Highest Mortgage Rates in Nearly 2 Years
Making Sense of Rising Rates And The Risks Ahead Sat, 22 Jan 2022 01:09:00 GMT

The bond market returned from a 3 day weekend to find yields surging higher on Tuesday.  That pushed mortgage rates to fresh 2 year highs and added emphasis to what has already been the sharpest rate spike since late 2016.   Why are rates rising so quickly? Mortgage rates are based on mortgage-backed securities (MBS), which are essentially bonds that correlate quite well with US Treasuries.   The Federal Reserve (the Fed) has been buying both Treasuries and MBS off and on (mostly on) since 2009 as a part of various stimulus efforts.  Higher demand for bonds means higher bond prices, lower bond yields, and thus, lower rates, all other things being equal. Since the pandemic, bond buying was intended to help the US economy return to full employment and "price stability."  By the fall of 2021, it became increasingly clear that the labor market wasn't going to return in exactly the same form and that inflation was going to be more persistent than the Fed expected.  As such, the Fed warned that it would begin winding down bond purchases in September, ultimately pulling the trigger at the next meeting in November. There are two phases to such a wind-down.  The first involves tapering the amount of  new bond purchases. Once the Fed is done tapering, their balance sheet stops growing, but they continue to buy bonds with the proceeds from past bond purchases.  By reinvesting those proceeds, the balance sheet remains the same.  The second phase involves shrinking (or "normalizing") the balance sheet by placing progressively smaller limits on the size of reinvestments.  
Mortgage Rates Leveling Off at Long-Term Highs Thu, 20 Jan 2022 20:31:41 GMT

Today was one of the most uneventful days in recent memory for mortgage rates.  The average lender is in very similar territory compared to yesterday, and there has been far less intraday volatility through 3pm E.T.  While things may be ho-hum over the past 2 days, rates are still in bad shape compared to most of the past 2 years.  In just a few short weeks, the average lender has moved roughly half a percent higher for top tier 30yr fixed scenarios. A shift in the Federal Reserve's policy outlook is primarily responsible for the pace of the move.  As such, don't expect things to improve too much before next Wednesday's official policy announcement from the Fed. [thirtyyearmortgagerates]
Tepid Recovery For Mortgage Rates; Big Picture Risks Remain Wed, 19 Jan 2022 21:22:26 GMT

Mortgage rates have been having a bad 2022 so far with the average lender up to the highest levels in roughly 2 years as of yesterday.  The reason? The broader bond market (which dictates interest rates) is in the midst of an adjustment process in response to a shift from the Fed ( discussed in greater detail yesterday ). This adjustment process can be thought of as the sudden realization that rates need to go higher by a certain amount and by a certain time.  The amount is a bit of a moving target, but it is likely larger than what we've seen so far.   The time is open to debate, but the March Fed meeting is the most popular guess.  Between now and then, the traders who share this realization will be making trades that drive rates gradually higher.  In other words, they're not trying to jump immediately to the apparent destination.  As such, we are going to see bonds/rate make token improvements every so often.  This happened last week.  It looked promising for a few days, and then rates promptly jumped higher on Friday (and higher still on Tuesday).   Today was one of the decent days amid the broader rising rate trend.  Could it be the first of many?  Technically, that's possible, but it's not especially likely.  Simply put, this is a rising rate environment until we see a far more substantial correction.  Today didn't cut it.  Ultimately, it allowed lenders to offer rates that were right in line with yesterday's mid-day rates. [thirtyyearmortgagerates]
Remember Mortgage Rates in the 2's? They're Closer to 4% Now Tue, 18 Jan 2022 21:12:32 GMT

One of the very few welcome byproducts of the pandemic was the pervasive availability of new all-time low mortgage rates.  Depending on when you checked in, you were highly likely to see top tier 30yr fixed rates in the 2% range.  Even after the first major attempt at lift-off in early 2021, rates were still best described as being in the "mid-to-low 3% range."   At any other time in history before covid, the mid-to-low 3% range would have been an all-time low or close to it.  Moreover, it wasn't long before rates began to fall heading into the summer months, ultimately spending several months with top tier offerings in the high 2% range.  At the time, it seemed like rates were immune from the timing and implications of past cycles. The good times began to stop rolling in late September after the 9/22 Fed announcement confirmed an impending wind-down of rate-friendly policies.  But even then, rates didn't jump higher too quickly.  They even managed to hold in the low 3% range for the next few months, all the while with exceptionally low volatility, all things considered.  Seemingly overnight, everything changed .  From the very first trading day of the year, investors have been rushing to get in position for even more aggressive policy tightening from the Fed.  2 days later, the Fed's meeting minutes justified the rising rate mentality.  Then last week, a slew of Fed speakers peppered the market with their comments that essentially reiterated the broad notion of "faster policy tightening." 
Fed May Not Be Hiking Until March, But Higher Rates Are Here Today Sat, 15 Jan 2022 00:20:00 GMT

In the past 2 weeks, press coverage of the Federal Reserve's policy outlook has ramped up significantly. The Fed is now expected to start hiking rates in March and to hike more than previously expected in 2022. If you think that gives you time to get a mortgage before rates go up, think again. While Fed policy has an impact on the entire financial market, the only major rate they control is the Fed Funds Rate--an overnight rate that applies to the shortest term borrowing between large financial institutions.  That's a distinctly different animal than mortgage rates. The Fed Funds Rate is currently expressed as a target range between 0% and 0.25% also known as the lower bound or simply "zero."  In 2015, the Fed managed to embark on a series of hikes culminating in a 2.25-2.50% range by the end of 2018, but from 2009 through most of 2015, it was also at the lower bound. Despite that, mortgage rates found a way to jump by more than 1% in less than 2 months in the middle of 2013 (a brutally fast move in the mortgage world).  The culprit was the taper tantrum: the market's reaction to the Fed signaling that it was considering winding down (or "tapering") its rate-friendly asset purchases. The most sincere tapering threats began in May 2013.  Fed policy officially mentioned tapering on June 19.  By the first week in July, the damage was done.  It was almost 6 months later before the Fed officially announced the tapering plan, and almost another 2 years before they finally lifted rates from the zero lower bound.
Mortgage Rates Move Up Despite Bond Market Gains Thu, 13 Jan 2022 21:06:25 GMT

In almost every case, a day of bond market improvement results in rates moving lower.  That makes sense considering mortgage rates are based primarily on bonds.  But there are days when the correlation breaks down.  Today is one of them! These periodic breakdowns can happen for several reasons.  The most common is due to the timing and magnitude of various bond market movements.  Specifically, bonds lost ground yesterday afternoon late enough in the day and in small enough measure that the average mortgage lender didn't do much about it.  Lenders instead chose to adjust this morning's rate sheets lower to account for yesterday's weakness. But today's official assessment of bond market strength/weakness is based on the end -of-day levels (which, again, had deteriorated in the final minutes).  So in day-over-day terms, bonds are stronger.  But compared to the last time mortgage lenders put out rate sheets, bonds are weaker.  That's the the most basic reason for the discrepancy. On a slightly more complex note, we could talk about the separate bonds the comprise the US Treasury market and the mortgage-backed securities market.  Mortgage bonds aren't doing as well today.  They're just barely stronger whereas US Treasuries are faring much better. The net effect is an average 30yr fixed rate that is modestly higher compared to yesterday's latest levels, but still not as high as those seen on the first two days of the week. [thirtyyearmortgagerates] [mndrateschart]
Mortgage Rates Fall Again Despite Higher Inflation Numbers Wed, 12 Jan 2022 21:25:30 GMT

Interest rates are typically determined by bond market.  Mortgage rates, for instance, are directly tied to mortgage-specific bonds know as mortgage-backed securities (MBS).  MBS tend to move a lot like US Treasuries despite trends of slightly stronger or weaker performance and Treasuries are the quintessential bellwether for the US bond market.  All that to say, if it matters to the bond market, it's going to have an impact on mortgage rates. One of the things that historically matters to bonds a great deal is inflation .  Inflation is measured in a variety of ways but there are 2 big, official government reports each month that stand out.  One of them, the Consumer Price Index, came out today.  It showed year-over-year inflation at 7.0%--the highest in decades. The post-covid surge in inflation has definitely already taken a toll on interest rates, and that has played out in several ways.  Notably at the moment, it is not really playing out in terms of economic reports causing surprises that push rates higher in the short term.  In other words, inflation hit 7.0% today and rates didn't care. One key reason for rates' nonchalant attitude is that the market expected the number to be exactly 7.0% today.  The market also expects that number to come down once the data cycle catches up with the bigger jumps in inflation seen in the middle of 2021.  If we were to see inflation jump by bigger-than-expected amounts in the coming months, rates would probably have a tougher time looking the other way.  Even today, the bonds that underlie mortgage rates didn't make any significant gains, but lenders have been so conservative with loan pricing that they were able to offer solid improvements simply because bonds were sideways.
Is The Worst Over For the Early 2022 Mortgage Rate Spike? Tue, 11 Jan 2022 21:39:20 GMT

2022 has gotten off to a bad start for the bond market and consequently, mortgage rates.  The pace has been on the aggressive side with the average lender seeing an increase of more than a quarter of a point in a week and 3/8ths of a point in 2 weeks.  The most prevalent 30yr fixed quotes are now in the 3.625% range, up from 3.25% at the end of December.   We've seen rates move higher, faster, but very rarely .  When this type of momentum is underway, we batten down the proverbial hatches and wait for some evidence that the sky is clearing.  This will usually take the form of smaller losses and eventually a push back in the other direction.  The first two days of this week have potentially filled that role. Yesterday was a bit more equivocal.  Rates hit their highest levels since the start of the pandemic early in the day, but the bond market stabilized by the end of the day.  Today was slightly more encouraging .  Bonds still lost ground in the morning, but less than yesterday.  They improved steadily from the mid-morning hours following congressional testimony from Fed Chair Powell. In the bigger picture, today's friendly bounce in the bond market isn't anything special, but it provided a nice contrast to the AM weakness.  It also gave us our best example of a corrective bounce since the rate spike began in earnest last week.  By the afternoon, almost every lender issued a positive reprice, offering lower rates compared to this morning's initial offerings.  For context, that leaves the average lender still noticeably higher than Friday, but slightly better than yesterday afternoon.
Mortgage Rates Spiking at Fastest Pace in a Long Time Mon, 10 Jan 2022 20:24:20 GMT

Last week wasn't a great one for mortgage rates.  Most lenders were roughly a quarter of a point higher on a conventional 30yr fixed scenario by Friday.  This morning's additional weakness in the bond market brings the average conventional 30yr fixed scenario closer to 3.625% (as always, rate quotes depend on multiple factors, and the overall range is very wide). There are several ways to reconcile the market movement underlying the rate spike.  The Fed is the easiest target as last week's "minutes" suggested a faster timeline for balance sheet normalization.  Those are fancy words that mean the Fed will be decreasing its rate-friendly bond purchases sooner/faster than previously expected.  Other explanations include the notion that omicron could substantially hasten the endemic phase of covid.  Finally, bond market supply has been elevated over the past 2 weeks, and higher supply means higher rates, all other things being equal. With any move as abrupt as this, there's always a chance that technical factors will help push back in the other direction.  Simply put, traders will eventually have sold enough bonds that the new, lower prices (and higher yields) are attractive enough to bring buyers back into the market.  There's no telling exactly when that will happen or how much of a recovery it could induce--only that it becomes more likely the higher rates go.
Highest Mortgage Rates in Nearly 2 Years Fri, 07 Jan 2022 22:00:00 GMT

Seemingly overnight, the mortgage rate narrative has changed rather drastically, at least in relative terms. While rates had risen gradually from near-all-time lows in August, they were still in a historically low range by the end of December. A week later and we're at the highest levels in 2 years . There are all kinds of ways to quantify the movement, but a chart provides the clearest picture. In other words, rates weren't ridiculously far from longer-term highs even before this week.  It's just a bit of a surprise to see how quickly they closed that gap.   So WHY did it happen? Rates are based primarily on the bond market and bonds have several concerns at the moment. The biggest general concern is the shift in the narrative surrounding covid and the omicron variant.  Traders were already prepared for a big uptick in covid case counts based on the omicron surge in other countries and subsequently in certain parts of the US in December, but they're also cognizant of the possibility that omicron may not impact the economy in the same way as the delta variant.  At the same time, there's speculation that record-setting cases counts could hasten covid's endemic status much earlier than previously expected.  Bonds feed on fear, turmoil, and risk aversion. If the pandemic outlook might be improving, the net effect is upward pressure on rates, all other things being equal.  Whether they're right or wrong, traders are looking past what may be a challenging January in terms of covid and forward to a more economically palatable phase of the pandemic.  At the very least, they're positioning for the possibility, and in this case, that means higher rates.

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