up indeed after the election, and actually kept rising up until the electoral college met.  After that, rates seemed to stabilize a bit, albeit at the highest level in over two years.

After the first of the year interest rates did begin to settle downward, although the downward trend halted temporarily after Trump took office.  Today (Monday, January 30th) interest rates are staying steady and retail mortgage rates (the rate you would actually be quoted) are rock-steady stable.

What’s going on?

First, the market is probably taking a breather to digest Trump’s first week in office.  Investors in long-term bonds, like mortgage-backed securities, love stability and hate uncertainty.  The yields today on these investments are very high compared to all of last year, so they are still attracting some interest for sure, but investors are cautious – it remains to be seen how the new administration’s policies will impact the economy and inflation.

This coming week is also a busy one for economic activity.  Today reports on Personal Income, Consumer Spending, Core Inflation and Pending Home Sales are all due out.  The “big” reports tomorrow will be the Employment Cost Index and Consumer Confidence, both of which give us insight into future inflation expectations.

And there are the Feds

Wednesday is a very big day with the Federal Open Market Committee announcement.  The Feds meet this week to discuss economic policy, and the big question on everyone’s mind is how the new administration might try to affect Fed policy.

(The Federal Reserve Bank is not a federal agency, and does not answer to Congress or the president.  The president, with the approval of Congress, does appoint the Chairperson of the Federal Reserve, who then serves for 12 years.  Unless Janet Yellen, the current chair, resigns, Trump will not have an opportunity to replace her.)

Thursday brings yet more news, with Jobless Claims and Unit Labor Cost reports due out, and Friday brings the Unemployment Rate, Average Hourly Earnings and Nonfarm Payrolls reports, among others.

In other words, this is an unusually big week for economic reports, so lenders are likely to have an itchy trigger finger on the “up” button, but are very unlikely to improve mortgage rates before the FOMC announcement at the earliest.

Let’s look at trends

Rates dipped slightly in mid-January

Looking at the chart above, you can see that both interest rates and mortgage rates took a quick dip in mid-January, but in the grand scheme of things you’d have to go back almost two years to find higher rates.

Margins are dropping as lenders get hungry for business

Looking at our second chart you can see that the margin lenders are charging over the wholesale cost of funds is still high by pre-2015 standards, but falling.  Mortgage volume has been very low since the election, and lenders are not only (finally) caught up but way under capacity right now.  Lenders are hungry for business.

Expect layoff announcements soon in the industry, starting with the larger banks, and a narrowing of margins as lenders try to bring more business in the door.  However, please note that this is only the margin over the wholesale cost of the money – if the wholesale cost goes up, mortgage rates will still rise, even if the margin falls.

The bottom line on mortgage rates this week is that they are more likely to rise than fall, but most likely to do neither.  We will know more by Thursday.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
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This article represents the opinion of Casey Fleming, and not necessarily that of C2 Financial. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial, have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.

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