It’s time to wake up to the new reality of mortgage rates


There are no precedent for the winning streak that mortgage rates enjoyed in H2 2020. We have never seen so many new all-time lows in the same year, and we have never spent so much time at those lows ( not even close). All of the above can be lulled into a false sense of low rate security, but it’s time to wake up.

In fact, the alarm has been going off for some time now. Previous articles have highlighted the disconnect between the bond market and mortgage rates on several occasions in 2020. Towards the end of the year, we cautioned against complacency in no non-specific terms.

After the Georgia senatorial elections, we followed a ascend in bond market volatility due to the expectation that it would increasingly spill over into the mortgage rate world.

(Read more: 1/8/21: Have we seen the end of record low rates?)

As of this week, this spillover happened in a grand way with many lenders citing rates as high as three-eighths of a point. higher than they were last week. This means that if you looked at something in the vicinity of 2.75% on Friday, it could be 3.125% today. Which give?

Again, the upward pressure is nothing new. Treasury yields have been telling the story since August and mortgage rates have finally exhausted their cushion enough that they are forced to follow the broader trends.

Why have things been so steep? Using the “cushion” is one thing, but that alone does not force rates to rise. For this we need “Wider volatility in the bond market.” In other words, Treasury yields must increase.

Turns out it’s one of their favorite things to do in 2021. If that sounds steep, it has a lot to do with the bonds that wind up in a conservative model ahead of Georgia’s Senate elections, and unleash chaos after.

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The election is old news now though. It just rolled the ball of volatility. More recently, falling number of covid cases, improved vaccine distribution, stronger economic reports and progress in fiscal stimulus invigorated volatility. This week, 10-year yields broke and broke out of their dominant “trend channel” (parallel lines below).

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There is no magic rule that says Treasuries duty stay within those red lines, but this type of breakout can be a signal for traders to step up selling pressure. In other words, this top line was a trigger so that the yields increase further.

“But wait… I thought the Fed said it was keeping rates low for YEARS. What happened to that?”

The Fed sets federal funds rates … NOT mortgage rates. The Fed Funds Rate is a very short-term (“overnight” rate, in fact). 10-year Treasury bills, on the other hand, last for 10 years. The average 30-year fixed mortgage lasts between 5 and 10 years depending on market conditions. Investors place different premiums on rates with different terms. Put simply, the fed funds rate is indeed always at its lowest, but long-term rates are not.

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It’s nothing new or different, for what it’s worth. The federal funds rate has always ebb and flow relative to longer-term rates.

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“But wait … I’ve heard that mortgage rates are still very low and have increased very little this week!” “

Well, it depends on your point of view. Is 3.125% still really low for the average 30-year fixed mortgage rate? Yes! It was the all-time low before covid. But is it much higher compared to the last few weeks and months? Here too it depends on your point of view, so let’s leave it to this: rates rose more this week than on any other week in the past 11 months.

If you’ve heard that rates have only risen slightly, it may be due to the headlines citing the Freddie Mac Weekly Survey. Although this survey is accurate over time, it does not capture short-term volatility. It also tends to stop measuring most of a week’s volatility on Monday, and Monday was a holiday! As such, it lags behind the reality of the streets.

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On the economic data front, retail sales (this week’s biggest report) increased in the 4th fastest pace since records began in the early 1990s. In general, stronger economic data puts upward pressure on rates.

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In terms of housing-specific data, this week brought an update on residential construction numbers. They are still stellar.

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While housing starts are subject to weather-related delays and other potential hurdles, building permits are a bit more open and they another long-term high.

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