WeeklyBasis: December Rate Outlook


Rates should be lower than current record lows given mortgage bond (MBS) strength since Thanksgiving. Rates typically drop when bond prices rise, but lenders aren’t fully passing MBS improvements to consumer rate sheets for two main reasons:

(1) to control extremely high loan volumes

(2) to protect from any sudden MBS selloff and resulting rate spike that would come from any sign of fiscal compromise in Washington.

Meanwhile U.S. economic data for the past two weeks has been mixed. Here is a two-week recap by Bespoke Investment Group where reports in green beat expectations and reports in red were worse than expectations. As you can see, two weeks ago, data came in better and last week it started getting worse—this is one other macro contributor to rates dropping late last week.

Next week’s big data highlight is Friday’s November jobs report, and expectations call for 90k new nonfarm jobs versus 171k created in October. Also the fiscal cliff debates will remain a primary focus.

All this said, the rate outlook for the next two weeks is that rates could drop .125% and could rise by .25% to .375%. Any drop is more likely next week as fiscal cliff debates are still too early on, and will create more uncertainty. Also if the jobs report misses already low expectations, it will help rates as well.

But my bet is still that lawmakers will at least get slightly closer to compromise as we move toward Christmas which will result in higher rates as MBS sell off—and rates always rise faster than they fall when MBS are at record highs and rates are at record lows.

So rate shoppers who have the stomach to float rates should do so with extreme caution. And they should read this primer on rates in the media so they know how to interpret headlines.

Also home buyers mapping out their schedules for December should take a look at this case for why the holidays are the best time to buy a home.