What’s driving current mortgage rates?
Mortgage rates today are a mixed bag of increases and decreases. Weekly unemployment claims came in lower than expected (260,000 versus 265,000), but this bip is likely due to the hurricanes and not because our jobs picture suddenly became rosy.
And, as mentioned previously, it’s likely to be ignored as we all wait for tomorrow’s report, which is actually important. So if you feel like gambling, wait for tomorrow. If you don’t, lock today. It’s that simple.
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Mortgage rates today
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Everything is still pretty much in limbo, perhaps pointing slightly in a higher direction, as investors wait for the “real deal” tomorrow in the form of the Monthly Employment Situation data. Here’s what we have now:
- Major stock indexes are up but only slightly (almost neutral)
- Gold prices fell $3 to a patriotic $1,776 per ounce (marginally bad for rates, because rising gold usually corresponds to uncertain economic conditions, which are good for rates)
- Oil increased $1 to $50 a barrel (slightly bad because rising energy prices can cause inflation)
- The yield on ten-year Treasuries is STILL unchanged at 2.33 percent, and it is very unusual for it to go unchanged for this long (neutral)
- CNNMoney’s Fear Greed Index rose three points to an insanely high 93. This is bad for rates, because the direction is toward a more “greedy” state. And the index is in the “Extreme Greed” range. “Greedy” investors tend to turn to stocks and from bonds and mortgage-backed securities. When everyone wants to sell their bonds, that pushes prices lower, which in turn causes rates to rise (see below).
Mortgage rates today are still very favorable for home buyers. The climate is highly-encouraging for real estate purchases.
Tomorrow brings the most important data of the month — the Monthly Employment Situation report. Analysts expect that the unemployment rate will remain unchanged at 4.4 percent, but that average hourly earnings will rise .3 percent.
They also anticipate that jobs added will be dismal — 75,000 new non-farm payrolls after the previous month’s 156,000. probably due to seasonal factors and hurricane issues.
On the other hand, earthquake damage requires a lot of work to repair, and if that causes higher-than-expected job additions, rates could rise. This report, being affected by a one-time (hopefully) event, may get less attention than it usually does.
Rate lock recommendation
If I had a loan that was closing very soon, or just a low tolerance for risk. I’d lock so can sleep at night. Otherwise, I would float until at least Thursday. Here’s the recommendation:
- LOCK if closing in 7 days
- LOCK if closing in 15 days
- LOCK if closing in 30 days
- FLOAT if closing in 45 days
- FLOAT if closing in 60 days
What causes rates to rise and fall?
Mortgage interest rates depend on a great deal on the expectations of investors. Good economic news tends to be bad for interest rates, because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.
For example, suppose that two years ago, you bought a $1,000 bond paying five percent interest ($50) each year. (This is called its “coupon rate.”) That’s a pretty good rate today, so lots of investors want to buy it from you. You sell your $1,000 bond for $1,200.
When rates fall
The buyer gets the same $50 a year in interest that you were getting. However, because he paid more for the bond, his interest rate is not five percent.
- Your interest rate: $50 annual interest / $1,000 = 5.0%
- Your buyer’s interest rate: $50 annual interest / $1,200 = 4.2%
The buyer gets an interest rate, or yield, of only 4.2 percent. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.
When rates rise
However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.
Imagine that you have your $1,000 bond, but you can’t sell it for $1,000, because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:
- $50 annual interest / $700 = 7.1%
The buyer’s interest rate is now slightly more than seven percent.
Verify your new rate (Jan 10th, 2018)
Gina Pogol writes about personal finance, credit, mortgages and real estate. She loves helping consumers understand complex and intimidating topics. She can be reached on Twitter at @GinaPogol.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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