Mortgage interest rates rose rapidly beginning the week before the Board of Governors of the Federal Reserve met on March 14th and 15th. As expected, the Feds raised short-term rates, and that spurred a rally in mortgage interest rates almost immediately.
They had come up a long way, however, so they had a long way to come back down.
Looking at the chart above, the red line shows that the yield on the U.S. Treasury 10-year bond rose a lot the last week of February and the first two weeks of March. The blue line tracks the Fannie Mae 60-day yield – essentially the wholesale cost of mortgage funds to lenders. Immediately following the Fed announcement, wholesale rates tumbled briefly, and then recovered.
Lenders are slow to react on the downside, however, because they know a dip could be temporary (as this one was.) The green line, which tracks retail rates – the rates lenders quote and you pay – did not notch downward until the week of the 20th. They are now moving down. Will that continue?
As everyone with an opinion has said for years, interest rates will inevitably rise. Of course, we’ve been wrong so far, except for the Trump bump after the election. Nevertheless, it is still very likely to happen.
For now, however, let’s look at the chart above. This tracks the margin that lenders charge over and above the wholesale rate of funds. Notice that the margin has been steadily declining since last summer, when lenders were so busy they couldn’t manage all the loans in their pipeline. When lenders are hungry they are willing to work on thinner margins.
In 2017 total industry volume is way down, and not surprisingly margins have been dropping since the beginning of the year. However, they jumped up a couple of weeks before the Fed meeting as lenders were trying to figure out where the market would take the inevitable news that short-term rates were going up.
Now that it is clear that investors in long-term bonds are happy with the Fed’s determination to fight interest rates, lenders are more confident that there will be a market for mortgages at today’s interest rates – and maybe even a bit lower.
So, in terms of this one factor, interest rates could continue dropping. What else might impact them?
This week’s economic calendar is not likely to produce any drama. Bond yields generally follow the stock market in quiet weeks, so if stock prices go up, rates should rise a little too, and if they fall rates should follow.
Next week, however, looks a bit more volatile, with many more reports due out, a number of which have the potential to signal economic growth that is overheating, and thus could contribute to inflationary pressure. I would expect interest rates to rise toward the end of this week and the beginning of next, and then settle down if the economic news is friendly to inflationary concerns.
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 Corp., 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 Corp. 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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