I haven’t updated interest rates for a while, because they were so stable for so long. After the election of Donald Trump on Tuesday, however, that changed. Let’s take a look at where they’ve gone and what they might do next.
Rates were unusually stable for several months. Looking at the chart above, the red line represents U.S. Treasury 10-year bonds, a real-time index that is the best proxy for mortgage rates available. The blue line represents the Fannie-Mae 60-day yield. Think of this as the wholesale price of money to mortgage lenders. The green line is the Freddie Mac Mortgage Market Survey, a backward look at rates that were actually locked over the previous week – so, the price you paid (if you were getting a mortgage) last week.
Since the beginning of February of this year U.S. Treasury bonds have traded in an extremely narrow range (from an historical perspective.) Fannie Mae’s index tracks the bond yields quite closely most of the time, except you’ll note that it tends to follow yields up quickly, and follow them back down cautiously. Still, overall rates have been very low and remarkably stable all year long.
The green line shows that lenders follow the rates down very cautiously, knowing that dips in rates could be short-term, and they don’t want to be making loans at an interest rate lower than what they can sell the loan for.
Greater stability = lower rates, and vice versa
The market hates instability, so everyone kind of assumed that rates would begin rising a few weeks before the election, and then settle down afterward. You can see rates made a quick run at rising in August but didn’t make it, slid back down very slightly in September, and then began a clear rise at the beginning of October, as expected.
You can even see that rates started to settle down the first week of November as confidence grew that the election outcome was predictable. And then…
Donald Trump won the election.
Bonds sold off precipitously the next two days, pushing yields for both Treasury bonds and the Fannie Mae index up sharply. The reason the green line doesn’t yet reflect the jump is because it’s a backward look at the previous week. Next week’s numbers should show the same upward trend.
But there’s something hidden in the numbers
Last year I noticed that the spread between the Fannie Mae 60-day yield and retail mortgage rates was changing, so I began measuring that as well. This spread represents the wholesale profit lenders, on average, are getting for loans they have closed.
In the chart above you’ll notice that beginning in January of this year lenders began to demand a higher margin. Some would argue it’s because rates were extraordinarily low and they could get it, others argue that new regulations increased the cost of doing business. Maybe it’s a bit of both.
But you can see that as the year progressed and rates became unusually stable, margins went up yet again. This summer was much busier in our industry than anyone had anticipated earlier in the year, so the industry as a whole was short-staffed and processing times suffered dramatically. Why lower your margin if you can’t handle the business you have?
By September most lenders had caught up, and you can see the margin began to come down again. We’ll have to see what happens going forward, but it’s hard for me to imagine lenders will accept thin margins as long as the current volatility continues.
Putting it in perspective, however, mortgage rates are still better than they were for all of 2014 and 2015, and from an historical perspective are still unbelievably low.
Where do we go from here?
It’s a good question without an easy answer. As I wrote in two previous articles, the President doesn’t set monetary policy and has little influence over interest rates – they are mostly driven by market forces.
Comparing the yields investors can earn on any other sovereign debt, the U.S. still looks like an awfully good place to park billions of dollars in safe-haven investments. Demand for U.S. Treasuries and mortgage-backed securities (MBS’s) will not go away because Donald Trump is president. Things will stabilize – probably pretty quickly – and once they do, money will roll back into bonds and MBS’s, driving rates back down.
However, let’s be honest. We were skating with some unbelievably low interest rates for a while. We might have been lulled into thinking that was normal. Let that sink in – being within a hair’s breadth of the lowest interest rates in history lasted so long, we began to assume that was “normal.”
Rates could come back to that level, but they probably won’t. If you didn’t lock your loan by October 1, you may have missed the absolute bottom of the market.
But rates are still remarkably low, and not that much higher than they were six weeks ago. Don’t let a small jump in rates keep you from getting what is, by any standard, a ridiculously low rate today.