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May 5, 2000
Out the top.
The nice, polite, steady, boring, 8.25-8.50% low-fee 30-year mortgage range prevailing from January to May 2, 2000 is... history. Toast.
8.75% today... and if we're lucky, 8.75% will be the middle of a new range that might... might hold for a while.
The credit markets have conceded a .50% rise in the Fed funds rate on May 16, but have not yet begun to price-in the move after that... and the one after that... and....
The credit markets began to fall apart on Wednesday, and this morning's April payroll data finished off the last of the bond market optimists: unemployment down to 3.9%, a 30-year low; payrolls rising by 340,000 jobs, and March revised up to a 458,000-job gain (the Fed would be comfortable with something under 200,000).
Data early in the week were on the silly side of strong: construction spending leaped 1.4% versus an "unchanged" forecast; a 2.2% surge in factory orders just about doubled that forecast; new home sales surged 4.9% versus a forecast decline; and April automobile sales jumped 10% over last year's all-time record.
The Fed has been tightening, you say? Pre-empting a too-strong economy?
Really?
The Fed's game in this cycle has changed decisively, and so should mortgage tactics.
The Fed's gradualism has failed.
The Fed is now forced to hit the economy very hard -- so hard that the Fed faces its classic risk: striking too hard, and causing a deeper slowdown than it intended.
So long as gradualism was a potential success, the odds favored an extended period of eight-something mortgage rates -- no big spike, and no big decline, either. Fixed-to-ARM spreads remained narrow, and ARMs were not a very good idea for defensive purposes. ARMs were fine for short-term ownership, but not in anticipation of a nearby, large drop in rates and a refinancing window.
New game, now. Nobody, not even Mr. Greenspan, knows how high rates will have to go to slow the economy. This pending .50% rise in Fed funds to 6.50% is not likely to do any immediate harm -- despite the obviously tougher Fed ahead, the screwball stock market is up big today.
The Fed may have to execute a succession of .50% moves, and the odds in this new game favor a rate spike followed by a deeper-than-expected slowdown, and a refinance window.
Check ARMs (carefully), especially three-to-five-year jobs, but never dismiss extremely low-cost fixed rate deals. The worst mistake here is to pay fees to get a lower rate, as the odds now suggest you won't have to keep the rate you get for very long... eighteen months, a year
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