Before I get started with this post, I must forewarn you… Nostradamus wasn’t always right. In fact, contrary to popular belief scholars say that his prophecies proved true only 5.73% of the time. But for his part, he certainly turned out to be quite the character. Indeed he has gone down in history as one of the most notable so-called “prophets” the world has ever known.
So in light of today’s topic, while it’s true that I’m going to show you how to generally “predict” what mortgage rates will likely do on a short-term/day-to-day basis, the technique is not exact and should not be exclusively relied upon.
If you’re in the middle of a real estate purchase or refinance and applying for a mortgage, you should heed the advice of your loan officer. The mortgage market is turbulent (especially these days) and doesn’t always follow a rule of thumb. A loan officer who is in the trenches every day and worth their keep will ultimately guide you in the decision of when you should lock in your interest rate. I’ll give my own present-day rate lock advice at the end of this post.
Having shared my little disclaimer with you that this post is purely educational, let’s talk about how you can get an idea of what mortgage rates will do short term or day-to-day. I believe it’s important for folks to know a little bit about this area of concern when using financing to purchase real estate.
Among innumerable other factors, you should know that mortgage rates get their marching orders from two main market forces:
1. The stock market’s Dow Jones Industrial Average (DJIA)
2. The U.S. government’s 10-Year Bond Yield
For simplicity, we’ll just call them the “DOW” and “10-Year Bond” from here on out. Generally speaking, these two markets are in competition with one another. Now as technical as this stuff sounds, we’re going to keep it super simple. We won’t really get into the ‘why’ of the matter; I’m just going to show you quickly where to look and how to decipher what rates will likely do based on what’s happening with these two market forces on a given day.
Let’s talk about where to look first. Each morning the first website I visit is MarketWatch. Here’s a screenshot of the website:
No doubt, I’m sure there are thousands of websites that display this information, but I’ve found that Yahoo does a nice job of making it easy to look at while offering global articles pertinent to what I’m interested in. As I mentioned previously, for now we’re only going to look at two things on this website.
The DOW is not really directly tied to mortgage rates. The relationship is actually rather loose. However, the daily ups and downs do play a role. In a normal market if the DOW is down, it’s a good thing for mortgage rates. All you really need to remember is DOW down, RATES down and vice versa… DOW up, RATES up. It’s really quite ironic in that on one hand, we root for bad economic news because it bodes well for rates, but on the other hand it’s a bummer for the economy outside of the housing market. It is important to note that we usually need to see significant movement up or down for there to be any noticeable impact on mortgage rates. I consider significant movement to be anything more than 100 points in either direction. In the illustration above, you’ll see that the DOW is down -170.33 points. So all other factors aside, in this scenario it’s a bad day for stocks and a good day for rates.
Unlike the DOW, the 10-year bond IS tied directly to mortgage interest rates. This is the indicator we really need to pay attention to. In a normal market, rates will follow it up or down. As with the DOW, there's typically a threshold by which this indicator must move in either direction before we see any movement worth noting. It has been my experience that all other factors aside, movement must be more than 0.05 points up or down to have any real impact on interest rates and/or **pricing. Historically, I consider anything above +0.08or below -0.08to be fairly dramatic and anything above +0.15or below -0.15to be very dramatic. These scenarios will most likely cause rates and/or **pricing to move up or down during the day. You’ll notice in the illustration above that the yield on the 10-year bond was down -0.084 points on the day this particular screen shot was taken and as expected, we did in fact see downward activity in rates or **pricing because the movement was fairly significant. It was another good day for rates. (see definition of 'pricing' below)
** Pricingrefers to the credits or ‘points’ associated with securing the desired interest rate. For example, it may cost a half-point (0.50%) to secure a rate at a certain time of day, but if the DOW and/or 10-year bond moves up significantly during the day the cost may go up or the rate may become unavailable altogether. Of course, this applies vice versa if the market improves.
In conclusion, the market influences that really drive interest rates and the lengths at which 'analysts' go to predict them are ridiculously complex (just ask the guys that use the Japanese Candlestick Technique). However, I do hope the concepts laid out here will at least provide you with a basic understanding of how mortgage rates can be affected day to day. I want to stress again how important it is to rely upon your loan officer to help you determine the right time to lock in your interest rate. Just remember that at the end of the day, it’s nothing more than an educated guess. So have some grace if he or she gets it ‘wrong’. We are in uncharted territory and have seen unprecedented government intervention in recent years. No one has a crystal ball.
I told you earlier that I’d give you my rate lock advice as of the date of this writing (September 6, 2013)…. If you are in agreement with the rate and fees quoted, LOCK ASAP!!! Rates have been artificially so low for so long, there just doesn't seem to be anywhere for them to go but up given all the factors that are pressing in today’s economic atmosphere.... 'just sayin'... I wonder what Nostradamus would say ;o)