Will interest rates rise in the near future?
Interest rates took a surprising dip in the first week of February, and millions (literally) of homeowners jumped on the opportunity and applied to refinance. The trouble with news reports has always been that when any news outlet announces “interest rates fall” it’s after the deed is done. (Just like this column, for instance.) Consequently, folks usually get their loan started after the interest rates have bottomed out.
Is it time to shrug it off and forget about it? Probably not. Let’s take a look.
It helps to remember the basic rule of supply and demand and how it applies to mortgage interest rates.
Prices (in our case interest rates, the price of renting money) are set by average agreement of suppliers (lenders) and buyers (borrowers.) If suddenly more lenders want to lend money, interest rates go down. If fewer investors want to lend money, interest rates go up. If fewer borrowers want to borrow, interest rates go down because lenders start competing for their business. If more borrowers want to borrow interest rates go up because lenders can’t handle the additional business anyway.
For many reasons institutional investors from all over the world are looking for safe places to park their money right now. U.S. Treasury Bonds and U.S. mortgage-backed securities may seem like they yield a very low return, but seem very safe. But keep in mind that the U.S. dollar is very strong and many analysts expect that trend to continue. Foreign investors buying U.S.-denominated investments will not only earn the interest rate they are guaranteed, but when they sell the investments they will do so (they hope) when the dollar is worth more relative to their own currency, thus improving their return on investment dramatically. (I could show you the math, but it would bore you even more.)
The bottom line is that European central banks, Asian central banks, Norwegian pension funds, and others find it attractive to lend you money for your mortgage (through a few middlemen, of course) and are willing to accept a very low yield (interest rate to you) to do so.
Interest rates have thus been driven much lower than anyone anticipated.
However, the surge in applications the first week of February meant that lenders could bump their rates up while working through their newly-flush pipelines, and rates – not unexpectedly – took a small turn upwards this week.
New applications, however, fell dramatically this week, and the broader economic pressures haven’t changed. We might conclude, therefore, that pressure this week on rates will be more in the downward direction than up.
Add to that falling oil prices, reduced consumer confidence and consumer spending, and a few other bells and whistles and overall there is a great deal more pressure on rates to go down than up. However, since they are only very slightly above where they bottomed out on February 2nd and 3rd, we might conclude that they are more likely to go down than up, but they don’t have very far to go down unless something changes in broader market dynamics.
Take a look at the chart to the left and you’ll see that the 10-Year Treasury yield (red line) hit a pretty firm bottom on the 2nd and 3rd. This implies that investors don’t have an appetite (today) for yields lower than this. Mortgage rates (as measured by the Fannie Mae 60-day yield, blue line) tend to track the Ten-Year Treasury fairly closely. Note that the “spread” between the two increases slightly when the market is volatile and lenders are uncertain, and decreases when the market calms down.
Barring unusual news this week (Greece collapses, Russia invades Ukraine, etc.) I expect the markets to be fairly calm, and trading to be light, so my prediction is that rates will pretty much flatline this coming week, and could improve very slightly.
If you are in process already and not locked, this week could be an excellent time to lock if you plan to close within the next two to three weeks. If your timeframe is longer than that and you’re a gambler you might want to float, but be aware there is not much room (based on what we know today) to move down much further.
Will interest rates rise in the future? Of course they will – eventually. But the million dollar question is “When?”.
As one of my smarter clients once said “Pigs get fat, hogs get slaughtered.”