August 20, 2011

WeeklyBasis 8/20: Headline Rates vs. Reality

August 20, 2011

WeeklyBasis 8/20: Headline Rates vs. Reality

Rates ended even last week, capping off a three week down trend. Below I discuss the direction of rates from these record low levels. But first, a word on rate headlines vs. reality.

Nearly all ‘record low’ rate headlines hit Thursdays. That’s the day Freddie Mac releases its weekly rate survey covering the previous week. The survey is source material for nearly all media, but the rates aren’t relevant for all homes nor borrowers.

Rate Headlines vs. Reality
Headline rates are expired by the time you’re reading about them, and here’s some other fine print most media stories don’t catch: those rates are only for loans to $417k, single family homes only, owner-occupied only, and those loans have .7% to .8% in points (aka extra fees) on top of a full set of closing costs.

So if you bought a condo with 20% down earlier this year and you’re looking for a zero-cost refinance of your $475k loan, your rate quote as of Friday was about .48% higher than the headlines you were reading. Here’s the fine print.

Rates change throughout each day as mortgage bonds trade, and a rate quote is based on your profile and your property profile, so it must come from a lender to be specific.

Double-Dip Fears Fuel Low Rates
Last week’s U.S. economic data fueled double-dip recession worries. Fed manufacturing reports (1, 2) confirmed a three-month slowing trend, existing home sales posted an eight month low, and jobless claims again broke above 400k after just one week of improvement.

Business and consumer inflation (PPI and CPI) were both a bit hotter, but not enough for alarm bells, especially when lower inflation readings from the manufacturing surveys suggest PPI will moderate.

Rate Preview August 22-26
Weak data suggest rates shouldn’t spike next week, but the “here and gone” rate lows will continue as mortgage bonds battle tough price ceilings. Rates drop when bond prices rise, and every time mortgage bond prices touch highs in the past two weeks, they quickly retreat, sending rates higher.

To manage this volatility, you need to set a rate target you can’t or won’t go below, then watch the market to see if it goes lower. BUT you should give your lender a standing order to lock that rate if it’s ticking up—which happens in minutes, not days.

Here’s a case for why rates might go even lower next week, but this is rooted primarily in Treasury trading, not mortgages. So the safe bet is the standing lock order recommendation above.

Economic calendar highlights next week include July New Home Sales Tuesday, FHFA home prices Wednesday, jobless claims Thursday, and the second of three 2Q2011 GDP readings Friday. The first reading was an anemic 1.3%.

We also have $99b in Treasury auctions as follows: $35b 2yr Notes Tuesday, $35b 5yr Notes Wednesday, $29b 7yr Notes Thursday.

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