You can always tell when mortgage interest rates are moving up or down in a dramatic way – every media outlet and blogger writes about it. So, I thought I ought to jump in. Skip to the bottom for the “Bottom Line” if you don’t want the ugly details.
I track interest rates by noting the daily rate for three difference indices – the Ten-Year U.S Treasury Bond, the Fannie Mae 60-day yield, and Freddie Mac’s weekly Mortgage Market Survey. The Treasury bond is the benchmark most commonly used when writing about interest rates because it is easily tracked, but it doesn’t directly impact the interest rates mortgage lenders offer you every day.
The Fannie Mae 60-day yield is the interest rate published daily by Fannie Mae telling mortgage companies what their required yield on a mortgage is for loans delivered to them 60 days from now. Thus, it very directly influences what interest rate lenders offer you every day, as this is the rate (plus a margin for profit) that lenders must offer you to sell the loans to Fannie Mae. It’s not an easy index to track, and the raw numbers aren’t that meaningful because the margin isn’t added in yet, but it’s very useful indeed for tracking trends.
The Freddie Mac Mortgage Market Survey is a weekly survey that Freddie Mac produces of a representative sampling of lenders. It thus is a fairly accurate depiction of the interest rate you should be able to get, but it is published after the fact, so it’s always a backwards look.
In the chart above you can see that the 10-Year Treasury bond hit a hard bottom on February 2nd and 3rd, and then rose up a bit. From the perspective of the last four months rates are still good, but not at the newly-established bottom.
Both the 10-Year T-Bill and the Fannie 60-Day Yield came back down a bit in mid to late February, but for the most part published rates at the retail level did not. Lenders don’t tend to lower the rates they offer you until they are confident rates will stay low for the immediate future and competition slows them down. A surge in new application the first week of February kept retail rates up because lenders have no reason to lower rates if they can’t handle the business they have.
Notice three things about these charts:
- First, you’ll notice that the margin between the 10-Year bond and Fannie 60-day yield indices track fairly closely. That’s because they compete with each other for investor’s money, since they are investments of fairly similar nature. Both are investments in pools of money making long-terms loans secured by something investors trust – The credit of the U.S. Government on the one hand, real estate on the other.
- Second, you’ll notice that the Mortgage Market Survey seems a little less volatile, but that’s only because it’s only reported weekly, so daily fluctuations are smoothed out.
- Finally, you’ll notice over the last two or three days that the margin between the 10-Year Bond and the Fannie Mae 60-Day Yield has widened. Unless the relative appeal of the security of these two investments has changed (it hasn’t) then this margin is unsustainable. Fannie Mae’s yield is bound to come down.
If you look at the blue line you would expect the green line (retail mortgage rates) to rise this week. In fact, they have improved slightly over the last two days, tracking the 10-Year bond rather than the 60-Day yield.
Now remember that rates won’t come down until lenders work through their backlog. (Why have a sale when you’re store is already packed?) Those of you who are in process now have learned that yes, things have slowed down dramatically; it almost seems like nothing is happening. But lenders are getting through the backlog, mortgage applications have declined over the last three weeks, as you can see from the chart to the right. The surge in applications in mid-January rather neatly tracked the dip in rates at the same time, but since then have actually gone down, even though we had another dip in March.
Here’s the Bottom Line:
- The fundamental interest rate (the yield investors need to see before they’ll invest in a pool of loans that includes your mortgage) has varied very little over the last couple of months – no more than about 0.250%.
- A volatile market for stocks and bonds have driven the yield investors want up (a little) since they bottomed out in early February.
- That yield (think of it as “cost of funds” appears to be coming down again, but mortgage interest rates have not followed because…
- …lenders are slammed with business right now and are working through their backlog.
- This means interest rates are more likely to go down in the next week than up. However,
- …they are only a hair above the “bottom” set in February. Unless there is a major event in the market, they don’t have that far to fall.
What might that major event be? Well, for instance, let’s say Greece doesn’t get the loan they negotiated last month (which they expect this week) and threaten default on their loans again.
NOTE: This is happening, today. Stay tuned!