September 24, 2011

WeeklyBasis 9/24: Will 30yr Rates Below 4% Hold?

September 24, 2011

WeeklyBasis 9/24: Will 30yr Rates Below 4% Hold?

Rates were down .25% last week—dropping below 4%—on a surprise Fed announcement that they’d buy mortgage bonds to support housing.

Below is a recap of last week and a preview of next week to see if rate lows will hold.

How Rates Dropped Below 4%
Markets got the expected Operation Twist announcement Wednesday—a Fed plan to sell short-term debt and replace it with long-term debt. But the real surprise was the Fed saying that, effective October 3, they’d start reinvesting cash flows from their mortgage bond holdings into new mortgage bonds.

And these cash flows are big: the Fed bought $1.25 trillion in mortgage bonds from January 2009 through March 2011. Previously cash flows were being reinvested into Treasuries.

The Fed’s renewed commitment to mortgage bonds causes investors to buy more, buying drives up prices of mortgage bonds, and yields (or rates) drop.

This happened in a huge way Wednesday and Thursday, and rates (on conforming loans to $417k) dropped to the high 3s.

Investors reversed course Friday and sold sharply enough to erase all of Thursday’s rate gains.

Still, the rate week ended with loans to $417,000 still around 3.875%—if you have great credit, a single family home with at least 20% equity, or a condo with at least 25% equity.

Market Preview September 26-30
Here are next week’s economic calendar highlights with rate impacts:

August New Home Sales Monday: New home sales last month were 298k annualized, a five-month low. No strong evidence to support a big August improvement. Rates even to down.

July Home Prices Tuesday: June Case Shiller home prices up 1.1% since May, the third straight monthly ’20-City’ gain after seven months of decline. But prices were down 4.5% since last June. Rates even to down.

2Q2011 GDP Thursday: The second reading of 2Q GDP was 1% and this will be the third and “final” reading—but 1Q was revised a fourth time on June 29, and cut massively from 1.9% to 0.4%. GDP. Rates even to down.

Consumer Inflation Friday: The Personal Consumption Expenditures Index (PCE) is the Fed’s preferred consumer inflation reading, and the Fed likes to see “core” inflation excluding food and energy below 2% annualized. Last month this fore PCE reading was getting close at 1.6%. Rates even to up.

$99b in Treasury auctions: $35b in 2yr notes Tuesday, $35b in 5yr notes Wednesday, and $29b in 7yr notes Thursday. New Treasury supply sometimes cause rates to rise as bond markets sell on over-suply concerns.

Europe: A permanent bailout fund will be discussed to stabilize the Eurozone debt crisis. If this is well-received by markets, rates will rise as bonds sell on stock optimism.

Rate Lock Strategy
Rates are stunningly low. People will be tempted to hold out for even lower because weak economic data might support it.

But rates also depend on mortgage bond trading patterns, and the charts (technicals) don’t support a run much higher.

Whether driven by economic data or technicals, rate lows are here and gone each trading day.

So pick a rate target you can’t or won’t go above, and give your mortgage advisor a standing order to lock when they see it.

That’s for refinancers. For homebuyers, you can’t lock a rate until you’re in contract to buy a home. Once you’re in contract, the same approach applies.

Further reading:
2011 Conforming Loan Limits As Of October 1

How The Fed’s Latest Plan Lowers Mortgage Rates

Record Rate Lows Here & Gone. How To Deal With It