≡ Menu

Where are mortgage rates headed?

“Where are mortgage rates headed, John—what are your predictions?”  That is the question that I am asked most often every day; and the answer is complicated, to say the very least.  I can tell you with great certainty what’s happening today with

 rates and what the general mood of the market is.  However, answering the question is like walking through fog–the further out you look the less you can see.

Therefore, instead of watching Mortgage Backed Securities (MBS) and their trend lines, daily averages, 100-day moving averages, candlesticks, death-crosses, and floors and ceilings, I prefer a more reliable barometer to help me predict rate movements.

These three factors in today’s market, which are easy to watch for, determine the direction of rates:

  1. Federal Reserve policy – QE1- QE3
  2. Economic health – Job growth – GDP – Inflation
  3. Europe, Japan, China – PIIGS – Japan’s QE

First, let’s take a look at the Federal Reserve’s monetary policy over the last five years, a policy that has arguably had the largest impact on mortgage rates.  The Federal Reserve System (aka the Federal Reserve and, informally, the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act.  The Fed is currently buying $50 billion a month in MBS.  This is creating demand and driving the yields down, which keeps our rates low.  Recently, the Fed hinted at a tapering of this program, the mere mention of which resulted in the rates shooting up .375% in one day. This is something to be watched closely as recent movements in rates have proven that even a Fed hint at a possible move is a major market mover.

The next thing to watch is the overall economic health of our economy, including GDP growth, unemployment rate, and any signs of inflation. Obviously, because the Fed’s QE program is designed to help all these indicators, we need to watch for signs of improvement.  An unemployment drop into the 6% range or any signs of inflation will not only drive rates up from a purely organic stance but will also encourage the Fed to taper MBS buying even faster than originally anticipated. That one-two punch would be a “lights-out” moment for low rates.

The last thing to watch for is outside influence on our market.  Over the past few years trouble in Europe, especially the PIIGS (Portugal, Ireland, Italy, Greece, and Spain), has driven international investors to look for safer harbors; and US treasuries and MBS have been the benefactors of this demand for safe investment.  Lately, though, Europe has seemed to be stabilizing, and foreign investors are pulling back from American investments.  Japan has renewed its own QE program, and we should keep an eye on that market because its volatility may drive those investors to our shores.  China–what to say about China?  Some reports have China in its own housing bubble with overall GDP growth dropping significantly over the last few years.   As I see it, it is difficult to interpret the information provided by the Chinese government. Keep a close watch on any news coming from China as its economy and the world’s are closely related to the US economy:  Any negative news would translate to better rates for us.

Obviously rates are hard to predict with any certainty, but my sense of the matter tells me that we are headed up and that the bottom is behind us. We will certainly have our down days over the next few quarters, but it will be two steps forward to every one step back.  That being said, I must confess that I put away my crystal ball and my prognosticator cap a long time ago; so use your own senses and watch the market movers that I have discussed in this article.

John McClellan

Branch Manager

Supreme Lending

www.JohnMcClellan.com

 

Be Sociable, Share!
{ 0 comments… add one }

Leave a Comment

Comments links are nofollow free!