“Who sees less? A blind man or the person who asks a blind man what he sees?”

Interest-Rate-UncertaintyMortgage shoppers crave certainty, so they continually question brokers or bankers about where interest rates are headed.  If this is something you’re prone to doing, first ask yourself if your broker or banker can predict the next global catastrophe, war, financial crisis, or sovereign insolvency. If not, you may want to rethink your question.

Unforeseeable events impact mortgage rates at unforeseeable times.

The events of this past week are the latest reminder of how fluid rate expectations can be….

A month ago, some economists were contemplating a BoC rate hike as soon as May.

Now, you see:

  • the benchmark 5-year yield plummeting Wednesday to 2.43%
  • deeply discounted 5-year fixed rates falling back to 3.79%
  • market rate-hike expectations being pushed out to September/October (based on Overnight Index Swap [OIS] yields).

The prediction business is as predictable as it never was.

Rate-Prediction-AccuracyThat’s not to say rate projections are completely worthless. Following the bottom of an economic cycle, rate increases are more probable and it’s useful to consider the magnitude of “reputable” rate hike forecasts. (You can define reputable. Some people use the Big 6 banks’ projections.)

From those forecasts, your mortgage professional can calculate how the expected rate increases might impact your future mortgage costs (and budget). Then they can analyze alternative rate scenarios, apply historical research, and factor in your risk profile & financial picture to recommend a mathematically sound term.

Just try to remember: When you hear a mortgage rate forecast that sounds plausible, distinguish if it’s a short or long-term forecast. Reputable near-term rate calls are more accurate. Moreover, each has different relevance. For example:

  • Reading that rates may rise next week should have little impact on your long-term mortgage strategy—unless you need a rate lock soon.
  • Specific rate prognostications like “prime rate will hit 6% by 2016” should go in one ear and out the other, given the enormous margins of error in long-term economics. (Although, that’s not to say you shouldn’t plan for higher rates.)

To put everything in the present context, consider that the Big 6 currently expect prime rate to climb 200+ basis points in the next 24 months. They project 5-year bond yields rising over 125 bps.

Even if these ball gazers happen to be right, it doesn’t mean rates will escalate in a straight line. Long-term rate trends are always speckled with short-term counter-trends (some believe we’re in one now).

What becomes important is keeping short-term market emotion from steering long-term mortgage strategy.



Side Note:  Rate forecasting is a tough gig…

Rob McLister, CMT