Mortgage Rate Watch

Mortgage Rate Watch


When it comes to mortgage rates, Thursdays frequently lend themselves to a discussion about fact versus fiction (or "delayed fact" as it may be) in news headlines.  Reasons for this are laid out in detail here.  For those who don't click links, here's the short version: many reporters rely on Freddie Mac's weekly rate survey for one big weekly update on mortgage rates.  The survey is out on Thursday mornings, but most responses are in early in the week.  Bottom line: if rates move much on Tue/Wed/Thu, news headlines may indicate a big move in the opposite direction from reality. The current example isn't quite as bad as last week's, but it's still wrong.  The survey said rates were sharply higher this week, but they're still lower for the average lender.  One reason for the smaller discrepancy is that rates have indeed been moving higher over the past 2 days.  Change hasn't been extreme, but it has lifted the average lender back up from the brink of the "high 4%" range seen last Thursday.  
First thing's first: we deal in extremely granular terms when it comes to mortgage rate movement here.  If you're just looking for an idea of how today's rates are versus yesterday's, they're lower.  The headline is a reference to intraday reprices--the practice of changing rates for better or worse during the business day in response to changes in market conditions.  Reprices are common.  We rarely see a day without at least a few of them.  Today didn't set any records in that regard, but the average lender ended the day with slightly higher rates versus the morning's initial offerings.  The afternoon reprices were counterintuitive considering the day's big event: the release of July's Consumer Price Index (CPI) at 8:30am ET.  As far as scheduled reports are concerned, few have had more market moving potential than CPI over the last few months.   That's because CPI is the more timely of the 2 main inflation indices in the US and inflation has been a big deal for rates in 2022.   The upward pressure on rates was counterintuitive because CPI showed inflation coming in distinctly lower than expected and much lower than last month both for the overall index and the "core" (which excludes more volatile food and energy prices).  Notably, the headline increase for July was 0.0% versus +1.3% in June! If you were a bond trader or rate watcher who had to bet on how bonds/rates would react to such a report, you'd need a really good reason to bet on anything other than rates moving lower.  Indeed, that's exactly what happened in the immediate wake of the data this morning.  Treasury yields dropped and mortgage-backed bonds surged (that's a good thing for mortgage rates).
Mortgage rates had a bad day last Friday, rising at a very fast pace and ultimately making it almost all the way back to the previous week's highs.  The new week started on a stronger note with rates recovering some of the lost ground yesterday and generally holding onto that improvement today. The ground-holding is impressive given the fact that the underlying bond market suggested higher rates today.  Timing is a factor as bonds improved steadily throughout the day yesterday.  Many lenders offered improved pricing in the afternoon (in some cases, late in the afternoon).  Compared to those late afternoon rates, today's are slightly higher, but still safely below last Friday's levels. All bets are off when it comes to tomorrow.  At 8:30am ET, the Bureau of Labor Statistics releases the next monthly installment of the Consumer Price Index (CPI)--the most influential inflation metric as far as the bond market is concerned.  Depending on how the data comes out, tomorrow's mortgage rates could be starting the day quite a bit higher or lower versus this afternoon.
The big monthly jobs report from the Labor Department (officially "The Employment Situation) is one of the most reliable sources of volatility for interest rates.  While this was much easier to observe before the pandemic, key economic reports have been getting more and more attention as the market looks for evidence that inflation and tighter Fed policy are taking a toll on the economy.  A weaker economy creates less demand for goods and services.  This serves two purposes for interest rates.  Lower economic growth increases the appeal of safer haven investments like bonds.  Excess bond buying demand pushes rates lower.  Lower demand can help prices fall, thus helping to cool inflation.  Inflation is an enemy of low rates, and a key reason for the tighter Fed policy that's keeping upward pressure on rates.  So if inflation subsides, rates would move lower, all other things being equal. All that to say: what's bad for the economy is usually good for rates. Several recent reports have indeed shown clear signs of economic contraction.  This is a key reason that rates hit new long-term lows last week.  But this is a new week, and the two biggest economic reports were anything but weak.   Swinging for the fences . On a week where many sports fans thought fondly of the late Vin Scully's famous "high fly ball into right field" call during the 1988 World Series, two of the heaviest hitting economic reports were also swinging for the fences.  
Regular readers are all too familiar with my fairly regular habit of explaining discrepancies between reality and the typical mortgage rate headlines on Thursdays.  What's up with Thursday?  That's when Freddie Mac releases its weekly mortgage rate survey. Freddie's survey is the longest-running, most deeply entrenched catalog of historical mortgage rates in the industry.  It serves as the foundation of strategic market analysis in several sectors.  It is the most widely-cited source for the news media's mortgage rate coverage.  It is even relied upon for certain calculations that determine whether loans violate certain lending laws.   All of the above is tremendously unfortunate by the time we consider just how stale the information can be.  Not to put too fine a point on it, the survey is best thought of as measuring rate changes from Monday to Monday, but waiting to report that number until Thursday morning at 10am ET!   Why the delay? The survey's official response window runs through Wednesday.  In that sense, the Thursday morning release time seems more reasonable. Unfortunately a vast majority of the responses are in by Monday.  Freddie officially states that most responses are received on Tuesday, but this is either not true or those responses are coming in early Tuesday morning before lenders update their rates for the day.  This is a longstanding contention of mine and if there was ever a report that confirmed it, it's today's!  Here's why:
We've devoted lots of time and space recently to discussing the uncommon mortgage rate environment recently.  The abbreviated thesis can be reduced to a few key bullet points: Mortgage rates involve both the rate itself and the upfront cost required to obtain that rate. Recently, there is much less distance between any two interest rates in terms of upfront cost. This makes the rate quote environment highly stratified between lenders. It also means mortgage rates can change much more abruptly for any given move in the bond market (bond prices are the key ingredients in determining mortgage rates). With bond prices' ability to move rates already amplified, a relative big move in bonds has translated to record changes in rates.  This happened in our favor starting last Thursday and has been reversed as of today.  The initial drop in rates lasted 3 days (Thu/Fri/Mon) and the correction was in place as of this morning. If all the above is true, we should be able to look at bond prices (which move inversely to rates) and see 3 days of gains offset by 2 days of losses resulting in roughly similar levels to Thursday morning.  The data does not disappoint! In nuts and bolts terms, the half point of improvement and deterioration roughly corresponds to the average lender moving from 5.50% to 5.0% and now back up to 5.50% all in the space of 5 days. This herculean round trip may exist in the past, but not since we began keeping daily rate records in 2008.  
Mortgage rates leapt higher at a record pace today--a statement that sounds a bit scarier than it really is by the time we consider the context. The first part of the context is the limitations of day-over-day record keeping for rates.  Our data only goes back to 2008.  There were likely worse individual days in the 20-30 years before that, even if there weren't very many. The second part of the context is that we were just able to witness the friendly version of the same development last Thursday (i.e. record-setting DROP for an individual day).   All of the above is a product of the same environment where the underlying mortgage bond market is making it much easier for rates to make big moves.  (If you didn't catch the deep dive down that rabbit hole, here it is: The Real Reason Mortgage Rates Are Dropping at a Record Pace). Unique market environment considerations aside, today's bond market movement was still fairly abrupt.  Bonds are the key driver of mortgage rates.  All other things being equal, when demand for bonds decreases, rates rise. Demand dropped quickly today after several comments from Fed speakers suggested the Fed is far from declaring any sort of turning point in the battle against inflation.  Those who tuned into Fed Chair Powell's press conference last week may have come away with a slightly more equivocal outlook. There was also a glut of new corporate bonds hitting the market over the past 48 hours.  These decrease demand among bond buyers simply by spreading it out to a larger menu of potential investments.  
Mortgage rates have been all over the map recently, both in terms of their movement and in their variation between lenders.  It's not altogether uncommon for certain borrowers to be seeing rates that are half a point lower than they were just last week and a full point below the mid-June highs. This is an  exceptionally fast drop!  Perhaps even more interesting (and uncommon) is the fact that mortgage rates have dropped faster than US Treasury yields.  It's typically the other way around as investors flock first to the most basic, risk-free bonds. So why are mortgages winning the race this time?  There are a few contributing factors, but the most notable is the structure of the underlying mortgage bond market. A quick disclaimer/warning before proceeding: there's really no great way to talk about what's going on without things getting a bit esoteric.  If it's all a bit confusing, that's normal.  We'll cordon off the most esoteric stuff in the six steps below, but you'll need to it to understand the thesis below. Step 1: Mortgage rates are based primarily on mortgage-backed securities or MBS. As lenders originate mortgages, those mortgages can be "turned into" MBS and sold to investors who want to earn interest on mortgage debt.   Step 2:  MBS have a coupon--which is the official rate paid out by a bond.  Other bonds, like the 10yr Treasury Note, also have coupons.