WeeklyBasis 6/1/2010: Rationale For Rate Lock Advisory

Zero-point rates on 30yr fixed Conforming loans (up to $729k) begin this week up about .125% after touching record low levels the week of May 17, and rates on Jumbo loans (above $729k) are steady. Rates are holding just above record lows because global investors continue to be net buyers of Treasury and mortgage bonds as a safe haven from European debt problems and stock weakness. When mortgage bond prices rise on these buying rallies, rates drop.

Eurozone Problems Lower U.S. Rates
Debt concerns in Eurozone countries continue as we enter June, with ratings agency Fitch downgrading Spain from AAA to AA+ on Friday, and France acknowledging that their ratings are justifiably at risk. As for stocks, the Dow and S&P lost 7.9% and 8.2% respectively in May, the worst losses in five quarters.

To calm markets last week, China stated they weren’t shifting away from European bonds, and it worked for a couple days. Stocks rallied and U.S. mortgage and Treasury bonds sold off, pushing rates higher.

But to begin this week, the data are proving that most institutional investors and central banks are net sellers of Eurozone debt.

This will help keep rates low short-term, but it’s unreasonable to expect that rates can go lower.

Before the week of May 17, we only touched on record low rates (which are .125% lower than today’s average rates shown below) two other times since Freddie Mac started keeping the official records in 1971: April 2009 and November 2009. And in both cases, rates rose just as quickly.

The reason is that there are too many factors preventing mortgage bonds (that rates are tied to) from rallying past current price levels—not the least of which is the Fed’s $1.25t mortgage bond portfolio they will look to start selling in the next 12-24 months.

Rate Lock Advisory for Week of June 1
Besides these global economic topics influencing markets this week, the high points of the economic calendar are as follows. The WeeklyBasis rate lock bias continues for the second week—this is the right time for borrowers to lock rates at the lowest possible levels.

NAR’s April Pending Home Sales Tuesday, which will show us how many homes went into contract and these numbers will still be skewed by the April 30 expiration of the Federal homebuyer tax credit.

There are five public speeches this week on the economic outlook by voting members of the Fed’s rate setting committee, including Kansas City Fed president Thomas Hoenig who has voted against keeping the overnight Fed Funds Rate at .25% at all three 2010 Fed meetings—he thinks inflation is a threat and his public comments usually cause rates to rise.

The Bureau of Labor Statistics jobs report Friday is expected to show 508k jobs gained in May, which would be a monumental single-month gain since 573k jobs were added from January through April. If this the actual number is close to this, rates will rise on improving economic sentiment—even if the unemployment rate doesn’t move much from it’s 9.9% mark.

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CONFORMING RATES ($200,000 – $417,000) – 0 POINT
30 Year: 4.875% (4.99% APR)
FHA 30 Year: 4.75% (4.89% APR)
5/1 ARM: 3.625% (3.74% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 0 POINT
30 Year: 5.125% (5.24% APR)
FHA 30 Year: 5.0% (5.13% APR)
5/1 ARM: 4.25% (4.37% APR)

JUMBO RATES ($729,751 – $2,00,000) – 1 POINT
30 Year: 5.375% (5.49% APR)
5/1 ARM: 4.5% (4.62% APR)