Independence Day meant more things than barbecues, beer, and baseball this year. Mortgage bond investors didn't like the idea of independence from Federal Reserve Bank subsidies.
Just before the holiday, I suggested that the Fed was sending stabilizing signals that the quantitative easing programs wouldn't be completely abandoned. Last week, there was only one fear; the non-farm payrolls report released on Friday (July 5, 2013). That report exceeded expectations and the mortgage bond market nearly collapsed-- rates spiked to as high as 4.875% for conventional loans and 4.75% for VA/FHA loans.
One thing which contributed to Friday's volatility was that it was a day after a holiday. The trading desks operated with skeleton crews of junior traders, most of which were nervously selling befoe the weekend. When their senior colleagues returned on Monday, they saw buying opportunities in mortgage bonds. The mortgage bond market recovered a bit more than half of its losses, in two trading sessions, and rates settled in at 4.625% for conventional loans and 4.5% for VA/FHA. Today, the mortgage bond market is slightly off on news that wholesale investory stocks are being depeleted.
All eyes were on the release of the June meeting of the FOMC minutes. The consensus is that the bad news is already out and, since the Fed Governors are split on the idea of QE tapering, the bond market is getting used to the idea that Fed action (or inaction) won't ruin the bond market.
Where do we go from here?
I look to investment adviser Lenore Hawkins a lot. She and I both share free market views and she has a good understanding of how non-subsidized economies should act. From her July newsletter:
While many are criticizing the Fed for the tumult the comments caused in the markets, we think they ought to be applauded for injecting uncertainty into a market that was becoming entirely too complacent about the degree of excessive leverage being used to combat the low rates of return imposed by the Fed’s financial repression.
As we delve deeper into the data, and you knew we were going to go there, the job growth continues to be among lower quality jobs. The unemployment rate held steady at 7.6%, but the U6 (broader employment metric) jumped from 13.8% to 14.3% caused by a surge in part-time work. Full-time jobs dropped by 240k and in fact, since the start of the year only 130k full-time jobs have been added while 557k part-time jobs have been added. The unemployment rate would today be 11.1% if the participation rate was the same as it was pre-recession. Despite the headlines, Main Street is still struggling.
I agree with Lenore--the grass isn't necessarily greener in this economy...yet. As economic data materialize this summer, we may realize that the QE bond buying program is (a) ineffective and (b) causing little asset bubbles (think real estate prices in San Diego)--a classic case of the unintended consequences of bad monetary policy.
I thnk we're at a crossroads of a mini-panic. The higher mortgage rates have certainly slowed mortgage applications, listings aren't moving as quickly as they did 4-5 months ago, and sellers are rushing to list homes for fear that higher mortgage rates will tank the real estate market.
The Fed isn't going to let mortgage rates tank the real estate market. Bernanke sees a housing rebound as essential to a broader-based economic recovery. On the other hand, Bernanke understands that QE has to end...eventually.
This summer should continue to be choppy. I expect the mortgage bond market to bounce around a lot this summer as we all get used to a "new normal". That "new normal should have mortgage rates bouncing from as low as 4.25% up to 5%. Currently, best-execution conventional rates are around 4.625% and best execution VA/FHA rates are around 4.5%. Jumbo rates are still over one percentage point higher with executions in the 5.75%-6.125% range
As volatility is the word of the summer, I still advise home buyers to lock-in rates at application--floating is just too risky.