Mortgage Rate Volatility and the End of the Refinance Boom

Kind of feels like an epic hangover.  The low low rate party that seemed like it would never end, has come to a decidedly abrupt change in direction.  The sunlight is streaming into the windows, our clothes are all wrinkled, and there are spilled drinks and confetti everywhere.  We’ve seen a handful of days in the bond market this month that have been extremely precipitous in speed and size of the deterioration.   Since April of 2010, every time I have locked a loan it has been a bittersweet and slightly regrettable experience.  Of course every loan must be locked at some point in the process, but it was a strange new frustration to see rates improve so steadily and relentlessly.  We would lock and fund, and then within a day or so rates would just get better.  I got in the habit of floating everyone for as long as possible to capture as much of the improvement as we could. {C} The grand finale of this downward trend appears to come in with the US Fed’s second round of Quantitative Easing, aka “QE2”.  My initial thought when the announcement was made was that this would be great news for bonds (when the government announces that it will purchase $600 BILLION dollars worth of bonds in the coming 6 months, its usually a clear indication of good bond news).  While good bond news is usually great news for mortgage rates, this time was the exception.  You see, the government buying money from itself is another way of describing “printing money” to add to our economy… This is an inflationary act, as adding money to the system makes all the other money a little less valuable.  Inflation is always HORRIBLE news for bonds, but lately since the economy has been so pathetic, these inflationary actions have actually NOT produced inflation (but the “potential for future inflation” is another story).

The timing of this QE2 has proven to be quite horrible in the short term for mortgage rates.  The purchasing began right at the same time that some strong signals of an improving economy arrived in a variety of places.  This created a fear of inflation for the first time all year which put a scare into the bond market, and drove rates up (11/12/2010 –  11/15/2010 to be exact) our first HUGE shift towards higher mortgage rates.

And then just yesterday (Dec 1, 2010), we had some very strong job growth numbers combined with news that the US government would also participate in purchasing EUROPEAN BONDS.  This is a horrible and unpredictable double whammy of pain for our mortgage rates.  I was looking to European economic weakness as something that would cause a “flight to quality” bump for our mortgage bonds… and now the flight appears that it may be AWAY from the US and into Europe.

Anyway —  rates continue to be super low, but the sub-4% fixed rates may be on their way out, maybe forever.  The low rate party is now having a change of tone,  the energy level is lower, and lots of fun people have gone home.  I continue to expect a correction, but every day that it doesn’t come is making both the chances of a correction lower, as well as the size of the correction.  Please CORRECT! Come back to this party! I wish it would never end.

I have no real opinion about QE2.  I am only interested in it as far as it effects my little mortgage universe.  But that said, it appears to be having a positive effect on our economy.  I’m happy to host any conversation here about QE2 if someone wants to make a comment.  I’m all ears (digitally speaking).

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