Mortgage Market Guide Monday-12/05/2022



A Look Into the Markets

This week home loan rates improved modestly as we approach an important Fed Meeting and inflation reading next week. Let's discuss what happened and talk about the headline risk on the horizon.

"I'm just waiting on a Friend" - Waiting on a Friend by The Rolling Stones.

More Signs Of Inflation Falling

On Tuesday, 3rd Quarter Productivity showed that Unit Labor Costs (how much a business pays its workers to produce one unit of output), came in lower than expectations. If it costs less to produce something, there is no pressure to charge more, thereby lowering inflation expectations.

The Productivity and Unit Labor Costs reading do not typically move the market that much, but in a world looking for signs that inflation is abating, this soft reading pushed bond yields sharply lower.


Back on Nov 8th, the 10-yr Note yield peaked at 4.20%. One month later, yields fell all the way down to 3.40%, matching the lowest level since mid-September.

Mortgage-backed securities (MBS), which is where home loan rates are derived, moved more sideways and didn't experience the large rate improvements seen in Treasuries. That is OK as mortgage rates also remain at the lowest levels since September.

2/10 Yield Curve Inversion

The yield on the 10-yr Note dropped over .80% beneath the 2-yr Note for the first time in over 40 years. Why is this important to us? Nearly every time the 2-yr yield moves above the 10-yr yield, a recession soon follows. Seeing the inversion steepen to levels last seen when Reagan was President suggests the threat of a recession is elevated. So, it seems, the financial markets have moved on from the threat of inflation to the threat of a recession.

Policy Error

Here's a term that is starting to catch the airwaves. Essentially it means the Fed will raise rates too high or try to keep them high for too long and push the economy into a recession. Remember, long-term rates only move higher with the Fed Funds Rate (the rate the Fed hikes) IF the economy can absorb those hikes. The bond market is clearly challenging the idea of a "higher for longer" Fed Funds Rate with the 10-yr Note falling as fast as it has over the past month.

Bottom line: Rates have improved and sellers are eager to make deals. This may pose great opportunities for a nimble buyer. This is not an environment to wait until everyone hears about the improvement in rates.

Looking Ahead

Next week is filled with headline risk. On Tuesday, the Consumer Price Index, will be reported and this reading on consumer inflation could be a big market mover. But the main event is the Fed's Monetary Policy Decision. It is widely expected they raise the Fed Funds Rate by .50%. What will have the market's attention is any words about a smaller hike going forward in response to "policy lags", where we wait for existing rate hikes to impact the economy.

Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 5.5% coupon, where currently closed loans are being packaged. As prices go higher, rates move lower and vice versa.

You can see on the right side of the chart the Green Candles moving above $101 for the first time since September. Next week's big events may determine if prices break above $102 and move a leg lower still.


Chart: Fannie Mae 30-Year 5.5% Coupon (Friday, December 9, 2022)


Economic Calendar for the Week of December 12 - 16


The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is without errors. 

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