It never ceases to amaze how much the public is almost exclusively fixated on Ben Bernanke, specifically when the Fed is going to raise or lower rates. It is true that when the Federal Reserve Chairman speaks Wall Street will listen. I can still remember how the market reacted feverishly to remarks made by former Chairman Alan Greenspan and how his cries of the market's "irrational exuberance" sent stocks crashing. The Federal Reserve Board of Governors may be powerful, but they aren't all that. I am not minimizing their influence, but there are other economic voices in the crowd that can send rates soaring or plummeting at a moment's notice. One just has to be aware of them and how much weight they carry on mortgage rates.
If you sit down with an issue of Business Week or pick up copy of the weekend's Wall Street Journal, you will notice that a variety of economic announcements will be made throughout the coming week. For example, on a Monday you may have the housing report. We may receive GDP figures on Tuesday. By Wednesday, the consumer confidence report might be released. Thursday could be the day that the numbers for initial unemployment claims comes out, and then on a Friday, the figures for durable goods are released. All told, in a week's time, no, in a 24-hour period, multiple pieces of economic data (both domestic and international) can be released turning the interest rate market into a proverbial roller coaster. A negative durable good report could send rates plummeting by .25% - .375% at 9:00 am, while an announcement of a 50,000 person decrease in initial unemployment claims will send rates in the opposite direction resulting in a wash for the day. Each indicator carries its own weight, but overall, good news for the economy is bad news for interest rates.
Over the past 30 days the Fed has barely made a peep, yet rates have fallen in many cases by 0.50%. Why is that?? When we take a closer look at the records, a lot of major bad news came out. New home sales fell on both a monthly and yearly basis. Consumer confidence took a nosedive. Initial unemployment claims shot up with a corresponding increase in unemployment from 8.8% back up to 9.0%. Accordingly, mortgage application indexes rose. People who had just refinanced in the earlier part of the year were back again. Therefore, one can draw the conclusion that bad news for the country really is good news for the mortgage industry. Interestingly enough, as I am writing this article, reports that durable goods orders contracted in the April along with news of the worries over Greece's fate and declines in China's banks' profitability are all contributing to a more risk averse mood in Wall Street. Accordingly, I expect stocks to fall, bonds to rise, followed by a corresponding fall in rates.
It almost seems sad, but it's true. In many cases when a client is asking me "when should I lock," my normal response is "let's wait for some bad news, then we'll lock." Rates have fallen to record lows during the Great Recession as the global crisis has rocked the markets around the world with banks that were too big to fail; record bankruptcies among individuals and business; a loss of more than 2 million jobs in one month; historic lows in consumer confidence; and the European financial flu. This was a lot of bad news; consequently, the market rewarded those with equity, employment (or if they were lucky enough to have a Fannie/Freddie loan) a 30-year rate that was as low as 3.875%. As such, our interests are divided in this nation with regards to this particular situation. If you are unemployed, good news is good news. If you are trying to lock a rate, bad news is all you want to hear.
It's an amazing paradox. It makes sense when you sit down to think about it as rates and inflation normally act and proceed throughout the economic continuum in lock step. If you are looking to refinance or land the lowest rate for your acquisition, you are best served to keep your eyes on the news or online. Watch for the signs of negativity in the market. As the nation cries tears of pain, ironically you will cry tears of joy at your wonderful, low rate. It's quite weird how it all works out that bad news drives great rates. Some pray for miracles while others pray for bad news.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in real estate finance, he can be reached at howardpr@rosecityrealtyinc.com.
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