On Thursday and also Friday morning last week, single family home loans up to $417,000 were locked at 4% zero points and loans up to $729,750 were locked at 4.25% zero points. Record lows to say the least. Rates at the bottom of this report show a correction off those levels. Still, rates were net down .125% last week versus the week of September 27.
Rates dropped mostly on speculation that the Fed may announce more “quantitative easing” on November 3, which means that they might buy more bonds to drive rates down–remember, when bond prices rise on a buying rally, yields (or rates) drop. This speculation drove mortgage bonds to record highs Thursday, then they rallied further Friday morning because September’s worse-than-expected jobs report showed 95k non-farm jobs were lost. This bond rally allowed for rate locks noted above.
Quantitative Easing 101: A Rate Timeline
But then rates rose late Friday as mortgage bonds started selling off. The reversal wasn’t solely because mortgage traders changed their minds on the jobs report, it has more to do with profit taking.
Rates are so low because mortgage bonds are already at all time highs. So the daily question for traders is when to sell and take profit. We saw this selling Friday, but to answer this question in a broader sense, consider this timeline showing how rates move based on Fed vs. market factors:
November 24, 2008: Fed announces quantitative easing program to buy $500b in mortgage bonds beginning January 1, 2009. 30yr fixed rates at 6.09%.
January 1, 2009: Before the Fed has spent one dime on mortgage bonds, 30yr fixed rates at 5.05%. This 1% rate drop is solely from market buying mortgage bonds ahead of Fed.
March 18, 2009: Fed increases mortgage bond buying program to $1.25t. Two weeks later (and again in November 2009), 30yr fixed rates at 4.78%, the lowest since official records started in 1971.
March 31, 2010: Fed mortgage bond buying program ends. 30yr fixed rates at 5.125%. The rise is from investors exiting mortgage bond trade before Fed money is gone.
May 6, 2010: Greece bailout triggers European debt crisis, driving global investors into U.S. mortgage and Treasury bonds most of summer. 30yr fixed rates drop to 4.78%.
September 30, 2010: Up to this day, U.S. economy posts three months of weaker GDP, home sales and consumer sentiment, fueling further rallies on mortgage and Treasury bonds. 30yr fixed rates set a new record low of 4.27%.
Which brings us to today: Just like open market trading drove rates down 1% before first round of quantitative easing, the same thing is happening ahead of an anticipated round two, and 30yr rates touched 4%.
The difference this time is that the Fed may say on November 3 that they’ll focus more on Treasuries than mortgages, which would mean rates rise as mortgage traders sell on that news.
And even if the Fed allocated part of a new quantitative easing budget to mortgages, the longstanding market strategy has been to trade before the Fed. As bond king and PIMCO head Bill Gross said when the Fed began its first quantitative easing in January 2009:
“Shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond. Anticipate, then buy what they buy, only do it first.”
That’s what’s happening now and why rates are so low. And as the timeline shows, the market trade ahead of Fed buying has more impact on rates than actual Fed buying.
Which means mortgage bonds will eventually sell off from nosebleed levels, and absurdly low rate locks will be gone.
CONFORMING RATES ($200,000 to $417,000) – 0 POINT
30 Year: 4.125% (4.24% APR)
FHA 30 Year: 4.25% (4.37% APR)
5/1 ARM: 3.125% (3.24% APR)
SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 0 POINT
30 Year: 4.625% (4.74% APR)
FHA 30 Year: 4.25% (4.37% APR)
5/1 ARM: 3.5% (3.62% APR)
JUMBO RATES ($729,751 to $2,00,000) – 1 POINT
30 Year: 5.0% (5.13% APR)
5/1 ARM: 3.875% (3.99% APR)
DAILY CONSUMER-FRIENDLY COMMENTARY
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Scenarios assume full doc pricing on single family home purchase loans for borrower with 740 FICO score or greater, at least 20% equity (unless FHA), and 6-12 months reserves left over after close (retirement assets counted at 60% of value for reserves). Better or worse rates apply to specific client profiles. Better rates are available using tax deductible points. ARM rates adjust the first month after initial fixed period shown, and once per year thereafter until year 30. Adjusted rate calculated by adding 2.25% margin to 1yr LIBOR index at time of adjustment. At first adjustment LIBOR+margin cannot exceed start rate+5%, subsequent yearly adjustments can never be greater than 2% per year, total of all adjustments for 30yr life of loan can never exceed start rate+5%. This is not a loan commitment nor a loan guarantee, rates based on loan amount ranges shown and rates available at the time of production. Rates subject to change without notice. California Department of Real Estate license #01376428. NMLS # 313803. Equal Housing Lender.
Julian D. Hebron
RPM Mortgage—Van Ness Office
DRE License #01376428
RPM Mortgage—Levi Plaza Office
DRE License #01379328