3/22/18 | Casey Fleming | It’s been a while since I’ve written about this topic, and I’m sure you’ve noticed that the market has been on an uphill climb until recently. It’s time to talk about the future and let’s make an educated guess as to whether or not interest rates stabilized this month.
What the Feds did
The Feds (more accurately the Board of Governors of the Federal Reserve Bank) decided last week to raise the target rate for federal funds – the range of interest rates that banks charge each other to borrow overnight – by 0.25%.
You may read ads for mortgages imploring you to get your mortgage now because rates are going up, and that notion will be supported by knee-jerk media reaction to the Fed move. While it’s true that the Fed’s move will raise the interest rate you pay on your existing credit cards and equity lines, and any car loan you get in the near future, it tends to have exactly the opposite effect on mortgage rates, which is the strongest argument that interest rates have stabilized.
More importantly, the Feds noted in the statement that although the job market remained tight that inflation has remained very tame, and consumer spending moderated from its increased pace in the last quarter of 2017. Since interest rates are inexorably intertwined with inflation, the statement itself was good news for mortgage rates. (See The Feds Raise Interest Rates in Order to Lower Them)
Mortgage rates are headed lower?
Not necessarily. There are many factors involved in the interest rate market, but this takes a lot of pressure off of interest rates for the time being. So, as a consumer, if you hear lenders panicking trying to get you to apply now, just remember they are trying to get you to call; the reason they give isn’t necessarily true.
So, have interest rates stabilized after the Fed move?
It’s too soon to tell, but let’s examine what they did up to the end of last week.
Looking at the chart above, you can see that interest rates move up sharply from late December until about mid-February. 10 year U.S. Treasury bonds (the red line,) which is the easiest to track in real time, show that investors demanded higher and higher yields while the stock market was running up to new record highs, but once treasury yields hit a certain level (about 1.75% in this case) the market settled down and interest rates stabilized.
Demand for mortgage-backed securities (see the blue line) stayed volatile for a little while longer, but have pretty much stabilized too. You can see both of these indices tracked up slightly in the days leading up to the Fed announcement, because when the Fed speaks, people listen. Investors sell off a portion of vulnerable securities, like bonds, before any major news event that could push them in the wrong direction.
The interest rates that people actually locked at (green line) have moved only very slightly in the last four weeks.
In the meantime, let’s remember that wholesale rates are not the only factor driving what lenders decide to charge. Lenders need to keep operating at close to maximum capacity to make money, so pipeline volume also matters a great deal, and lenders will raise margin when their pipelines are full and their operations are stretched, and lower them when they are operating below capacity.
This year total loan volume is down, and lenders would rather lower their margins than layoff staff that they have spent good money to hire and train. (At least for now.) Looking at the chart above, you can see that lenders are starting to lower their margins to compete for your business. The blue line measures daily activity and is thus prone to wild swings as lenders chase the market. The red line is a 30-day moving average and so smooths out the trends.
You can see lenders have reduced their margin about 0.10% in interest rate from a year ago, when they were all quite busy. This represents roughly a 25% reduction in their profit margin, so it isn’t insignificant.
Where will interest rates go this week?
With Easter weekend coming up we are likely to see lender margins come back up slightly, as they are likely to have staff out on vacations for Spring break with the kids. Plus, the bond markets are closed on Good Friday, so the risk associated with setting interest rates and then having three days go by before you can re-set them is rather high.
As for economic reports, it will be a moderately busy week come mid-week. Monday brings only the Chicago Fed National Activity Index, a composite of other indices that have already been published. We expect no surprises, and therefore nothing to drive the market. Barring unexpected news in the market, mortgage bond yields should remain stable, and with lenders loathe to reduce margins this week retail rates should be the same or slightly better than they were this last Friday.
On Tuesday the Consumer Confidence index for March will be released. Consumer confidence has been running very high, and with many companies offering tax-plan bonuses (even if they are only one-time and come with strings) consumers are in a confident mood. So, this number should not move interest rates in a negative way because we already expect consumer confidence to be high. The only way it would move the markets would be if the number dropped, and this is very unlikely. Again, bond yields and retail rates should move very little, if at all.
Wednesday brings us the 2017 4th Quarter GDP report – a closely-watched index that tells us how much the economy expanded in the last quarter of last year. A survey of economists projects a 2.8% growth rate, and that isn’t likely to be far off. A substantially higher figure (say 3.0% or more) could roil the interest rate market and push rates up.
Wednesday also brings pending home sales which is important, but again very unlikely to surprise the market because the data are already pretty much known. However, lenders are likely to push margins up a little on Wednesday, because…
Thursday is a big day, with Weekly Jobless Claims, Personal Income (February,) Consumer Spending (February,) Core Inflation* (February,) and Consumer Sentiment (March) being major reports that can move the market if any of them surprise to either side. Thursday morning we will see a broader range of retail prices than normal as lenders try to divine which way the bond markets are going to go, and then tighten up in the afternoon as a clear trend is established.
If you want to lock your loan this week, you probably want to lock before Thursday unless you like taking chances for a possible big win, should bonds rally strongly then.
Friday is Good Friday and there are no economic reports being released, and the bond markets will be closed. Lenders will still issue pricing, but do not expect it to be an improvement on wherever we land on Thursday afternoon.
And then there’s the whole administration thing
The wildcard this week will be what the stock market does in response to the administration’s moves on trade wars and actual wars. Recent personnel moves by the administration and confusing public announcements have created a lot of volatility in stocks; stock market volatility tends to move investment money into bonds. However, bonds hate instability even more than stocks, and lenders are loathe to narrow margins when markets could turn on a dime with the next Tweet.
On the other hand, institutional investors can’t just park their money in a mattress, and lenders can’t let their pipelines empty out and their operations sit idly by. So, there will be a lot of tension in the market this week and moving into April.
It looks to me that interest rates stabilized in March, and my bet is that when the dust settles interest rates will be about where they are now in a month, but with some pretty interesting swings between now and then. The trick is always catching the dips.
Get your popcorn out.
This article represents the opinions of Casey Fleming, and not necessarily those of C2 Financial Corp. 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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