If you've been following the November mortgage rates rollercoaster, you have to wonder how conventional mortgage rates almost dropped below 4%, then almost topped 4.5%, and are hovering in the middle of that range today. What will December bring in the mortgage rates market?
Let's look at what happened:
1- Warning signs about the second round of Federal Reserve Quantitative Easing (QE2), flashed at the beginning of November. Still, the mortgage bond traders like what they saw in initial rollout of the program:
The best conforming 30 year fixed mortgage rates have moved back down to a range between 3.875% and 4.25%. 3.75% is phantom but I've received more than a dozen emails from borrowers who locked in a 30 year fixed loan at 3.75% today. Read "phantom"as believing in the existence of 3.75% but not having scientific proof. 4.25% is widely quoted with no closing costs while 3.875% still carries an expensive closing cost price tag.
2- While pleased with the initial reaction, I sensed a crack in the foundation of the bond market, and issued a lock-in alert, after the first weekend of November:
Mama Grizzly and Mama Brady know something about inflation; they do the weekly grocery shopping. When Mama Brady told me that our grocery budget had to be adjusted upwards, while I was remarking that our budgeted monthly fuel expenses had to be adjusted as well, I started thinking that inflation might just be around the corner- that’s not good for mortgage rates.
3- As expected, the bond market fell apart, and mortgage rates jumped .375%. Why then, did I reverse course, just ten days later, if I felt this pressure building?
Traders are calming down, and trusting the power of central banks’ and governments’ bailouts again. A trader’s loyalty is about as reliable as a lap-dancer’s love but, for the near-term, bond traders think QE2 just might drive bond prices higher. They ain’t selling too much and they ain’t buying too much. Expect them to watch what happens through next week, then pile on the bond train, hoping to make a quick buck. That’s good for mortgage rates, in the short-term.
What now, for December, 2010 mortgage rates?
I think we could see rates move back to the pre-November levels. If you have a closing after December 15, 2010, you might consider waiting to lock-in your interest rate. Two things support this strategy:
- QE2 buying, by the Fed, in absence of marklet moving economic statistics.
- Flight-to-quality, amidst the economic uncertainlty surrounding the Irish bailout (and a possibly escalating collapse in Portugal). That strain on the European Union, has investors looking at United States-backed securities, as safe.
Why caution is needed, and you must have a mortgage loan originator who obsessively follows mortgage rates:
- The Fed's QE2 buying, might be seen as inflationary...again. This would cause the bond bubble to prick and the escaping helium means higher mortgage rates.
- Economic figures might show a more robust economy rather than a slightly positive one. A key figure for me will be the Black Friday retail sales. That figure is always puffed up (and later amended) but it could be a key indicator as to how strong this alleged recovery really is.
In summary, I have enough evidence to warrant a delayed lock-in strategy. The rewards are a potentially .25% lower in mortgage rate but the risks are treachorous. If you are thinking of refinancing, don't delay on the paperwork. Make an application, give the lender your paperwork, and wait patiently to lock-in and order the appraisal.