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The Joy of Spring (Market)


When winter gets gloomy, it’s comforting to know that spring is just a few short months away.

Spring is revitalizing. There are more hours of energy-giving sunshine, happy little flowers start springing to life, and lenders fight like alley cats for spring mortgage business.

Indeed, “spring market” is prime time in the home loans business. Some mortgage planners do over half their annual volume in the four months from March to June.

Real estate activity reflects a somewhat similar upswing.


(Chart source: CREA)

Higher volumes make spring a prized opportunity for lenders to build market share and make progress on their revenue targets. That can spark some sizzling rate discounts.


A side note: With spring market around the corner, someone asked us the other day if lenders will start lowering rates soon. The answer is “probably”…in the near term anyway.

Longer out, it’s impossible to foretell what this spring will bring. Most analysts call for relatively flat rates over the next 1-2 quarters, and that may be true. But we can’t kid ourselves. The next 4-5 months are not without upside rate risk.

Among the possibilities:

  • The Euro-debt crisis could boil over
    • That would potentially drive yields lower
    • Fixed mortgage rates typically move in tandem with yields, but the exception is when systemic risk makes investors demand higher returns on mortgages.
    • The default of a Euro-member could therefore be a net negative for mortgage rates, for at least some period of time.
    • The Italian 10-year bond provides a gauge of European risk. A new high in Italy’s yields [e.g., a 10-year bond over 7.50%] would signal stormy weather ahead.
  • Europe could get a happy ending
    • If the EU assured the world that its debt crisis was contained, traders would likely sell “safe” North American treasuries and buy riskier assets
    • This asset rotation could drive up bond yields and, due to their linkage, fixed mortgage rates.
    • By contrast, variable discounts from prime could actually improve in this scenario.
  • Inflation could scare the bejesus out of fixed income investors
    • Traders don’t need to see actual inflation, just the threat of it.
    • This too would let some air out of the bond bubble. Other things being equal, yields and mortgage rates would rise as a result.
    • For what it’s worth, analysts assign very low probabilities of inflationary pressure in the near term.

Yet another possibility is an ongoing diet of lacklustre economic performance. That may not make for an upbeat spring, but at least it would be a plus for mortgage rates.

Whatever happens, hold your hat tight because the 2012 spring rate market will come with surprises.

And if your mortgage is closing in the next 180 days, don’t sit back to see how all the news plays out. Cover your ass-ets with a rate hold.

Rob McLister, CMT