Heartbreaking Day Leaves Mortgage Rates Much Higher Than 6.29%

At the closing yesterday, there was hope. Well, to be honest, there’s still hope, but it’s much less immediate, and it’s certainly not the first thing that comes to mind today.

Yesterday’s hopes stemmed from a combination of factors. Rates had risen at a breakneck pace since early August, accelerating to their most alarming pace in the week following the most recent release of the Consumer Price Index (CPI), a key inflation report that guides Fed decisions.

CPI had added strength due to its proximity to the next Fed meeting (which we witnessed yesterday). Market participants expected the Fed to become even more committed to its prospects for rate hikes as a result. Not only did that happen, but in the Fed’s forecast overview, there was a sharp shift in expectations for even higher interest rates in the coming months and years.

Granted, the members of the Fed can’t begin to guarantee or even reasonably predict that 2023-2025 interest rates will be as high as yesterday’s forecasts suggested, but if they had to guess at those levels based on what they know today , that’s their guesses.

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How high do they see rates? That does not matter. I could tell you that nearly a third of the Fed sees the Fed Funds Rate at 5.0% by the end of 2023, but that’s the Fed Funds Rate — not the mortgage rate. The two are both similar and different, and if you’re not sure why, take a look at our introduction to the topic here: No, the Fed’s rise means nothing for mortgage rates.

Perhaps more importantly, this marked an increase of about 1.0% in the outlook for a Fed rate hike since the last scheduled release of forecasts in June. For those who have not clicked on the link above or who otherwise need convincing, we can pause there to realize that, in addition to the 1.0% increase in the forecast ceiling, the Fed Funds Rate itself is now 1.5% higher. than it was on June 14, and despite all that, today’s mortgage rates are nowhere new 1.5% higher. And yesterday’s mortgage rates were actually much closer to June levels.

And THAT is the source of hope. At least that’s what it had been since yesterday afternoon. In other words, the market came through what appeared to be bad news for Fed rates, with rates actually moving a little lower! The more optimistic hope was that such a ground-holding event could serve as a turning point after soaring to its highest level in 14 years.

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But everything changed today. The bond market had serious reservations about yesterday’s resilience. The underlying reasons for this remain a point of discussion among market parties. There’s a laundry list of seemingly useful excuses, but none hold enough water to explain today’s carnage. It’s not that I’m the only one who knows all about why the market moved a certain way today. I’m just saying that if an event, piece of data, or some other discrete cause was responsible for today, it was far from obvious. I see/hear every market watcher I look up to say the same thing.

Once we get to the point of such humble confessions, further analysis of market motivation tends to get in the weeds with heavy reliance on balance sheet and the nature of trading positions leading up to and away from Fed day. Suffice it to say, the move yesterday at the end of work was unexpected, and was large and aggressive in a way rarely seen in the absence of the neat scapegoats referenced above.

Such moves in the bond market are equally troubling news for mortgage rates. There is actually no perfect way to pass the current position of the 30-year fixed rate at the highest level, as it varies widely depending on the lender’s pricing structure and the borrower’s pricing preferences. The big problem is the presence of upfront costs. They are unavoidable in many cases. In other countries, lenders use them to offer customers a way to “buy off” at a lower rate.

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Sure, while “points” or “buy-offs” aren’t good or bad, they are an interest expense in the same way as the interest portion of your mortgage payment. You just pay it upfront instead of over time.

All that to say that the rates that appear in many news headlines are hopelessly low. Freddie Mac’s weekly rate survey came in at 6.29% today. Not only does that require almost a full “point” of initial cost, it’s very outdated data at this point. If we could magically remove the mortgage market’s ability to rely on points as part of the price comparison, and if we could magically track daily rate changes, including late-day “re-price” from panicked lenders, we would be left with a top tier 30 year fixed mortgage rate that is at least 6.625%.

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