When you’re in the market for a new mortgage, whether it’s for a purchase or a refinance, you want to get the very best rate and terms as possible. Sometimes though the process can get a little too crowded with too much information. I often get asked the question, “What are rates going to do?” And while I can give you my personal idea on where rates might be headed I’ll also qualify that remark by saying no one knows what interest rates are going to do and if they do tell you they know, they’re not really telling you the absolute truth. No one actually knows. But there are some indicators, mostly short term.
Conventional Mortgage Rates
Conventional mortgage rates follow a specific set of indexes. These indexes can react to recently released economic data. Here’s why: rates are typically tied to a mortgage bond or a Treasury. These indexes can be bought and sold just like any stock, mutual fund or bond. Financial analysts will typically tell you when economic news comes out that is bullish for the economy, investors tend to put more money into stocks and out of bonds. Stocks can yield greater returns over time, but bonds will not. Comparatively bond yields are very low. Yet that’s not the allure of bonds. The allure of bonds is safety. An investor puts money into bonds to get out of a potentially volatile stock market, not for hefty returns. When investors think the economy is headed for a slowdown, more funds will be funneled into bonds. At least that’s the historical theory.
Interest rates can react to certain economic reports and some of these reports carry greater weight compared to others. Inflation is one of those. When the economy appears to overheat, prices for various goods and services can rise due to increased demand. Unemployment rates and job growth are also very important. Other reports such as Home Ownership Rates or Construction Spending will have a lesser effect and typically not very much at all.
Impact of Economic Reports on Interest Rates
Economic reports are released on a scheduled, regular basis. Unemployment and jobs numbers are released on the first business Friday of each month and this is a very good example for those who are trying to time markets. Let’s say someone is thinking about refinancing and already has an application submitted and documented. The only missing ingredient is the rate. So, the individual sees that the Unemployment Report is coming up in two weeks. Thinking the economy is experiencing a slowdown in certain sectors, the decision is to wait for the jobs numbers to be released. If the assumption is correct, interest rates might drop another 0.125% that day.
Time goes by and the numbers are finally released. But the employment numbers are not what was expected. Instead of slower growth and fewer jobs created, the opposite occurred. Unemployment fell, more jobs were created than the “analysts” were expecting, and wage growth was strong as well. The result? Investors pulled money out of mortgage bonds and back into the stock market. Due to the selloff in the bond market, prices for bonds move lower and yields for bonds had to rise in order to attract buyers. And as the markets work, it takes quite a bit to move rates lower but sometimes just a hint of inflation and the onset of a booming economy and rates zoom. In this example, interest rates didn’t fall by 0.125%. Instead, interest rates rose by 0.375%, or a spread of 0.50% from the expectation and the end result.
The lesson here needs to be repeated. Don’t try and time the markets. Even the best of market analysts get it wrong. If interest rates make sense now, don’t hold off for just one more drip. Take the available rate. If not, the opportunity may be in your rearview mirror for a long time.