At the close of yesterday’s work, there was hope. Well, to be honest, there’s still hope, but it’s a lot less immediate, and it’s certainly not the first thing that comes to mind today.
Yesterday’s hope was born from a combination of factors. Rates have risen at a breakneck pace since early August, accelerating to the most worrying pace of the week following the most recent release of the Consumer Price Index (CPI), a key inflation report that drives Fed decisions.
The CPI got a boost due to the proximity of the next Fed meeting (the one we just experienced yesterday). As a result, market participants expected the Fed to signal an even firmer commitment to its rate hike prospects. Not only has this happened, but in the Fed’s summary of forecasts, there has been a sharp shift in expectations for even higher rates in the coming months and years.
Sure, Fed members can’t begin to guarantee or even reasonably predict that rates will be high in 2023-2025 as yesterday’s forecasts suggested, but if they were to guess those levels based on what they know today, those are theirs. hypothesis.
How high do the rates see? It does not matter. I could tell you that nearly a third of the Fed sees the Fed Funds Rate at 5.0% by the end of 2023, but this is the Fed Funds Rate, not mortgage rates. The two are both similar and different, and if you’re not sure why, be sure to check out our primer on the subject here: No, the Fed’s hike means nothing for mortgage rates.
Perhaps more significant was the fact that this represented a roughly 1.0% increase in the Fed’s rate hike outlook from the last forecast release scheduled in June. For those who have not clicked on the link above or who need to persuade otherwise, we can pause for a moment to appreciate that, in addition to the 1.0% cap hike, the same Fed Funds rate is now. 1.5% higher than it was on June 14, and despite all this, today’s mortgage rates are nowhere higher than 1.5%. And yesterday’s mortgage rates were actually much closer to June levels.
AND THAT IS the source of hope. Or at least she was, starting yesterday afternoon. In other words, the market has managed to overcome what appeared to be bad news for the Fed rates with rates actually moving a little lower! The most optimistic hope was that such a major event could act as a turning point after climbing to the highest levels of the past 14 years.
But everything has changed today. The bond market had huge second thoughts about yesterday’s resilience. The reasons behind this remain a matter of debate among market participants. There is a long list of seemingly convenient excuses, but none are enough to explain today’s carnage. It’s not like I’m the only person who knows all about why the market has moved a certain way today. I am simply saying that whether some event, piece of data or other discreet root cause was responsible for today, it was far from obvious. I see / hear every market observer I watch say the same thing.
Once we get to the point of such humble admissions, further analysis of market motivation tends to get into the weeds with a heavy reliance on the balance and nature of trading positions leading up and away from the Fed day. Suffice it to say that the move was unexpected at yesterday’s close of business, and was sweeping and aggressive in a way rarely seen in the absence of the aforementioned neat scapegoats.
Such movements in the bond market mean equally troubling news for mortgage rates. There is actually no perfect way to convey the current top tier 30-year fixed rate position because it varies greatly depending on the lender’s pricing structure and the borrower’s pricing preferences. The big problem is the presence of upfront costs. They are inevitable in many cases. In others, lenders use them to offer customers a way to “buy back” at a lower rate.
To be sure, while the “points” or “purchases” are not good or bad, they are an interest expense in the same way that the interest part of the mortgage payment is. You’re just paying it upfront instead of over time.
All of which is to say that the rates that appear in many news headlines are hopelessly low. Freddie Mac’s weekly poll just came out today at 6.29%. Not only does this require almost a full “point” of initial cost, but data is very outdated at this point as well. If we could magically remove the mortgage market’s ability to rely on points as part of the rate quotation equation, and if we could magically track daily rate changes, including end-of-day “repricing” from panicked lenders, we would end up with a fixed mortgage rate of over 30 years of at least 6.625%.