A Common Theme: Stability
Between my phone ringing every 30 to 60 seconds, below I will attempt to relate what is happening in the financial markets and what it means to mortgage interest rates. But, before I begin, please note a common theme: STABILITY. Any action taken by the Fed is to support stability in the financial markets and support the flow of credit to households and businesses to achieve their goal of maximum employment and price stability. This is their mandate.
The cliff notes version
- Jay Powell, the Federal Reserve chair, announced emergency actions taken on Sunday to "ease hardships caused by the disruptions to the economy” and to “support a swift return to normal once they’ve past.” -- p.s. nothing happening now is "normal".
- The Fed's role is mandated by congress to promote maximum employment and stable prices for the american people. Additionally they have the responsibility to provide stability to the financial systems.
- The Fed reduced it's target range to their policy interest rate by 1% bringing it “close to zero”. This does not mean mortgage rates are going to 0%.
- Before the virus, economic outlook had been strong, job gains were good, wages were rising and US banks were strong and liquid. US treasuries were stable and liquid.
- Since the virus, the cost of credit has risen, stock markets are down sharply with high volatility in the financial markets. Most importantly for mortgages, previously safe US Treasuries are stressed with impaired liquidity.
- Lack of liquidity (i.e. the flow of money) is the main culprit as to what caused such a sharp rise in mortgage rates of recent. It's not lenders padding their pockets.
- Fed Action: To purchase 500 BILLION of treasury securities over the coming months to provide stability and liquidity to US treasuries.
- Fed Action: To purchase 200 BILLION of agency mortgage securities to restore smooth market functions so credit can continue to flow.
- Fed Action: Reduced discount window loans by 1.5%. This supports liquidity in the banking system and encourages banks to hit up the window so they can lend. This will provide lenders more credit to fund loans.
- Lenders are still over-capacity from the last time rates tanked so don't expect rates to drop immediately or to the levels they were in early March.
- If you locked in your rate within the last 2 weeks, consider yourself lucky to be on the train. Please do not jump off and try and get on the next one coming.
- The direction of mortgage rates is highly unclear. I do not expect rates to significantly decline immediately and it could take weeks.
The (3) takeaways
This should improve interest rates again
I know that many clients missed the train on the super-low interest rates 2 weeks ago. I mentioned an analogy in my recent blog that there were some that were waiting for a train that never came, well... here comes another. Although I think our industry will be better prepared for it this time around, I don't feel we will see rates dip too much until we have more capacity and some sort of direction with the market. More importantly, our industry needs to fund the record application loan volume that was originated since March 2.
So, please don't wait. I can't stress enough that you will never hit the market rock-bottom or get it perfect. If a refinance works for you where rates are today, then do it. If you are buying a home and the payment is comfortable, lock it in. If you are trying to get more, I would ask yourself if it's worth the risk? Do you risk the savings or risk adding thousands in costs to your budget? I would also ask a more difficult question... am I being too greedy?
Lenders aren't padding their pockets
Lenders aren't just raking it in by offering the rates available today. This is a common question and sentiment among consumers and loan officers. Well, this isn't how it works. Yes, capacity issues can create a favorable supply and demand scenario for the lender, but that's not what really is driving this train. Higher mortgage rates are fueled by the lack of stability in treasuries, the lack of demand in mortgage securities and the severe volatility and instability of the overall markets. Remember the theme? Right... stability. Until there is stability in the financial markets, we won't see rates drop.
The toilet paper analogy
Imagine you're in the parking lot at Walmart. You see this huge sign on the front of the building saying the price of toilet paper is $10 per roll. It's expensive, but you REALLY need toilet paper! You hear news that Walmart is expecting over 1 million rolls of toilet paper to this Walmart and it's expected "soon". Walmart said nothing about the price of toilet paper going down, only that they would be getting a BUNCH of supply over the coming months.
Because of this good news and the massive shortage of toilet paper, crowds start to flock to the Walmart. You see the rows of cars coming in. They fill the lot and many start parking across the street. There are so many people coming... it's going to be chaos.
Some people take off running for the door eager to get in and buy the remaining toilet paper regardless of what it costs. I mean this toilet paper was really going to help things at home!
Some just walk slowly in the front door only find the lines at the toilet paper isle and registers growing at an astounding rate. They then freak out and start running. They only were able to get a few rolls and it wasn't exactly what they needed, but it certainly helped. The long lines are going to suck as well, but at least... at least they have toilet paper.
Some are still standing outside, watching the big sign and the price of toilet paper, hoping it will go down... it's gotta go down right? There's a bunch of toilet paper coming! They start to reason and convince themselves that these people rushing in now are pretty stupid to pay $10 a roll for toilet paper and that they can just wait for everyone to clear out.
The moral of the story. The massive influx of supply does not guarantee lower prices. This action by the Fed does not guarantee lower mortgage rates. It is there to fill our dire, and immediate needs and provide stability for a shaken market.