This week’s mortgage rates are hard to compare to last week’s. There are two simple reasons for this. The first is the recent removal of the adverse market fee that artificially increased rates for refinance transactions starting late last summer. The second is the general strength in the bond market compared to last week. Mortgage rates are, after all, based on trading levels in the bond market with higher prices (or lower yields) coinciding with lower rates. Bonds aren’t doing quite as well as they were doing on Monday, but because lenders didn’t rush to drop rates as much as the bond market allowed earlier in the week, they haven’t had to dial things back as much as bonds would suggest over the past 2 days.
Now today, bonds are improving once again, albeit only slightly. Still, the fact that improvement is even on the menu when bonds are operating in their best range since February is impressive. The average mortgage lender isn’t offering quite the same rates seen on Tuesday morning, but they’re close. Moreover, apart from the past few days, we’d have to go back to February to see anything nearly as low.
Much of the bond market improvement is predicated on fear and uncertainty surrounding rising covid case counts, especially as they concern the delta variant of the virus. Investors conclude that, as long as that uncertainty persists, the Fed won’t be in a position to start winding down its rate-friendly bond buying program, nor will the economy be firing on as many cylinders as it otherwise might.
Overseas markets play a role as well. Officials at the Federal Reserve have previously called attention to the fact that the world’s major central banks tend not to move too far away from each other in terms of short-term interest rates. While short-term rates (specifically, the Fed Funds Rate) do NOT dictate mortgage rates, they do provide an anchor for the rest of the rate spectrum, thus effectively setting a potential range in which longer-term rates will operate. With all that in mind, the European Central Bank released its latest policy statement today, and while it didn’t fall far from expectations, it was slightly better than expected for rates, all other things being equal.
We’ll have a chance to hear from the Fed next Wednesday. They, too, are in no position to make actual changes to current policy, but investors will be paying careful attention to the verbiage of the announcement (as well as the press conference with Fed Chair Powell) for clues as to how and when the Fed’s policies may change in the near future.