A Slowing Economy Usually Means Lower Rates

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The U.S. Federal Reserve’s Open Market Committee lowered overnight rates in September. Some bond yields declined. Brokers are being asked by their clients, “Why aren't mortgage rates following?” A mixed picture emerged in mortgage rates one day after the start of the U.S. government shutdown, while a release of new jobs data raises concerns about the nation's economic picture. Orion’s management believes that the basic answer is: nothing in the financial markets moves in a straight line, and no one can predict the future.

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Ten-year Treasury yields, whose movements typically influence the direction of mortgage rates, have been in the low 4 percent range for quite some time (although they were below 4 percent when the Fed lowered overnight rates) but are down from their peak. Orion’s brokers have seen that the average 30-year mortgage rate, though, moved in different directions over the same time period, according to various industry trackers.

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Mortgage Rate Momentum

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There has been some downward momentum that has picked up due to the government shut down. A report from payroll processor ADP showing a loss of 32,000 private-sector jobs last month, and that likely played a bigger role in investor activity that drove yields downward. (With the government shutdown, most economic releases that come from the government and on hold, and so bond traders and investors place more emphasis on privately produced numbers.)

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While yields were down, brokers have seen that the mortgage market showed little reaction to the ADP employment report. In fact, mortgage rates have drifted higher due to a variety of factors including elevated political and economic volatility and uncertainty. For example, while the Federal Reserve lowered its funds rate at its September governors meeting, some forward-looking investors had priced in a larger reduction and were left disappointed the central bank's decision did not align with expectations. Rates subsequently jumped.

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Investors had factored in the effects of a government shutdown, which many expected to occur… but perhaps be over with quickly. If the shutdown extends longer than expected, mortgage rate movements will become difficult to predict. But generally speaking, any shutdown by the government slows the economy, and as low economy leads to lower rates.

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For Orion’s brokers working with potential home buyers, the market holds some opportunity under current conditions, with the current week's 30-year rate still well below its average over the past year. Affordability remains challenging, given homeowner insurance and property tax increases, buyers may have greater negotiating power than in previous years. Homes are staying on the market longer, giving potential buyers additional time to evaluate their choices.

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