MORTGAGE RATES DECLINE (AGAIN)
Mortgage rates went down in the first quarter of 2016 as investors drove up the price of mortgage bonds (see chart). Mortgage pricing gets better when bond prices go up. The first run-up in bond prices was caused by global growth worries and a “flight to quality” in the financial markets. Investors started buying government bonds on fears that an economic slowdown in China would spill over into the rest of the world. There were also other fear factors at play in the markets, and government bond yields remain low to this day. Mortgage bonds look very attractive by comparison because the yield on mortgage bonds is higher than the yield on government bonds.
The second factor that caused mortgage pricing to improve, was the series of recent statements made by the Fed and also comments made by Fed Chair Janet Yellen. The Fed has indicated that they will continue their mortgage bond buying program until the Fed Funds rate is in the 1.5 – 2% range. The recent Fed statements and Janet Yellen’s comments seem to indicate that this is not likely to occur until sometime in late 2017. The Fed is the largest buyer of mortgage bonds in the market. Bond prices rallied (and mortgage pricing improved) once the market got wind of the fact that the Fed’s bond-buying program is likely to continue until late 2017.
All that being said, we shouldn’t get too comfortable that mortgage pricing will remain as good as it is right now. There are only a few instances in the past 18 months where mortgage pricing has been this good. The last time this happened, bond prices fell off a cliff and mortgage pricing got worse very quickly. At the moment, bond investors are concerned with the “pre-payment risk” of borrowers refinancing their higher-rate mortgages. This may put a damper on mortgage pricing moving forward.
Contact me for further information about current market conditions, and what they may mean for your situation.