Risky float, but….

Many people have asked me lately why mortgage interest rates are actually heading down towards multiyear levels at a time when the US economy is performing better than it was in 2013 when rates reached their lows, and at the same time the Federal Reserve is pushing short term interest rates higher.  Although the answer to this question is very complex, two of the most influential aspects are 1 – The global economy, and 2 – The tapering of fear of what the Fed hiking rates will mean to the long end of the bond market (such as 30-year mortgage bonds).

The Global Economy – In the recent months, we have seen China suffer deep losses in their stock market, Japan lowered their equivalent to the Fed Funds Rate to a negative number to help stimulate growth, and Europe is also considering reducing their interest rate for the same reason.  Since we are all one interconnected global economy, this has driven a great deal of investment money into the safer and higher yielding US bond market.  As a result, yields have been forced lower here in the US and bond prices have been pushed higher.

Reduced Fear of the Fed – The fear of the Federal Reserve raising short term interest rates caused mortgage rates to move higher in the second half of 2015.  Many feared that as the Fed raised rates, mortgage rates would also climb higher.  However, the long end of the market (30-year mortgage bonds for example) doesn’t necessarily care what happens on the short end.  It is still inflation that primarily drives long term interest rates higher.  Since inflation has been near anemic levels, mortgage rates have remained low.

2016 could be the year that we match the lowest interest rates in history.  Remember, if your current rate is higher than the current rate of a no-cost loan, take the opportunity to refinance now.  You can always do another no cost refinance in six months if rates go even lower at that time.

With mortgage bonds appearing to have capped out, locking in loans that need to close in the near term appears to be prudent.  Purging the top of a difficult ceiling, it is too early to tell if will break through this or not. If you are comfortable with the rate here, we will still suggest a locking bias.  If you are one that wants to hold out and play the game of ‘see what happens’, then you can float and watch the market very carefully as you do so.