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Bart Castelli

Mortgage Rates Take a Wrong Turn

Monday, April 14, 2014 - Article by: Bart Castelli - Homestar Financial Corporation NMLS #70864 - Message

Mortgage rates took a wrong turn today and went up for the first time since April 3. I did not see anything in the market action today that has changed the bearish near term outlook for stocks, as for the bond and mortgage markets, to expect interest rates to continue to fall either a much larger decline in stocks or actual military activity in Ukraine has to occur. The rate markets have not had the strength to break this year's low rates so far since the 10yr hit 2.58% in early February. Since then, we have broken the resistant level and are now seeing this hover between 2.60% and 2.80%.

Even though the losses today were not that bad, at least it gave an opportunity to see if this would be a good time to continue floating or locking at the current rate. The most prevalently quoted conforming 30yr fixed rate for best-case scenarios is now centered on 4.375%.

Two news items after the drop in the Stock market had little impact on the outlook is likely to continue lower. Valuations are high and the Fed is going to end its bond and Mortgage Backed Securities (MBS) buying within the next six months - as investors begin to think of the eventual impact of removing Fed support for the interest rate markets. The US economies as well as China are still showing very low historic growth. Europe teetering on deflation and emerging markets can only improve if global economies are growing at a pace much stronger than what is occurring presently. Until recently investors were running head long into stocks as the Fed wanted then to do, but so far there has been little economic improvement to show for it. Investors are increasingly more nervous.

The negative view for the near term outlook for stocks will not change unless indexes rally to make new highs as the DJIA would need to rally 500 points from present levels before we have to swallow hard and chalk up a bad call. Investors now will have to contend with very high volatility - a usual condition at major turning points. The interest rate markets, even with the soft stock market, may not decline as much as to be anticipated from current levels even with more equity market declines. The Fed is stopping its support, and will end treasury buying in October. Interest rates are historically low and may not have as much room to decline.

In summary, equity markets are higher today and while this may just be a bum in the road, we do need exercise caution. I was hoping rates could break out of the recurring range between 4.25 and 4.5%. We have bumped against the best levels in more than a month, but we find ourselves bouncing higher yet again. To break lower we need some truly negative data to be released to move lower. That is why I am recommending locking now in the short term and floating cautiously if you want to take the risk.

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