photo © 2010 Tedd Santana | more info (via: Wylio)Mortgage rates in the Bay Area and elsewhere have been on a pretty wild run higher over the last several weeks. We’ve seen a few big jumps happen all in a string, not something we see too often without some corrections along the way.
That this has happened in the face of an economy that continues to struggle in general, and with unemployment and deflation concerns and no clear path to recovery, has kept many of the mortgage market analysts and commentators adequately confused as well.
It’s been like watching a kid on the beach running away from a wave as it rolls up on shore, and finally getting their feet wet. Or in this case, maybe the wave kind of overcame them and knocked them down, got them soaked. And just before being dragged out to sea, the commentary from the analysts has changed in the last day or two from one that was generally defiant, to surrender.
I mean no disrespect here. I know that nobody is capable of predicting the markets. But I look for a variety of opinions, because that gives perspective on the events that impact markets as they unfold, and helps frame conversations for me with my clients. Thats why there are people getting paid to analyze and forecast. And that’s why I read, watch and listen. Ever since Quantitative Easing II was announced by The Federal Reserve, the bond market has been retreating, and the analyst consensus has been pretty heavily oriented toward disbelief, and an expectation that it would come back around most, if not all the way. After all, that was the whole point behind QEII.
Then on Monday, two days ago, we got the first day of what looked like a correction, to bring the rising rate trend to a halt, maybe send it back the other way. It was triggered by an episode of 60 Minutes, where Fed Chairman Ben Bernanke reiterated that he believes our economy is fragile, and stated that he expected unemployment to be elevated for several (4-5) more years. This gave all the collectively defiant analysis the reinforcement it thought it needed to once again remind that this too shall pass.
Until yesterday. The consensus changed quickly. Triggered by tax cut extensions and unemployment benefit extensions, which happened over night. Look at some of the snippets I’ve gathered over the last two days:
Yesterday: The equity market is rallying and the bond market getting hit; that the deficit will increase by $700B is a death knell in the bond and mortgage markets for lower interest rates, in the minds of many it clearly shows that Washington is still paying only lip service to deficit reduction. That is the knee jerk reaction and in an already bearish rate market it doesn’t take much to add selling of fixed income investments. <$700B being a reference to the expected shortfall to the US Treasury due to tax cut extensions…>
Today: Very unusual that there seems to be no one stepping up to try and put some reasoning behind the spike in rates. It is as if it is happening with shock and awe, no consensus or any particular explanation.
Yesterday: With the way the market is reacting to goods news compared to bad news, I would suggest if you are not already doing this, to lock when your deal is approved until this madness stops. Changing advice from float to lock.
Today: Lock (no comments)
Yesterday: Not sure current level of support is strong enough and if we dont hold, we will fall hard in search of new lows. Ouch.
Today: We are in a free fall until bottom can be found
As I was writing this, the bond market seemed to have hit a bottom. The day isn’t over yet, but it bounced, and has started to recover. Nowhere close to erasing yesterday’s move, but no longer looking so much like a free fall. We’ll see… There’s always tomorrow. Or later today. But either way, it struck me as a good time to revisit the Investor Emotion Cycle (chart). When everybody starts thinking the same way, look out.
It can be tough to evaluate your own circumstances when the targets are moving this quickly. But if we’ve seen the bottom in rates, and are in fact headed to a new range, it’s going to stir up quite a few issues for people with adjustable rates, or who had been waiting for something else to fall into place. Sound like you? Let’s talk about it. Contact me below, and let me know what’s up.