In the past few weeks, markets have steadily driven mortgage rates up. Last week the 30-year fixed rate experienced its largest single-week rise in nearly a year, jumping to 3.23%. Refinance volume has come down too, with this week’s weekly mortgage application survey from the MBA showing refis dropping to 67.5% of total applications, down from 68.5% the week before. All this movement has been driven by the markets, with no change in the Fed’s key rates.
According to Joel Kan (pictured), the MBA’s AVP of economic and industry forecasting, these rate hikes are the product of a more positive economic outlook. Markets are noting the progress of a $2 trillion stimulus package and the rapid rate of vaccinations across the US as signs that the economy can get back underway in the second half of the year. While vaccination rates translating to effective control of the pandemic still relies on some assumptions, the data is becoming clearer that once vaccination thresholds are met, more businesses should be allowed to reopen. Many of those businesses, Kan explained, are already positioning themselves for a reopening, increasing demand for key inputs across the economy. It’s his view that we’re now entering a period of considerable rate volatility as markets rise and fall on key epidemiological and economic data.
“If you look at last Thursday, the 10-year took a 20-basis point swing within one day. It’s certainly possible that we could see rates climb higher, faster,” Kan said. “But on the flip side we’ve also seen times where rates surprise on the low side if some other shock pushes things the other way. The way to characterize what we’ve seen over the past couple weeks is that there’s more volatility now given the potential for incoming information to change what markets are thinking about the future.”
Read more: First Community Mortgage secures major acquisition
Kan and the MBA’s baseline mortgage rate prediction is that rates will rise to around 3.5% by the end of the year. However, that comes with the significant caveat of no major events rocking the boat in any way. Now almost a year out from the initial lockdown orders in North America, most of us have a recently lived experience of how new information can change the whole picture.
The fact that this rise is happening without the Fed actually hiking up its rate has precedent, too. Kan explained that in the 2013 ‘taper tantrum,’ communication from the Fed that it might scale back its quantitative easing resulted in a 100bps jump in rates driven by markets alone. Kan believes that after the Fed meeting later this month, chairman Jerome Powell will have to be extremely careful in his communication to not set off additional volatility in the markets.
Beyond communication, the Fed’s options appear somewhat limited, having already slashed their own rates to the bone. Kan does believe Powell still has some options when it comes to stabilizing rates, however, largely around scaling up quantitative easing. By work or action, the Fed has to send the right signals to the markets.
Read more: Deephaven rolls out new non-QM products for brokers
If today’s volatility persists within an acceptable band and no secular shock or miscommunication from the Fed comes, then Kan believes we can expect rates to slowly tick up this year. For mortgage professionals that means the refi boom is likely coming to its end. Individual originators are already doing their best to lock in the lowest rates possible for borrowers trying to refinance now. Speed may be the key differentiator now as the market begins to tighten.
“In terms of refis, I think now it’s a matter of responding quickly to lock in as low a rate as possible,” Kan said. “On the purchase side, the picture still seems to be inventory driven more than anything. Staying competitive on purchase, too, closing times are critical as borrowers need to stay competitive. Given this volatility, it’s key to get the borrower the right rate incentive, to close quickly and to act quickly.”