This morning's important Institute of Supply Management (ISM) manufacturing index came in with a reading of 57. blowing away expectations and causing a sharp spike in mortgage rates. Analysts had anticipated February's reading to duplicate January's level of 56.
The ISM index measures confidence at the manufacturing level of the economy. More confidence in the future fuels economic heat -- leading to rising mortgage rates today.
And that's an important thing to keep in mind about interest rates and financial markets in general. Anytime something is expected, it's already reflected in the current price of the stock or bond in question. It's only when expectations differ from reality thatÂ prices and interest rates change.
In this case, unexpected optimism of manufacturers has spiked concerns about inflation, leading to falling prices in the bond and mortgage-backed securities markets, causing interest rates to increase.
In addition, following President Trump's speech last night, CNN Money's Fear and Greed Index reversed its course, swinging from "Greed" at 66 to "Extreme Greed" with a reading of 80. That also indicates increasing economic activity, leading to inflation fears for tomorrow and higher mortgage rates today.
** FHA APRs include government-mandated mortgage insurance premiums (MIP).Â
Tomorrow brings us the Weekly Jobless Claims report. Unemployment data is always considered pertinent to mortgage rates today, but this is just a weekly report. Its effect is minuscule compared to the highly-important monthly report due on March 10th.
Expect rates to be driven largely by stock prices -- prices up, rates up. Prices down, rates down.
Today's volatile economic climate may prompt the risk-averse to lock their loans now. Even those closing after 30 days might consider locking if they can get a 45 or 60-day lock without extra costs. However, most lenders charge significantly more for a longer lock. Â You need to decide if "setting and forgetting" your rate is worth the added fees.
Note that this is what I would do if I had a mortgage in process today. Your own goals and tolerance for risk may differ.Â
Mortgage interest rates depend on a great deal on the expectations of investors. Good economic news tends to be bad for interest rates, because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.
For example, suppose that two years ago, you bought a $1,000 bond payingÂ five percent interest ($50) each year. (This is called its â€ścoupon rate.") Thatâ€™s a pretty good rate today, so lots of investors want to buy it from you. You sell your $1,000 bond for $1,200.
The buyer gets the same $50 a year in interest that you were getting. However, because he paid more for the bond, his interest rate is not five percent.
TheÂ buyer gets an interest rate, or yield, of only 4.2 percent. And thatâ€™s why, when demand for bonds increases and bond prices go up, interest rates go down.
However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.
Imagine that you have your $1,000 bond, but you can't sell it for $1,000, because unemployment has dropped and stock prices are soaring. You end up gettingÂ $700. The buyer gets the same $50 a year in interest, but the yield looks like this:
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