Lots of volatility in interest rates in the last week.Verify my mortgage eligibility (May 16th, 2022)
Tonight we’re going to talk about why, what comes next and if we’ve already seen mortgage rates as low as they are going to go.
And a little bonus, my favorite “rule of thumb” for when it makes sense to refinance.Verify my mortgage eligibility (May 16th, 2022)
Welcome back, I’m Josh Lewis with BuyWise Mortgage with the mortgage and real estate update for June 8, 2020.
The big question, the big thing everyone’s been talking about for probably the last month or two, probably the only positive to come out of the Coronavirus for most people is interest rate’s really low. So if you’re looking to borrow on a car or a house, not so much credit cards but credit cards have trended lower.
A lot of people are asking “Is now the time to refinance?” We talk to a lot of people, help ’em run through the numbers. And a lot of what we hear is, “I think they’re gonna go lower, we’re gonna wait and see what happens.”Verify my mortgage eligibility (May 16th, 2022)
And we’ve had a lot of activity here in the last week that has led us to believe, at least for the near term, we may have seen the lows in interest rates.
But we’re gonna give both sides, all sides of that here, run through it for ya and hopefully give you some insights into what we’re seeing what’s likely to happen next, and hopefully help you make some decisions whether it makes sense to refinance.
I keep mentioning refinance, the low rates are awesome, they help buyers but if you’re gonna buy… most people, rates have been so good for the last five, six, seven years. That interest rate doesn’t really dictate the timing of the move, but it’s good information if you’re in the market or if you’re a professional working with buyers.Verify my mortgage eligibility (May 16th, 2022)
So let’s jump into that. First, I’m going to increase the size of our info here and make it a little bit easier to follow that stuff. So if you remember this, this is actually the one that I put up last Monday. We were seeing a pennant formation.
Again, I know technical analysis bores most people, but all it means is this 25-day moving average was moving lower, this 50-day moving average was moving higher and they were forming this pennant.
Normally what we see is a breakout when they converge, and the breakout most of the time goes to the direction of the prior trend. So you can see this prior trend was up, so we’re expecting a breakout to the upside, meaning even better interest rates.Verify my mortgage eligibility (May 16th, 2022)
The upside in bond prices, lower in yields, lower in interest rates. So let’s look and see how that actually played out. Now this chart, you’re gonna see… I’m gonna show you the one through today, but this is through Friday. So we have, again, just the bottom trendline, and you saw Thursday, Friday below it.
This is interesting, this pattern here, it just shows that it moved a lot lower. And we saw this… We’re gonna kind of talk about why we saw this big move on Friday and what it means moving forward, but just notice that we were well below that trend.
And we actually, this can be a reversal when we have this breakout on this pennant, it can be a reversal of the trend and it’s a lot of what people were talking about last week, “Hey, the best interest rates are behind us, we’re not gonna see those awesome low rates, rates will still be good, but not as good as they were.”Verify my mortgage eligibility (May 16th, 2022)
So let’s look at why that was. Last week, earlier in the week, we had the weekly initial unemployment claims for the prior week, for May 30th. And you can see, we’re now starting to moderate all the way down to 1.8 million claims for unemployment.
Now continuing claims are continuing to be higher than what we expected. And if you remember and if you’ve been following, I’m sure there’s one or two of you who’ve seen a lot of these reports. We wanted to talk about a month ago, the continuing claims are gonna be more important than the initial claims.
Most of the people that were let go have been let go. But to put this in context, before the Coronavirus, we were looking at about 250,000 claims a week. And now we’re at like 1.8 million, so the four week average is 2.2 million.Verify my mortgage eligibility (May 16th, 2022)
So just monstrously high numbers relative to what was the normal before that, but they’re absolutely moderating getting back to normal. So, middle of last week we had a little bit of shock to the markets, that ADP, the payroll service, some of you may have your payroll done through them.
About five, six, seven years ago, they created their own employment report and they release it on the Wednesday before the Bureau of Labor Statistics releases the actual Federal Employment Report.
And what they do is they’re just looking at all of the employers who use them, they’re aggregating all of that payroll data and saying, “What are we seeing?” So it’s a good report, not super predictive of what’s actually gonna happen on the Friday with the BLS statistics, but this was a big surprise last week.Verify my mortgage eligibility (May 16th, 2022)
ADP said only 2.76 million jobs lost, and their expectation, their prediction was for over 8 million jobs lost. So that’s great news, great news for the economy. And the mortgage and bond and financial markets started looking and saying, “Hey, maybe on Friday the numbers we’re gonna see are not nearly as bad as what we were expecting.”
So what actually happened with that? Again, Friday comes and we get an even bigger surprise than that Wednesday report. So what I wanna show here, these are the jobs, the monthly jobs report, we’re seeing about 200, 250,000 jobs created month after month, through January of ’19 through January of 2020.
If you look at those they average out right around 200,000 jobs. Well, we went from creating 200,000 jobs to losing 700,000, to then losing 20 million. And this month, the number comes out and says, “We created 2.5 million jobs.”Verify my mortgage eligibility (May 16th, 2022)
Now, again, very positive news for the economy as a whole, but bonds generally trade off of bad news. When it looks like the economy is gonna be slowing, things are contracting, or when we’re seeing deflation, those are the things that lead to lower interest rates and what’s kept our mortgage rates quite low.
So this number made everyone just sort of shake their heads, like from what we’re seeing, what we talk to people on a day to day basis, what, you know, other professionals that we know, the conversations they’re having is that’s just a monstrous change in one month.
It could be due to the PPP loans, and that is gonna be a big thing for us to watch going forward. But long way of saying what I wanted to go through and point out to what we saw today, what we’re gonna see, it was a big reversal, again the other direction and rates improve today.Verify my mortgage eligibility (May 16th, 2022)
And the reason for that was just errors in the data. So what we saw is in March, what happened here, let’s just show all of the numbers and what the differences were. Apparently there was a misclassification over the last three months in the BLS jobs report.
Millions of workers were classified as employed but absent from work, when they technically are unemployed or are actually unemployed is how they should have been classified.
And if those numbers were applied, we would have had 5.4% unemployment in March versus 4.4. 19.7% last month and 16.3% this month, so they’re not gonna go back and adjust the data. But the headline that we saw much lower unemployment figures was not as good as it’s cracked up to be.Verify my mortgage eligibility (May 16th, 2022)
And with that, what we saw today is this was Wednesday, Thursday, Friday with the great employment figures last week. Today, the bond market, mortgage bonds recovered the majority of that and we’re actually back just above the 25 day moving average.
So now we’re in this range between again, the 25 and the 50, they’re just flip-flopped. So it doesn’t mean anything to you guys, other than to say we’re still in this sideways trend as far as mortgage bonds go.
Now, if you’ve been following along, you know what I think about that, in that the absolute level of mortgage assets in the secondary markets are telling us that rates should be a lot lower than what they are.Verify my mortgage eligibility (May 16th, 2022)
So if we look at that, the thing that I’ve been pointing to is this is a chart of the spread between 30 year fixed rate mortgages and the 10-year treasury.
Historically, that’s been 1.7 to 2%. You can see here that this is over the last 10 years from 2010, the high point was about 2.2, but other than that, everything contained here from 1.5 to about 2.0 with a little foray down under the one four and one up over 2.2.
But we’ve got all the way up to a 2.7% spread with a 10-year treasury at .65 and mortgage rates at 3.35. Now we’re way, way moderating down to just over 2.4, and I expect this next week, we’re probably gonna be back down under 2.4.Verify my mortgage eligibility (May 16th, 2022)
So that’s still at least a 1/4 percent higher than the high end of the range for the last 10 years. So what that tells us is despite the fact that on this chart we’re just going sideways, and we may moderate down to worse mortgage rates based on the value of the asset in the secondary markets, as long as this moderates, rates are going to stay good.
We have a lot of play in the joints there where lenders can keep their pricing the same or even improve it without the value of the asset and the secondary markets improving. So what does that actually mean for you as a borrower?
Really its just like Groundhog Day, if you saw that slide a couple months ago where it just got to the point where we’re getting the same information day after day after day, well, this is where we’re at. Conventional’s at 3 1/4. Last week, I think both reports were reporting at 3.375.Verify my mortgage eligibility (May 16th, 2022)
And for us, that’s no lender fees, no points, well qualified borrower, very well qualified borrower. FHA, down to about 2.875, and with maybe a 1/4 of a point, you can get that down to 2.75. VA also at 2.875, but the important stuff, what we’re actually seeing right now is for high balance loans, over 510,400.
Those have gotten just way out of whack relative to the great rates that we were seeing on standard balance loans. So we’re at 3 1/4 and we’re now an 1/8 higher than that with only a quarter of a point in fees. So really, really close.
This is almost back to what we would normally see as the spread between those two, about an 1/8 for high balance versus standard conventional point 125 higher in interest rate. Now we’re that plus about a quarter of a point.Verify my mortgage eligibility (May 16th, 2022)
Now the reality is we’re broker, I’ve got 25 different lenders that we shop with, that we actually use. But 100 that we shop with and I only have a handful of them that have this good high balance pricing.
On FHA, again, 3 1/8 with zero points, you’re about a 1/4% spread, which may be double what that spread normally is, but it’s definitely a workable number.
VA, same thing three and an 1/8 with a 1/4 point. So a 1/4 plus a 1/4 of a point in cost, long way of saying these are acceptable spreads. These are things that people can handle and you’re not getting punished for having a high balance loan or living in a high-cost area where you’re doing a loan of over 510,400.Verify my mortgage eligibility (May 16th, 2022)
So right now the people that I’m talking to, that I’m seeing that are really still on the outside looking in, anyone with a sub 680 credit score, it makes it really hard to qualify because everyone has put additional add-ons to their rates or just price is poorly for loans with credit scores under 680.
I looked at one for a borrower today that was just a hair under 680 on an FHA loan, instead of being 2.875, or 3%, they were looking at 3.75%. That’s normally not the difference that we’re seeing a 3 1/4, to almost a full point spread for having a sub 680 credit score.
For most of the time, a 640 credit score on an FHA is considered good. So looking at that, the big question that I get all the time. I have clients call in, borrowers call in, people who see these videos, they call and they go, “You know, I’ve talked to a couple people, it doesn’t make sense.” Or, “Hey, I think it has to make sense at this number.” Or, “Hey, I heard this rule of thumb.”Verify my mortgage eligibility (May 16th, 2022)
A lot of times, you hear rules of thumb that came about in the 80s when the average loan amount was $100,000, and so that if you weren’t saving a percent, that it didn’t make sense. So what we wanna look at, a real simple number and this works for rate and term refinances.
If you’re trying to shorten the term of your loan or you’re taking cash out, the benefits are a little bit different, we gotta do a little more analysis. But when does it make sense? Take $125,000 and divide it by your current loan balance, that will give you the rate savings needed to justify a rate and term refinance.
So let’s make it super simple. Again, we said going back to the 1980s, average loan amount is 90 or $100,000. People said, “Hey, if you don’t save a percent, it’s not worth doing.” Well, the reality is we’re about that point right now.Verify my mortgage eligibility (May 16th, 2022)
$125,000 loan divided by 125,000, or 125,000 divided by 125,000 loan amount, tells you you need to save about a full percent for it to make sense. Now, let’s say if you had a million dollar loan, you take $125,000, you divide it by a million dollar loan, you only need to save an 1/8 of a percent of interest to make that make sense.
Now whenever I walk through this with someone, they always ask, “Well, why is that? What makes it a rule of thumb.” And it really is as simple as if I pencil it out and we do the full analysis like we do for all of our clients, that’s about the number that most people will say, “If I’m saving less than that, it’s not worth my time.”
So it’s a really good quick and dirty, easy way of getting to the number that we need to save you to make it make sense. So depending on where you are between $125,000 loan needing to save a percent, a $500,000 loan needing to save about a 1/4 of a percent, or a million-dollar loan, then you save about an 1/8 of a percent, gives you an idea of where you need to be.Verify my mortgage eligibility (May 16th, 2022)
Now all loans are not created equal, we see people pop up all day and send us numbers, “Hey, I got these great quotes, you know, from such and such online lender.” And you see a lot of fees packed in there, fees packed in when they’re told it’s a no-cost loan or a no-point loan, and you see things just kind of shuffled and moved around.
Again, we’re not the only lender that can give you a good loan, but you really wanna be careful with that, and you want to work with someone who is an expert and is able to analyze the numbers and present them to you in a way that they make sense.
So that we can say, “What is the actual cost of this loan? How long is it gonna take me to recoup the cost? Or, “Does it make sense to do a no-cost loan and save half of a percent, versus paying two points and saving a full percent?”Verify my mortgage eligibility (May 16th, 2022)
If you don’t have the right tools, if you don’t have the right ability to analyze that, it can be really hard to understand and it’s really easy to manipulate a client with a super low-interest rate when you’re not taking into account fees and other things that we need to look at when we’re doing that.
So again, just want to circle back that interest rates are good, they’re gonna stay good. I don’t think we have any risk of them shooting up without going into more detail, we’re already 15 minutes into this video.
Without going into extremely great detail. Stocks have recovered incredibly fast from the big downturn in February and March. We’re seeing the NASDAQ at an all time high, and it doesn’t make sense, it doesn’t make sense in the market.Verify my mortgage eligibility (May 16th, 2022)
They just had a big financial shock that consumers are not gonna be able to spend the way they have spent, at least on a broad level, some households have been fine. But when we see that shock to the economy, what we’re looking now is asset prices for stocks are as high as they’ve ever been.
But earnings are lower than they’ve been in the last several years, that can’t continue on. So either earnings are gonna make a huge, big, big uptick, or prices are going to come down. And the only reason I mentioned that or even talk about it is that stocks and bonds compete, when stocks do poorly, bonds do well.
I expect we’re going to see more weakness in stocks, it’s going to cause bonds to do well. That will lead to low mortgage rates. We’re gonna see as lenders get their minds around what the forbearance issues are, that they’re gonna be able to bring that spread between 10 year treasuries and mortgage backed securities back in line.Verify my mortgage eligibility (May 16th, 2022)
So with that being said, I guess the thing I wanna leave you with is if it makes sense to refinance right now, if we can do a low or no cost loan and it benefits you and you’re meeting that minimum required savings, or if you can pay off some debt, if you can put some savings aside, if you can shorten your term for achieving valid financial objectives today, I would not wait for rates to go lower.
There is no guarantee that it’s going to happen, we’ve seen the stock market outperform in ways that we could have never imagined, and that may or may not be valid.
So we wanna analyze the numbers today, so what I’m saying is everyone with a mortgage should sit down with someone and run through the numbers, run through the options and make a decision, “Hey, does it make sense to do something today, or should we just wait and see what happens moving forward.”Verify my mortgage eligibility (May 16th, 2022)
If the numbers make sense today, lock in those gains and do it at a really low cost where if we do see another leg lower, you can save money going forward So with that being said, I’ll let you guys go tonight, if any of you are trying to run the numbers, looking to analyze, if you’ve gotten numbers from another lender, we’d love to help ya and review ’em.
We do loans only in the state of California, but I’ve got a huge network of awesome professionals that can help you no matter where you’re at.
Last week we connected someone in Idaho, someone in New York, another one down I believe it was Florida or Georgia.
We got professionals anywhere they can help you figure this out, you don’t have to make these decisions on your own. So hopefully the information was helpful, have a great night and we’ll be back Thursday.Show me today's rates (May 16th, 2022)