If you've been following my mortgage rates report, you'll notice that I've had some challenges with my compass this past year. That's to be expected in market distorted by an 800-lb, gorilla (The Federal Reserve Bank).
A year ago, I cautioned that mortgage rates could quickly rise to the 6% level when the Fed stopped QE1:
That's what I think is happening today. The MBS traders are purposefully selling mortgage-backed securities, knowing that the Fed will buy every last bond they offer until they are "bone dry". Everybody is running towards the finish line (6%) now and they don't care how wet they get along the way.
Mortgage rates are headed to 6% and it probably won't take until March, 2010 for them to get there.
I was wrong on that. The overriding prospect of QE2 (which was announced) was the hammer the Fed needed to keep rates around or under 5% for most of 2010. When the Fed announced QE2, mortgage rates had plummeted to the 4.25% level. What resulted after the announcement however, was an unitended "pop" as the market collapsed. Mortgage rates immediately shot up to 4.75%-5%, in December, and I thought the sell-off might have been overblown:
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.
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.
My strategy of a cautious float didn't really hurt any customers, as rate vascillated between 4.625% and 4.75%, for most of December, We did have a scare before Christmas, when rates peaked at 5% but, for the most part, mortgage rates were stable after the ides of December.
What then for January 2011 ?
The mortgage market isn't reacting to economic data, conflicting as that might be. We see figures released which show that the economy is growing, and mortgage rates get better. Contrary reports suggest that the economy might be sputtering and mortgage rates rise. The dollar declines against foreign currencies and rates decline. North Korea and South Korea flirt with a potential nuclear conflict and mortgage rates rise. There was little to no correlation between released economic data and market movements in December.
Political risk may now be the new mover to mortgage rates. The Fed is buying treasury securities and it's tought to fight the Fed. Massive government regulations of free enterprise (including those facing the mortgage industry), are dragging economic productivity down, dissuading private sector expansion, are an extra cost on all industry. Late minute budget deals and tax code changes have the private sector scared to engage in any risk taking or expansionary activity.
Event risk appears to be shrugged off by the markets. The European Union is threatened with collapse, war breaks out on the Korean Peninsula, and there will always be a crazy man in the Middle-East but the mortgage market shrugs it all off.
This whole thing is becoming a crap-shoot to me. I think that the new Congress and a business-bashing Executive Branch could squabble and cause a lot of volatility. The excessive regulations, unclear budgetary items, and money-printing machine should lead to high inflation which means mortgage rates should jump. Still, the mortgage and real estate markets are anemic...again, and lower demand translates to lower mortgage rates.
I think the first week in January will be the bellwether of what we can expect for mortgage rates in the first quarter. Until then, I'm still floating but my finger is itchy for the lock trigger.