Mortage Rates Weekly Review, July 30, 2010

Mortgage Rates Reach All-time Lows

This past week has provided a great deal of news and data for the stock and bond markets to analize.  Fortunately for mortgage borrowers, the analysts have focused on the data showing economic slowing in the US rather than the mostly positve earnings reports from US companies.

Week in review

Some data this week was more positive than anticipated: new home sales, first-time jobless claims and the Chicago Purchasing Managers Index.  However, the negative reports seemed to carry more sway.  Consumer Confidence for July dropped to a new record low, meaning that American consumers do not have confidence in economic conditions currently, nor are they confident about their economic prospects improving in the short-term. The June Durable Goods report showed a marked decline in the purchase of "big ticket" items like refrigerators, washing machines and the like.  The Federal Reserve's report on economic conditions in its 12 regions showed slowing economic activity.  Finally on Friday, the Advance GDP report indicated that economic output has indeed slowed during the second quarter.

Unlike most weeks lately, mortgage pricing has moved in only one direction this week (not counting intra-day movements): down.  For the week (as of 2:30 PM ET, Friday, July 30) mortgage-backed securities prices have improved substantially (approximately 2/3 of 1%).  This translates into real value to the lender and leads to savings for borrowers on lender fees for the specific interest rate desired.

Next week

The week is bookended with important economic reports: Monday's ISM Index of Manufacturing activity and Friday's Non-farm Payroll Report that provides the best look at the employment situation in the US.  During the week several other less impactful reports are scheduled for release including, Personal Income, Factory Orders, Pending Home Sales, the ISM Services Index and first-time jobless claims.  Expectations are for data that confirms the slowing economy.  Mortgage rates should, therefore, hold their historically low levels.

When rates inevitably rise will it be a gradual increase?

I received an email from a friend who was seeking a referral to a lender this week.  My friend's statement and question got me thinking.  Here is her statement and my response:

I understand that when the economy improves mortgage rates are likely to increase, Right? I also have noticed that the drop in rates has been fairly gradual.  Is that true? So is it safe to conclude that when rates begin to rise they will do so gradually as well?

My answers to her questions were: Yes, Yes and No.  Perhaps I should explain in a little greater detail ( as I did for her). 

Question 1: Mortgage rates are influenced by the pricing of mortgage-backed securities (MBS) that are simply a type of bond that are made up of pools (groups) of individual mortgage loans.  These bonds have been traditionally, and excepting the 2005-2008 period are, extremely safe investments.  This makes them very popular among investors during weak economic times.  In challenging economic times investors choose safer investments even though the rate of return is very low.  Naturally, when the economy (especially the job market) improves, other types of investments (stocks) may offer better returns at acceptable risk levels. This (among other boring economic factors) will lead to higher mortgage rates.

Question 2: Mortgage rates have been a historically low levels for months, dropping gradually to the all-time low levels at which they currently sit.  If we look back over the past five years even, we find that mortgage rates have been below historical averages (Average rate on a 30 Year Fixed rate mortgage over past 50 years is @ 7%) throughout the period. 

Question 3: Unfortunately, when our economy shows signs of putting the challenges of the past two years behind us it will not likely take long for mortgage rates to increase.  Specifically, when the unemployment rate begins to come down for reasons that are related to economic growth, rates are likely to rise very quickly.  We could see rates rise by a half to whole percentage point or more in a single day.  From there most economists believe we will see steady rate increases that may last for decades to come.  The primary reasons for this pessimistic forecast are the US national debt and the unfunded liabilities of Social Security, Medicare and Medicaid.