Mortgage Rates Added 1/2 Percent In A Day For The Second Time In A Week

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Mortgage rates are on the move.

After a two-month period of relative calm, Memorial Day 2009 ushered in a new era of mortgage rate volatility.  Over the last 5 days of trading, mortgage lenders have issued 19 separate rate sheets, or nearly four per day.

Every 2 hours, in other words, mortgage rates are changing and when they change, they change big.

The frenzied pace of change is making it next to impossible for mortgage applicants shop for "the lowest mortgage rate".  By the time a buyer talks to competing lenders and gather the rate quotes, it's time to start the process over again.  It's giving Skyline-style heartburn to home buyers in Cincinnati, for one.

More important than the pace of mortgage rate change, though, is the size of mortgage rate change. Look at the action since last week from a sample of lenders:

• Tuesday, May 26, 2009: Rates up by 0.250 percent
• Wednesday, May 27, 2009: Rates up by 0.625 percent
• Thursday, May 28, 2009: Rates down by 0.250 percent
• Friday, May 29, 2009: Rates down by 0.375 percent
• Monday, June 1, 2009: Rates up by 0.500 percent

These are ridiculously out-sized movements for the mortgage market, a Wall Street niche accustomed to gradual change.  Furthermore, it's making a real impact on household budgets.  The rate hikes since last week have added $92 per month to a $200,000 mortgage -- or, $1,100 per year.

That's the cost of a new washer and dryer set; or a multi-million dollar life insurance policy; or food for a few months.

Long-term, the mortgage market can't sustain this pace. That's one part that's clear.  But to homebuyers, sustainability is a moot point -- homebuyers don't live in the long-term world.  Homebuyers in Cincinnati, Chicago or wherever need mortgage rates now and those rates have been both hit-or-miss, and all over the map. 

Homebuyers under contract are short-term players by every definition and can only hope to cash in some karma on the day they need to lock a rate.

The most challenging part to homebuyers and other rate shoppers is that the movements of the mortgage markets have neither come with warning signals, nor have been followed specific trading Rules of Thumb like "strong economic data makes rates go up".  It's been mostly momentum trading; investors hitching a ride on the sentimental favorite of the day.

For now, a concensus that the global economic recovery is underway is fueling stock markets and it's coming at the expense of bonds.  It's the reverse of the Safe Haven Buying pattern that drove rates down earlier this year while investors shunned all types of risk in their respective portfolios. 

Today, investors clamor for risk.  They're behaving as if stocks will outperform bonds over the next few years and why wouldn't they? The S&P 500 is up 40 percent in the last 3 months and the Dow Jones is up 24 percent over the same period of time. Although past performance is no guarantee of future results, traders tend to gravitate toward numbers like that -- at the expense of the mortgage bond market.

Until it's more clear what's happening with the economy, expect volatility to stay high.  Maybe not half-point-swings-to-mortgage-rates-in-a-day high, but high nonetheless.  Consider getting defensive with your mortgage rate shopping, locking in a rate as soon as you find a payment that makes sense for you. 

As we're seeing first-hand, annual payment swings of $1,000 aren't too uncommon anymore.