Category: Mortgage Time

Wednesday brought a full schedule of events and data for the bond market to digest and bonds dictate day to day changes in mortgage rates.  The morning’s data was perfectly palatable, resulting in modest strength heading into the afternoon’s Fed announcement. Contrary to impression given by many news headlines on Fed day, there is rarely any significance to the Fed’s actual decision to hike/cut/hold steady at any given meeting by the time the meeting actually happens.  Markets will have long since priced in the likely outcome based on economic data and Fed policy transparency. In other words, it was a surprise to no one that the Fed held rates steady at this meeting.  Bond traders tuned in for other reasons–mainly to hear what Powell had to say at the 2:30pm ET press conference. There were a few ways Powell could have framed the recent set-backs seen in inflation data.  Some analysts thought he might say more to entertain the possibility of rate hike instead of a rate cut.  Powell (and, indeed, the Fed announcement itself) definitely acknowledged that inflation data meant a delay for the Fed’s next move, but in the press conference, Powell reiterated that the next move was much more likely to be a cut, based on the trajectory of the data.   Bonds improved and many mortgage lenders were able to re-issue slightly lower rates compared to the morning levels.  The average 30yr fixed rate is still elevated by 2024’s standards, but nicely lower compared to yesterday’s latest levels.

A mortgage rate is highly subjective and can vary for a variety of reasons.  A news story that provides an outright level like 7.5% requires context and qualification.  Some online advertisements (especially among builders) could still be showing rates in the high 6’s.  Some borrowers will be seeing rates of 7.625 or higher.  Loans with less than 25% down will have higher and higher costs, either in terms of upfront closing costs or the rate itself.  Investment properties incur significant extra costs as do lower credit scores (you start getting hit for anything under 780 in many cases these days).   These are just a few considerations to illustrate the point that a 30yr fixed rate isn’t necessarily apples to apples. Fortunately, we can control for most of the variables by only ever looking at the same scenario, free from most of the subjective adjustments.  We can also control for the practice of advertising lower rates by quoting them with implied discount points (extra upfront cost that goes toward “buying down” the prevailing rate). That’s one of the reasons the MND index is higher than Freddie Mac’s weekly survey. All that to say, 7.5%+ might not be the exact rate you see today, but after adjusting for everything we can control, that’s the most prevalently quoted top tier conventional 30yr fixed rate again today.  It’s the 3rd time we’ve seen 7.5 in the past 2 weeks. Today’s increase followed the release or the Employment Cost Index–one of the economic reports the Fed watches closely in determining rate policy.  In not so many words, it suggested higher momentum in price pressures than previously expected.  This wasn’t necessarily out of line with any of the other recent inflation-related reports, but the confirmation was worth a bit of extra weakness in rates nonetheless.

Mortgage rates didn’t change much at all over the weekend with the average lender still in the highest territory since November.  The average conventional 30yr fixed rate is just under 7.5% for top tier scenarios. Things could end up changing quite a bit by the end of this week owing to a slew of important events and economic reports.  The sneak preview of one of those events took place this afternoon as the U.S. Treasury released borrowing estimates for the 2nd quarter.   Why would this matter?   Rates are driven by bonds and U.S. Treasuries are the bonds that set the tone for all other bonds/rates in the U.S.  Bonds can be influenced by a number of factors, but supply and demand always matter to any financial security.  The Treasury department directly comments on the supply side of that equation in these announcements.  When the number is bigger than the market expects, it puts upward pressure on rates, all other things being equal. Today’s number was slightly bigger, but the market did a good job of taking that in stride.  The rest of the week’s calendar is even more likely to cause volatility–especially on Wednesday and Friday.  As always, volatility can either be good or bad for rates.

As 2024 has progressed, economic data–especially inflation data–have made it increasingly clear that rates will not be coming down nearly as soon as the Fed (and the market) expected. Rates are driven by multiple factors.  At present, inflation is chief among those, followed by the economy.  In general, higher inflation and economic strength coincide with higher rates.   Inflation and economic data evolved in such a way as to offer some light at the end of the high rate tunnel at the end of 2023.  Even the Fed acknowledged the shift by lowering its 2024 rate projection by half a percent in December.   But 2024 has proven to be a frustrating year so far for everyone who’d been hoping that inflation and rates were finally on the way back down.  We weren’t necessarily expecting to see any new fireworks this week, but we got them anyway. The trouble began on Thursday morning with the release of the quarterly GDP data.  One component of GDP is “personal consumption expenditures” (PCE).  One manifestation of the PCE data is a price index which in turn has a variation that excludes food and energy to give us the Core PCE Price Index. Core PCE is akin to Core CPI and it happens to be preferred by the Fed when it comes to tracking the 2% inflation target.  There are several different Core PCE measurement methods, which can make things fairly confusing on weeks when the data is released.  They include:

Interest rates care about quite a few different things, but inflation and Fed policy are two of the biggest considerations.  One of the Fed’s favorite ways to track progress on inflation is the PCE price index which comes out every month, but also every quarter. Oddly enough, the quarterly comes out a day before the monthly data on the 4 days of the year where a new quarter is reported.  Today was one of those days and the quarterly data showed a big surge in inflation.  The implication is that there’s a much bigger risk that tomorrow’s monthly inflation number also proves to be higher than expected. Bonds/rates don’t like inflation to begin with, but it’s even more problematic when it has a direct bearing on Fed policy decisions.  This particular news is seen as pushing the Fed even farther into the future for its first rate cut of this cycle.  In other words, both the data, and the Fed implications were bad news for rates today. The average lender jumped immediately higher by roughly an eighth of a point.  This brings the top tier conventional 30yr rate index over 7.5% for the first time since November 13th.  Tomorrow could add insult to injury, but it’s also worth noting that markets are expecting worse news now, so if it’s only a little worse, the injury might not be that bad.

The average mortgage lender was able to offer conventional 30yr fixed rates that were very close to yesterday’s levels despite bond market movement that suggested a bigger spike.  In a vast majority of cases, if the bond market is in weaker territory compared to the previous day, rates will be higher in proportion to that weakness. In today’s case, rates moved higher by an arguably insignificant 0.01% on average.  Bonds suggested the increase should be more like 0.03-0.05%.  Lenders were able to hold the line due to the timing of yesterday’s bond market improvement and the fact that it was not fully priced in to rate offerings. In other words, if mortgage lenders were painters, they got a delivery of some nice new paint yesterday but didn’t have time or inclination to get it all on the canvas.  Now today, some of that paint has gone missing, thus leaving the big picture to look almost exactly like yesterday’s.

Mortgage rates are driven by day to day changes in the bond market.  Bonds are focused on the Fed and the economic data that shapes Fed decisions.  Today’s data isn’t necessarily big on the Fed’s radar, but the market reacted due to its implications on other data. Specifically, the S&P Purchasing Managers Indices (PMIs) came in lower than expected for both the services and manufacturing sectors. PMIs can be thought of as fairly timely, general barometers for the economy because they ask the financial decision makers at businesses about the current state of affairs as well as future plans.   One of the topics concerns “prices” which is the hottest of hot buttons for rates these days.  On that note, the data mentioned lower price pressures in April due to a deterioration of demand and a slight softening in the labor market. S&P’s PMIs aren’t as big of a deal for rates as a similar set of PMIs published by the Institute for Supply Management (ISM), but we have to wait until next week for the latter.  The first mover advantage of today’s data helped drive the reaction.  Thankfully, it was good for rates with the average lender moving down to the lowest levels since Friday, April 12th.

Mortgage rates began the new week at almost exactly the same levels seen at the end of last week.  There were no major events or economic reports to cause volatility in the underlying bond market, but bonds were able to improve modestly by the end of the day. In general, bond market improvement leads to lower rates.  The catch, in this case, is the improvement was fairly small and that it was offset to some extent by modest weakness earlier in the day.  Even so, a handful of lenders offered mid-day improvements.  Other lenders will technically be more likely to improve tomorrow morning if bond market trading levels are unchanged (and that’s not something that can be guaranteed or even assigned better than a 50% probability). By staying near Friday’s levels, the average lender is just shy of the highest rates in 5 months.  A top tier conventional 30yr fixed scenario is still in the mid 7% range. Volatility will definitely be higher next week due to the calendar of events, but it could start increasing in the coming days as well.  There’s no directional connotation to “volatility.”  It’s an inherent 2-way street.  The direction of the movement will depend on the tenor of the data.  It looks like rates are at least willing to treat current levels as a ceiling, but only if we finally see some friendlier data–something that’s been hard to come by since February.